Go North, Or East, Or West, Or South!
In a 1999 article for the Cannes Film Festival, Greg Bernstein discussed the advantages of shooting in a country other than the United States and how such "runaway production" can help finance a film
Greg S. Bernstein
Almost every other day over the past few months there have been news articles discussing the flight of production from Los Angeles or attempts to attract it here or there, and advertisements either promoting production outside of Los Angeles or pleading to keep production in Los Angeles.
In March alone, Minnesota Governor Ventura came to Los Angeles to sway more productions to his state; Missouri announced recent legislation to give financial incentives to film there; SAG members took out full page ads pleading with their members not to go to shoot in Canada; North Carolina sponsored the American Film Market to entice productions to their fair state; Baywatch announced that Hawaii (after that state's governor got directly involved) beat out Australia for production of the series (Los Angeles did not make the honorable mention list); Los Angeles Mayor Riordan spoke at the American Film Market and announced upcoming incentives to keep production in Los Angeles; and at least three bills were introduced in the California legislature to try to provide financial incentives to keep production in California.
Almost all of these people and entities were directing their attention to a group ignored for years-the independent producer. A group that most sneer at as the bottom of the barrel, "B" movie producer. The typical American Film Market film as some would say. The typical film being sold at this Cannes Market.
So why all the attention when it appears that studio production in Los Angeles is up. Because not everyone works on studio level movies. Because most of the 1,090 films that debuted for sale at the recent American Film Market could have been made in Los Angeles, but most were not. Because most of the 163 telefilms and mini-series made for the cable networks in the 1998/1999 could have been made in Los Angeles, but were not. Because independent film production supports most of the lower paid actors, directors, producers and crew in this industry and generates significant income to ancillary services involved in a production (the most often quoted statistic is that $1 of money spent on a production actually results in about $3 of income throughout the local economy).
The fact is that not much has really changed in the way of studio level production or, in general, television series production. Oh, there are a few much publicized cases, such as, "Baywatch" or "The X Files" but, the reality is that only a handful of U.S. broadcast network series are shot outside of the United States. While several syndicated shows are shot in Canada or Australia, their number is not significant. Fortunately, for Los Angeles and New York, there are just not enough suitable sound stages to be monopolized for a series nor is it that easy to convince television stars to spend 9 months of their lives, year after year, away from their homes.
As for studio and large budget films, they will shoot in Los Angeles, if possible, and if not, the reason is more likely the locations needed by the script. With an average studio film costing in excess of $52 million in 1998 (MPAA statistic), a saving of a few hundred thousand dollars here or there (or even a million dollars) by shooting in a different state or country won't make much of a financial difference and certainly won't influence a production decision. Issues like guild residuals or union costs don't come into the equation given that these systems were established by, for, and with, the studios in the first place. If financial incentives happen to be available in the location utilized for a production, the studios will take advantage of them (such as "Braveheart" did), but the studio won't decide to shoot here or there because of them.
So why the big shift of independent production and the uproar? Be cause independent productions are price sensitive. A few hundred thousand dollars can make or break a production. A number of factors have converged to create an atmosphere that makes it substantially more economical and financially favorable to shoot an independent production outside of Los Angeles, and, frequently in more and more cases, outside the United States. Unlike the few TV series that have left Los Angeles, the numbers of Indie films lost, and associated dollars, are substantial.
There has been much finger-pointing as to reasons why production of independent films in and around Los Angeles, and the United States in general, has been leaving and heading elsewhere.
Producers have been pointing fingers at the Guilds saying they're the reasons why they won't shoot in the United States. The Guilds have been pointing their fingers to Canada and saying that their exchange rates, favorable (to the producer), guild residual policies and government sponsored financial benefits, are the reasons why production is heading north. Everyone points their finger at the United States and local government and say they are the reason for the problem, having ignored independent production for so long, thereby allowing areas such as Canada time to develop a skilled labor force and infra-structure. Others point their finger to economists and say its their fault for creating economic models that result in favorable exchange rates or cheap labor in other countries or states.
Surprisingly, most independent producers don't believe that, despite the rhetoric, California and the Los Angeles government, or the Guilds or unions, really understand the problems, the real economic impact of lost production or what it really takes to change the flow of production. My own experience supports this perception. Over the past two years there has been much talk by government and the unions, but the fixes implemented or proposed have been inadequate, and not, from the independent producer's standpoint, really effective at addressing the real problems. To address the problem, one must understand the realities of production of independent films and the differences between studio and truly independent production.
