MAY 2004





Photo of Greg S. Bernstein

A Practical Guide for Filmmakers in the Independent Film Financing Galaxy

The annual  Cannes Film Festival is the  prime location where the entire industry from novice to most experienced gather to view,  pitch , sell, and market  film product from around the globe. In spite of the ” knowledge bank” within the film business, on all levels, from producers through to banks and investors, the complexity and time for putting together projects in today’s marketplace are often grossly underestimated. A  regular contributor to The Business of Film, Greg S Bernstein analyses the process that is often overlooked and the illuminates the fact  that  in spite of the  deluge of available material on the subject  more often than not  the fundamentals are misconstrued.

Greg S. Bernstein

As the industry gathers in the South of France for another Cannes Film  Festival, and the Festival organizers presenting a Producers  Forum on current financing for inide films, three recent meetings I had with producers demonstrates why,  with all the articles, lectures and panel discussions on the current flavor of the month  for  ‘independent   film financing’, producers are confused as to the practical aspects and realities of film financing.

Producer  A.  Was going to finance a genre film he was producing by preselling the entire $500,000 budget. He did not have any presales yet, but he believed he could go into production in about a month.

Producer B.  A producer with a number of projects under his belt and the experience that goes with it, was going to shoot his film in a particular state because they had a program that loaned 100% of the budget just for shooting in that state. He had no presales or other financing and would be looking to the state financing to fund the entire project.

Producer C.  An innovative producer who was going to shoot half his film in Fiji to pick up their 15% credit, half in Australia to get their 12.5% credit, do the post, about 20% of his budget, in British Columbia and get the combined Canadian and BC 27% credit, had presales of 40%, and would get some bank gap financing for another 15%.  He was very proud of himself that he had 109.5% of his budget covered before his film even got made.

The current climate, where  the maturing of the technology for digital film making, and the various incentives available from some 130 countries, has resulted in film financing becoming more complex  and muddled. Not just in terms of how each piece to the puzzle works, but even the most experienced producer grossly underestimates the time, complexity, and costs of actually closing the financing, even once they think they have all the pieces to the puzzle.

Can Producer  B get a loan to cover 100% of the cost of his film if he shoots in a particular state?  Yes, provided he has the collateral to back it up, and, of course, if he had that, he could get any bank to loan the money, whether he shoots in that particular state or not.  The only benefit of shooting in states that provide this type of incentive program is usually just a lower interest rate on the loan, and maybe a small financial benefit of 10-15% of the budget through a refund of sales tax or similar program. But 100% of the financing?  Not based on any of the current schemes available.

Can Producer  A  obtain enough presales at the upcoming market and make his film next month? While its possible to get the necessary presales, which is no easy task, presales are not cash.  It’s amazing how novice producers misunderstand this essential fact. The presale contracts need to be converted into cash through a bank loan.  That takes a remarkable amount of time. It used to be 4-6 weeks. Now it can take up to 3 months. Another complication in this particular situation is that its unlikely that the producer will find a bank or bond willing to participate in such a small transaction.  

And  can  Producer C, the creative producer who thinks he can combine several different benefits, have everything he needs to finance his film, and also make a profit before the film even shoots? While most financings these days do involve a multitude of jurisdictional benefits, most benefits are based on the amount spent in the particular country or only part of the expenditure (such as in Canada were it is based on the labor spend), not on the budget itself.   Thus, most benefits are not cumulative.   The few that might tend to be so only when complying with very complex and onerous co-production rules.  Thus, our enterprising producer probably only has 70% or so of his budget covered, rather than the 109% he thought.   

There are some fundamental errors in perceptions about the many film finance programs available worldwide.  First, no single film finance or incentive program actually provides 100% of the financing for a film.  Most programs that producers think provide 100% of the financing for a film (UK, Germany, Ireland to name a few) in fact provide only 10-20% of the financing. This error in perception originates from the fact that many incentive programs have their basis as local tax shelters.  In order to get the tax shelter benefits, most local laws require the taxpayer to invest or own 100% of the cost of a movie.  What many producers miss is that these structures require that there be an absolute, no risk, guarantee (although sometimes its not called that) to the investors for a large portion of their investment.  Although the investors are investing in movies, they are really just looking for the tax savings. So they could have invested in soybeans as easily as movies.  It all dependent on the tax benefits.  Since the investors are investing for the tax shelter benefits, they are not seeking to take any significant risk with their money. They are, however, willing to pay something to get the tax breaks they need to reduce their payments to the government. That ‘something’ is the piece of the benefit that the producer captures to pay for part of his film.

