MAY 2003





Annual Report on the State of Indie Film Financing


For the past fifteen years, respected Entertainment lawyer Greg S. Bernstein has written a series of exclusive articles on the state of the Independent Financing for the Independent sector of filmmaking for The Business of Film’s Cannes Film Festival edition. Despite the negative economic realities, which all independents are aware of, Bernstein once again offers  insight into ‘tough times” for the emerging Indie producer based on the  harsh economic realties of 2003.

Greg S. Bernstein

A number of jurisdictions – notably New Mexico, Australia and Fiji – implemented new incentive programs during the past year to entice production to their locales. The possible financing benefits that come from these new sources are overshadowed by the down scaling of continued German funding, the UK government’s limitations on UK sale leasebacks, as applied to UK/Canadian co-productions, and a dearth of presale activity.   

Budgets have been reduced lower in an attempt to make films on the financing that still exists. Films that only a few years ago might have been made for $2 million must now be made with the same quality and cast, but for well under $1 million. $15 million films must now be made for $8 million.  Whatever the budget, the question still remains: how to raise the financing to produce the film?

As we all know, the prices and demand for films due to stockpiling and the rollover effect of 2002- 2003 remain at all-time lows, with many territories cutting back on their purchases, regardless of price.  Lower prices, and films going unsold in many territories, all mean a tighter market for financing since the risk of recoupment, let alone profit, is too great. So the banks have reduced their level of gap financing, and correspondingly the level of risk they are assuming, at the same time as the buyers have reduced their presale appetite. A financing “Catch 22” if you will.

Currently, bank gap financing runs between 15% and 25% of a film’s budget.  The banks that provide gap financing do so based on their analysis of the film’s commerciality (using their past experiences, not subjective determinations), the reputation of the sales agent in meeting sales estimates, analysis of the current market, and sales estimates for the film.  Most importantly, few banks will gap finance without some presales to test the market for the film and justify the sales estimates. With only a few territories still prebuying, meeting the bank’s criteria is tougher than ever.

For those few films that can attract presales, those presales probably only amount to around 20% to 30% of a film’s budget. Those films that can garner prebuys are, generally, limited to very commercial films with fairly well known casts. The typical low budget genre films, dramas and comedies just don’t cut it when it comes to presales.  In all these cases, the buyers would just as soon wait and see the finished product.  

So, most indie films, which typically don’t have budgets to support the name casts needed for presales, are struggling to look to something other than presales and gap financing to get made.

Most producers first think of government incentive programs, usually referred to as “soft money”, such as Canadian benefits and subsides, UK sale leaseback’s, Australian rebates, the new Fiji incentives, and other programs around the world, as a means to solve this financing dilemma. But these can only generate, on average, about a 15% benefit. Currently, it takes more than a
co-production to finance a film.  That said, it’s possible to combine benefits from more than one jurisdiction to increase the benefits to 25% to 40%. Combining benefits from different territories is very complicated, and an example is given in this article.  In general, while Canadian benefits are accessible for any size budget, and shooting in such places as Romania will substantially reduce the cost of production, most European and multi territorial “co-productions” while doable, involve a tremendous amount of expertise, which on small productions under
$1 million I would venture is not cost effective.

In the last couple of years, the arena for indie film finance has been German equity funds. Most German funds have been supplying between 20% and 35% of a film’s budget (as with most tax based programs, technically they fund 100% of the budget of a film, but because of the required guarantees, the effective funding is far lower).  What many producers don’t realize is that when they access a German fund, they have to guarantee the German fund back 65%-85% of the investment, and secure most of the guarantee with a letter of credit or other collateral. How is a producer going to make this guarantee? After all, if the producer can supply such a collateralized guarantee, the producer probably has the wealth, presales or other collateral to make the film without the German fund.  And therein lies the problem. To access the German funds and supply the guarantee, the producer must have presales, gap financing, and other benefits or money to back the guarantee.  Thus, the available German funds can only be accessed by those who are missing the last 20-35% of their budget.

Last year, the German government decided to alter the German tax rules that made the funds attractive to German investors. What we have been seeing in the past 9 months has been investment by funds that were grandfathered under the old rules, giving many a false sense of financial security.  Funds that still qualified under the old rules were able to raise money and, for the most part, have already committed these proceeds to various films being made right now.  Of course, once in a while, a targeted film falls out and the fund needs to scramble to find a replacement.  Some time soon, the funds raised late last year will run out.  As of the writing of this article, the German government had not come out with new regulations that would keep the fund activity alive, at least not for the typical American indie filmmaker.  That said, some German funds believe they have found some loopholes that may or may not prove viable if successful, or at least until the government changes the rules to plug up these loopholes.

At about the time the German funds started to worry about their future, the British equity funds and super sale leasebacks, which can bring 25-40% of a film’s budget to the table, started to materialize and bring hope to the indie film world.  While there is no question that, in theory, these programs could generate significant funding for indie films, the UK equity fund, which came out last year with much fan fare, has not proven to be the windfall that we had all hoped for.  Whether it be a lackluster economy or that the fundamental risks of investment in films were still too great for most UK investors, UK residents just did not flock to the equity funds, leaving many expectant producers high and dry.  On the other hand, early this year, some enterprising UK leaseback fund managers (such as Grosvenor Park)  announced structures for so called “super sale leasebacks” that appear to ameliorate some of the risks associated with the equity funds.  It’s too early to tell whether these structures will succeed or not.  But once again, these funds only supply a portion of a film’s budget, with the balance coming from equity, presales, gap, and other soft money benefits.

At this point of the analysis of indie financing it is clear that a larger budgeted, commercial film, with top name cast, might pull together 60-75% of its budget from gap, presales, German funds, UK leasebacks, and soft money, while a typical low budget film will be floundering.

That is true.  However, while lower budgeted films might access modest benefits from Canada or might run to Romania for next to nothing production costs, the only way any film today can get made, and virtually the only way for low budget indie films, is through good old-fashioned equity.  

A look at the films debuting for sale at this year’s Cannes Market, demonstrates that virtually all of them were funded, in whole or in part, by either investors or by the production company itself utilizing its existing asset base, using cash flow generated by their existing films and libraries.  This cash or equity has been combined perhaps with the German funds, presales, gap or other soft money described above to complete the financing package. So regardless of all the various financing schemes, good old-fashioned cash needs to be available.

In conclusion: there is never an easy answer to the equity equation and how to find investors for the indie producer trying to solve the present state of indie financing. To me, it seems just a matter of luck.  Being in the right place at the right time, Think about it.  How did My Big Fat Greek Wedding get made? What if Rita Wilson never went to see the play?  I could list several well known companies that we all talked about several years ago, scratching our heads asking “how did those guys convince some controlling shareholder of a NYSE company to invest in their fledgling film company?”  It seems that the key to finding investors has nothing to do with having the best film project or the most interesting cast.  At the end of the day, it’s just a matter of perseverance and luck. So, for indie filmmakers it’s time to hit the talk circuit. Namely, talking to just about all wealthy persons they meet and trying to convince them to take a chance on their film.  



Reprinted with permission by The Business of Film

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