The productions that are leaving Los Angeles are, generally, films produced by producers or production companies not supported by studios or large capitalization. The films are made for $5 million or less (despite the hype) and, more likely than not, and despite intentions to the contrary, are destined for initial U.S. exhibition on cable television. A fact rarely understood by those not involved in the production or financing of Indie films is that for most of these films, 80% or more of such film revenues will come from international, mostly television. Another fact not recognized is that in the last few years independent producers rarely make any profit (however you define it) on a film. As such, independent producers live film to film. Money made on one film is used to pay the debts incurred to get the current production off the ground and/or are used to try to get the next production off the ground. Given the vagaries of the financing of independent films, an Indie producer, no matter how successful, never knows if the financial pieces will come together to get the next film into production before the cast pay or play offers are payable or the bill collectors knock the door down.
Independent producers will do whatever is necessary to get their film financed. If financing is easy, as it was in the 80's and certain parts of the 90's, where to shoot a film, aside from script concerns, was not part of the decision process. When financing becomes difficult, as it is now, and the "where" impacts the financing and/or budget, the "where" to shoot becomes an integral part of the production decision.
Today, producers of independent films have an extremely hard time putting the financing for their films together. Only a handful of international distributors still prebuy films. Domestically, producers face better odds of making it into competition at the Sundance Film Festival (16 films out of 850 submitted) than getting a U.S. distribution deal. A producer is lucky if he or she can cover 40%-50% of a budget with presales. Banks now require 75%, rather than 50%, of the budget to be covered by presales, resulting in probably less than half the number of films bank financed in the past 12 months versus the 12 months before that. And the new insurance financing schemes are also cutting back on single picture financings.
Combine these negative financing factors with recent changes in Guild policies and other factors which have caused budgets to increase rather than decrease on independent films, a strong dollar which has made goods and services in other countries cheaper, economic incentives provided by governments of various locations throughout the world and reduced costs of production in some locales, and there is a tremendous financial incentive to shoot a film elsewhere. A financial incentive that helps to get a film into production given the financial reality of today's independent film industry.
The only way to get an independent production to stay in Los Angeles is to make it easier to finance the costs of production. Making the process more user friendly couldn't hurt either. Both can be accomplished through a combination of lower costs, financial incentives and changes in business methods.
The biggest competition to Los Angeles production is Canada. Financial and business incentives in Canada are enormous. You have an English-speaking country with skilled labor. Exchange rates are favorable, resulting in substantially reduced labor and materials costs. Tax rebates from the government help reduce production costs by another 10%; more in some provinces. Films meeting certain production standards enjoy higher sale prices in Canada than non-Canadian productions. All told, it is possible to save or finance a combined 25% or more of the costs of production. A film that might have cost US $3,000.000 in Los Angeles, might only cost a little over US $2,200,000 when all the financial benefits are added up. Finding the financing (presales, gap loans, equity) to cover US $2,200,000 is going to be a lot easier than finding the financing for a US $3,000,000 production.
Another factor is the Guild and trade union situation. A trade union production can add $ 100,000 or more to the cost of an Indie film. Shooting in a place free of this extra cost and associated production requirements is paramount for many productions.
The Guilds have also not been particularly helpful, despite their touted "low budget" programs. These "low budget" programs have certain advantages, such as lower minimum wage payments, but did not address the real problem for independent producers, residuals. More importantly, the Guild concerns and tactics to enforce residual payments have added (some say significantly and others say it was the proverbial "straw that broke the camels back") to the problem.
At a time when producers were having a harder and harder time of putting their films together, SAG and DGA decided it was time to require independent producers to put additional monies in their budget (usually an additional 5%-10%), rather than less, to be a security deposit for the residual obligation. They also required more stringent and extensive documentation to protect their members. All of which is commendable from the standpoint of protecting their members rights. But their policies and tactics have probably hurt their members financially, more than it has helped, given the number of productions that have left the United States. Much can be said of the tactics, which probably more than any other factor, created ill will between the Guilds and Indie producers, banks and completion bond companies. While there is no question that the Guilds needed to do something to help protect their members right to residuals, the timing and tactics could not have come at a worse time for independent productions. With a desire to avoid both the financial and psychological impacts of recent policies, Indie producers sought asylum in Canada. Canadian Guilds have been much friendlier on the residual issue. Deposits have not been required. Assumption agreements and security documentation are much more relaxed. More importantly, ACTRA (the Canadian equivalent of SAG ) allows for a buyout of most residuals by way of larger minimum payments to members during production. While this adds some cost to the production, overall it is not significant and, more importantly, it eliminates the long term burden for both the producer and the Guild.
Most outside our Industry, and even most in the business of independent films, don't realize that residuals are due whether a film is profitable or not. The Guilds will point out that residuals are not intended to be a profit participation, because they are payable whether a film makes a profit or not. For an Indie, any payment outside of the budget, whether gross, net or otherwise, is a profit participation, and probably not a payment that is viable. Therein lies the problem for the Indies.
A typical independent film made for an average of $3 million will, today, on average, generate about $3.5 million gross. After reduction for sales commissions and expenses, actually less than the production cost is achieved. The short fall comes from the sales agent who will never earn its full fee, having deferred it so that the bank can recoup its investment. At the same time these gross receipts are being used to pay the bank back its loan, an obligation for residuals of , about $350,000 (this includes PHW) has been created. The producer has no resources to pay this sum, nor in most producer's minds should they when the actor, writer or director has been, in the producer's mind, fully compensated for work on the production.
In summary, when combining the lower costs of production, tax rebates, subsidies, and other incentives, and elimination of the union and Guild issues, 25% or more of the cost of production of a film can be eliminated by shooting in Canada. Other countries in the world provide financial incentives for shooting in their countries including, but not limited to, Ireland, Australia and the U.K., not to mention other financial incentives out of Luxembourg and Germany. These financial incentives, even after reduction for higher production costs in many of these places, can reduce or support the financing of 20% to 65% of a film's budget.
Given the various articulated problems, what can the United States, and Los Angeles in particular, do to correct this problem. Here are my suggestions with regard to each of the problems or disincentives I've described above (all of which I recommend be enacted for productions with budgets under $5,000,000).
Sales Tax Exemption
The 8+% California sales tax added to rentals and physical materials used in production adds up. Other states and countries have taken the initiative to eliminate this cost, or the equivalent, to attract productions and so too should California. Based on a $5,000,000 budget, the typical savings would amount to about $75,000 - $125,000. A significant number for an independent film.
The California legislature is considering several possible programs, all of which are based on tax credits. None, in my view, are sufficient and most would be bureaucratic nightmares, have less of a net benefit than contemplated and will likely not change production decisions significantly. I would recommend a program that provides a direct payment to the production company based on easily verifiable criteria. The program should provide for a preproduction application and certification. That way the payment can be banked and the requirements bonded so that an advance against the payment can be obtained to actually help finance the film. I would also recommend the payment be $500,000, regardless of budget, but dependent on at least 90% of production and post production being expended in the state. A fixed number will provide more certainty, easier banking and a greater benefit to most productions. Lower ($ 1 million) productions will especially benefit by such a large portion of their budget being covered, enabling them to continue to train our industry, as well as employ workers who don't work as much or earn as much as others in our industry.
Another concern about the current proposals is that they focus on a transferable tax credit. Transferable tax credit programs create an industry in themselves. In most jurisdictions that have transferable credits, partnership type structures are offered to investors to purchase the credits. These structures involve legions of promoters, lawyers, brokers, accountants and others, all of whom charge fees and incur expenses that reduce the benefit to the production
As previously mentioned, the current low budget programs by two of the Guilds are not, in my view, truly responsive to the needs of independent production. While I would like to suggest residuals not be payable until after break-even, I doubt that this suggestion will get very far. My second alternative would be to adopt a system, similar to that in Canada. Namely, a program by which producers can elect to pay extra to actors and directors during production to eliminate the ongoing residual obligation. A comparable program will even the playing field.
The reality is that very few independent productions have, in fact, paid residuals over the years and that an enormous amount of resources have been expended by both the guilds and the producers in trying to deal with these issues. The current guild preproduction enforcement program is a major factor in less films being made here. The fact that Canada offers an alternative will continue to be an attractive incentive to productions unless this issue is dealt with on a comparable basis.
Many independent productions that leave Los Angeles for elsewhere in the United States do so to avoid this particular union problem and the extra costs associated with it. If the idea of the union is to cause employment for its members, finding an overall program for independent productions would seem to be a better way to go. One bill before the California legislature gives financial incentives to productions employing union labor. The bill has the right idea but, just as the guilds with their low budget programs, does not adequately address the problem. I would suggest that a program be adopted that permits a lower budget production to sign on to the union, and thereby be required to employ union members, but that's it. No minimum wage, no shop rules, no minimum number of workers to be employed for a certain task, etc. A moderate contribution to the union pension fund (which is done in most situations of shutdown anyway) could be built into the program. SAG and DGA have adopted programs like this with respect to really low productions. Most films under a few million dollars avoid the unions anyway, so why not find way to work together.
In summary, the foregoing suggestions could reduce production costs by 20 to 35%, depending upon which proposals are enacted and how they are taken advantage of by productions. These proposals will make the Los Angeles region more financially competitive with other areas and more palatable. Given that most production companies are based in Los Angeles, lower cost and less anxiety will help keep production at home.
Reprinted with permission by The Business of Film
Law Offices of GREG S. BERNSTEIN, A Professional
9601 Wilshire Boulevard, Suite 240, Beverly Hills, California 90210-5288.
Phone: (310) 247-2790; Fax: (310) 247-2791; Internet: www.thefilmlaw.com