As an example, an investor in a movie in a particular country will save 30% of the investment in terms of saved taxes. (Investor invests $100, writes off the investment on his tax return, reducing his taxes by $30).  Thus his true investment is only 70% of the amount invested.  If the investor were absolutely guaranteed to get back 85% of his investment, say by putting the 85% aside in a bank account or having other acceptable collateral, the investor would actually have a profit of 15% even though it appears as if he lost money based on his $100 investment.  The 15% that the investor is not guaranteed back is the amount the investor is willing to truly invest in the movie and is the net amount available to the producer to use to make his movie.

With some exceptions, most of these guarantees have to be backed by a letter of credit (akin to a cashiers check).  The issuing bank won’t issue the letter of credit without having acceptable collateral. The collateral many times consists of presales, gap, expected subsidies, equity and other sometimes the expected net benefits from another jurisdiction (for example, a 14% UK benefit, 12% Luxembourg benefit, 40% presales and 14% bank gap financing, might combine to equal the 80% guarantee a German fund is looking for, assuming one could shoot the film in Luxembourg, do the post in the UK and meet the co-production treaty requirements).  In some of the simpler guarantees, the structure uses the investor’s own money to be put aside in a bank account to fund the guarantee.  Of course, in that situation, you still need to find the rest of the financing for the budget.

Intuitively, when one thinks about the idea of raising money from investors for a tax shelter and putting part of it aside for the guarantee or supporting the guarantee with other financing,  one already starts to realize this is a time consuming, complex and possibly risky (in terms of it happening) proposition. The number of investors willing to invest in a tax shelter depends on the level of prosperity in the economy of the country and sometimes world (e.g. a down stock market or recession decreases the level of need for tax shelters), the timing of when investors want to invest (e.g. the tax years around the world vary and investors don’t invest in tax shelters at the beginning of the tax year since they don’t know how much income they will need to shelter), and changes in the tax laws. e.g. the recent promulgation’s in the UK and Germany and the effect they have had on both programs that the regulations were directed at and the chilling effect they have had on other established programs, that can eliminate a popular program.  Its interesting to note that recent tax shelters in UK and Germany were actually not intended as a film incentive but a situation where inventive tax lawyers and accountants found loopholes that could be exploited for film.  When the government realized what was happening, they issued regulations to curtail the tax abuses. The net result is none of these financing structures happen over night.

Not all-incentive programs are tax shelters. Many countries provide direct (or quasi direct) subsidy programs.  These are programs like those in Canada, Fiji and Australia to name a few.  These types of benefits are usually based on how much is spent in the particular country.  So you can spend money in two or three countries and get each country’s benefits, but they are proportional (if you spend half your budget in Australia you will get the 12.5% subsidy on the half you spend there and if you spent half your budget in Fiji you would get the 15% subsidy on the half you spend there, so you end up with a benefit equal to 13.75%, not 27.5%).  (there are some small exceptions to the above, but I am not going to get into that here).  Then there is the “catch 22” that the subsidy is normally paid after the shoot is complete, but you need the money to spend on the production now.  The solution is usually a local bank willing to loan against the probable benefit, but that takes time and the costs reduce the net benefit.

While some countries give benefits simply for shooting in their country (although they might have some minimum spend requirements), other programs may have more onerous requirements. Such as the writer or actors being of a certain nationality, or the project approved by a government agency.  The UK programs and certain Canadian programs, are dependent on both spending money in the particular country and meeting either the required content or other rules, or the requirements of the co-production treaty between the countries involved in the project. If you are trying to access benefits from two or more countries, one or two of the countries may only give their benefits if the project meets the requirements of the applicable co-production treaty between the countries.  Each time you add a country to the mix and are utilizing a formal
 Co-production treaty, an additional layer of government bureaucracy and oversight is added. Working with any government for any situation, whether its film related or not, is beset with delays and pitfalls. It becomes multiplied in a co-production situation.

