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Financing the Film Industry

Karen Niwinski

April 5, 2002

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Ways and means to finance your film:

“Investing in a motion picture is risky business. Unless a film was fortunate enough to garner sufficient advance sales, to cover at least the movie’s production cost, there is no guarantee and little promise that the investors will recoup their investment or earn a small profit.”

“Film is probably the worst investment anyone could make. One might as well go to Las Vegas and throw the dice- in fact, those odds are probably better!”

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Ways and means to finance your film:Ways and means to finance your film:

• Investor Financing– Partnerships

• joint venture• limited partnership

– Corporation

• Industry Financing– Studio Development Production

• Foreign Financing

• Lender Financing

– bank financing

– presales financing

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Investor FinancingInvestor FinancingPartnership: joint venturePartnership: joint venture

– Any partner may pool their monetary, creative, and business resources

– all partners, or a combination of partners are considered active

– every one of partners has agency power- one partner can bind all members in a joint venture- if one partner incurs debts related to the project the partnership is involved with, all partners are liable.

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Investor FinancingInvestor FinancingPartnerships: joint venturePartnerships: joint venture

– Each partner individually can perform any service necessary to conduct business

– Each partner is personally liable for the debts and taxes of the partnership; if the partnership assets are insufficient to pay any creditors and/or IRS claims, each partner’s personal assets are subject to attachment.

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Investor FinancingInvestor FinancingPartnerships: joint venturePartnerships: joint venture

– Unless partners agree to share profits and losses equally, they have to agree on a sharing ratio.

– Partners cannot compete amongst each other in the business.

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Investor FinancingInvestor FinancingPartnerships: limitedPartnerships: limited

– Limited partnership is composed of a group of limited partners (the investors) and one or more general partners (the producer, or producers).

– Risk only the capital the invested.

– Never pay if picture goes over budget

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Investor FinancingInvestor FinancingPartnerships: limitedPartnerships: limited

– invest because of tax benefits– interest payments are deductible– expenses are passive– if capital gain, gains will be taxed as regular

income.

– equivalent to having a share

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Investor FinancingInvestor FinancingAdvantages and disadvantages of Advantages and disadvantages of

partnershipspartnerships• Advantages

– limited partners do not necessarily have to put up funds, but guarantee the bank loan by issuing letters of credit

– partners are more easily set up than a corporation

– partnerships can be set up from film to film

– among reliable partners, all working for the same goal, a venture makes a great production team

• Disadvantages– the general partner (producer) is

liable for a film’s over budget and other debts

– limited partners lose then their limited partnership status if they become actively engaged in the limited partnership’s business

– In a joint venture, partners are agents for each other and liable for each other’s debts incurred in the management of the business

– limited partner shares cannot be solicited publicaly

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Investor FinancingInvestor FinancingCorporationCorporation

– Right to issue stocks– corporation v.

partnerships

– ownership in corporation is evidenced by stock certificates, but ownership of stock certificates does not give a stockholder the right to participate in the corporation’s

management.

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Investor FinancingInvestor FinancingCorporation: advantages v. Corporation: advantages v.

disadvantagesdisadvantages

– Advantages• corporation rather

than directors are responsible for debts

• corporate shares may be more readily transferable than interest in partnerships if there is a market for them

• shares can be sold publically.

• Disadvantages– costly to set up– have to adhere to

stringent rules and regulations (i.e.: stockholder meetings, directors)

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Industry FinancingIndustry FinancingStudio Development ProductionStudio Development Production

• Development Deal Memo• Step Deal • i.e.: Warner Brothers, Disney, Sony,

Universal, Paramount, 20th Century Fox

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Industry FinancingIndustry FinancingStudio Development ProductionStudio Development Production

• Advantages– use studio’s money and

studio’s development companies

– studio’s can provide for bigger pictures because they have a higher production budget.

– Collaborative process

• Disadvantages– odds are not good– Hollywood System– theft– lose material to studio if

project is delayed– can be laid off at any

time

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Foreign FinancingForeign Financing

• All countries insist on the following:– picture must be a major production– U.S producer may bring in an American director

and two American stars, all others must be hired within the country

– all key personnel must be hired within country– must have “national content”– certain percent of revenues from the film must

remain in that country

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Lender FinancingLender FinancingProduction Loans

• Lender financing is process of obtaining a loan from a lending agency to finance the development, production, and/or distribution of your film.

• Bank Loans– banks can only lend money based on measurable risk, and

only credit they can take is collateral or assets being offered to secure the loan

• resource loan= loan made only if an endorser (producer) is made personally liable for payment in the even the borrower (production company) defaults

• debt or equity transaction= important to make clear how intended loan is to be characterized.

– Equity investment- the lender becomes an investor whose investment is at risk.

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Lender FinancingLender FinancingProduction Loans

• Cost of loan is tied to the prime rate, which is the rate of interest the bank pays to borrow from the Federal Reserve– floating number that fluctuates – in commercial lending, loans to low-risk firms (major studios)

are 1/2% to 1% above the prime rate– small production companies pay 3% above the prime rate– EX.

• Say the bank charges 2 percentage points above the prime rate and the prime rate is at 9%. Total the rate is 11%. On a $1 million loan, the bank removes $110,000 (1 million * 0.11)

• To hedge risk the bank retains another 1-2% incase prime goes up• if the bank charges 1% , another $10,000 is added to their retained

amount, now down to $880,000.

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Lender FinancingLender FinancingProduction Loans

• Advantages– lender does not share in

the net profits– lender does not have any

creative control– option of a non-

collateralized loan, which is not supported by collateral and therefore may be suitable for development money or for financing a low budget picture

• Disadvantages– have to be paid back– may lose collateral and

non-collaterized loans are limited

– loans have a specific term, where they are repayable on or before a specific date, regardless of whether the film made it

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Lender FinancingLender Financingpresale financing dealspresale financing deals

• Presales- funding of a film’s production costs through the granting of a license for the film’s rights by a producer to a distributor in a particular media or territory before the completion of a film.

• Take forms of:– funds– guarantees– commitments

• EX: if you have a contract for the presale of your film to a distributor, then you may be able to present the contractual commitments to a bank or lender and walk away with cash

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Lender FinancingLender Financingpresale financing dealspresale financing deals

• Revenue cap– a certain amount of money in

sales, up to which the buyer gets to keep all the money.

– Buyers try to estimate the highest amount that the movie will make and then try to make that amount the cap

– after the revenue cap is reached, the seller may start receiving a percent of the revenue or may renegotiate the deal

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Lender FinancingLender Financingpresale financing dealspresale financing deals

• Advantages– Can provide for a big

portion of financing.– Less creative

intervention.– If you aren’t confident in

the economic upside potential of your picture, then a presale arrangement is a viable option.

• Disadvantages.– Difficult to collect the

money from the lenders.– Increase the number of

films produced a year, and the demand for and cost of various film elements that are limited in supply.

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RecapRecap

• Four basic ways to finance a film• Investor Financing

– Partnerships

– Corporation

• Industry Financing– studio-based Independent Production Company

• Foreign Financing

• Lender Financing

– bank financing

– presales financing

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Financing the Film IndustryFinancing the Film Industry

THE END