Assuming one has surmounted the nuances of all the various incentive programs, many times the biggest obstacle is time.   In the last eighteen months financing closes months beyond what was anticipated, and many close long after the film is even shot (these of course are situations where the producer was able to access some interim bridge financing).  Its not a matter of poor preparation by the producer or a lack of expertise of the attorneys and other professionals involved
It’s simply that the complexities of today’s financing schemes result in a long drawn out process.

Take the traditional presale, the presales are only a piece to the puzzle, but when added to the interrelated problems and the domino affect grows.

Recently, I had the situation of a film that had enough presales at MIFED to get made. The producer set the start date for early January on the assumption he “had the financing”.  Yet having enough “sales” and having the cash to actually make the movie are two different things. As I previously mentioned, many novice producers don’t realize that presales are not cash in hand the moment the presale is made.  Presales are agreements to pay an agreed sum for the distribution rights to a film WHEN the film is delivered.  So they could be thought of them as receivables to be.  Banks are willing to lend the value of these contracts based on the credit of the buyer. If the bank believes the buyer will pay when the film is delivered, the bank will “bank” the contract.  Not all presales are bankable, either because of credit issues or because the presale is from a small or unstable country, which makes collection uncertain.  Many times producers have anywhere from 10-20% of their presales not bankable for one reason or another. The banks will take them as added collateral, but the banks will not fund against those contracts. So producer who thought they had enough presales, now find they have less than they thought, which usually requires that they either get more presales, other sources of financing or deferments (usually of the producer’s fees).

Presales are not bankable until a) the presale contract is signed by the buyer, b) a document called a notice of assignment is signed by the buyer, and c) the Bond Company agrees to guarantee delivery.  (the notice of assignment are a complexity upon itself, however , essentially,  it is a document that defines specifically what items have to be delivered to the buyer for the buyer to pay, what happens if there is a disagreement, and, finally, that the buyer agrees to pay the bank directly). As simple as it sounds, it’s not.  Sometimes one or two missing documents can side whack the whole process.  And the banks won’ t finance part of the money. It’s all or nothing. Banks will not get paid back their loans unless the film is delivered. While the completion bond insures that a film will get finished and delivered, it only makes that assurance if the money is made available by the bank or financiers to meet the bonded budget.  So if the bank loans money before it has all the pieces to the puzzle, it could be taking a risk that it did not plan to take.

Despite having done this documentation hundreds of times before, it cannot be reiterated enough, it takes time for the buyers, banks, bond companies, sales agents, and all their lawyers, to review, comment and approve the documentation. Each time one party comments or changes something; it affects the others involved in the deal. A domino affect. Is created from the simple issues arising from wording specific to the particular project, the materials the buyer is expecting to receive to trigger payment, what the bond company is willing to guarantee will be available to be delivered, and what the producer has budgeted, are among some of the common interrelated problems.  

Then there are extrinsic influences. That obvious as they are not factored in. Trying to close the financing on sales made at MIFED before the holidays is plain asking for trouble.  Or you are in desperate need to get responses to satisfy another aspect of the puzzle and you find the bankers and lawyers in Europe are off for Public holidays specific to a country you have never heard of, and by the time they get back, the US are on Public holidays, they have never heard of frustrating those in Europe.   Add to all that the fact that most of the executives who have to make the decisions are traveling g to festivals or markets when problems arise.   Making the whole process not easy to resolve when the issues need answers.  
The bottom line is, when it comes to the independent financing of films today, it is NEVER as simple as it sounds, and factor into the process that everything that could go wrong in the process, most definitely will  



Reprinted with permission by The Business of Film

Law Offices of GREG S. BERNSTEIN, A Professional Corporation
9601 Wilshire Boulevard, Suite 240, Beverly Hills, California 90210-5288.
Phone: (310) 247-2790; Fax: (310) 247-2791; Internet: