NOVEMBER 2005 – Special 25th Anniversary Edition
The Cry From Independent Producers Is Still:
Greg S. Bernstein
As we look back over the past 25 years, the avenues of financing to getting filmed entertainment produced have not changed greatly overall. It’s a cycle of available ‘market trends’ and the bottom line remains access to ‘the money’ and a good script. However, in the past 25 years the plethora of production entitlement programs has mushroomed to a dizzying level, with over 50 countries, provinces, states or local agencies offering some kind of entitlement for production in their homeland. An independent producer needs an advanced degree just to keep track of them, let alone analyze where the ‘real’ advantages lie. In 2004, the United States government also got into the act with the addition of accelerated depreciation on certain qualifying productions. [The real effect of this tax change on US production of independent films is still questionable, given the limitations of the passive loss rules on investors, and the likely repeal of the only real benefit, namely the arbitrage between deduction at ordinary tax rates and recapture at capital gain tax rates.]
Yet, because the net benefit to the production from any one incentive program usually only amounts to approximately 12.5% to 15% of the budget (it’s difficult to combine multiple jurisdictional benefits to more than 30%), and with the dollar down more than 30% in most jurisdictions, the benefits (particularly to US filmmakers) of traveling to one or more jurisdictions to take advantage of these benefits has become marginal. Many independent producers (or individuals with the title of producer) are under the mistaken belief that some programs can provide 100% of the financing for their film. While some elements of such structures might, at least on paper, provide 100% of the budget, the end result of the transaction usually only leaves 12-15% actually available to the producer to use to make his film.
While some jurisdictions have recently adjusted their benefits to try to take into account exchange rate changes, there is only so much government agencies can do, given that they have limited resources available for such purposes and exchange rates have changed as much as 40% in the past few years. Canada found production dropping precipitously as a result of the US Dollar falling from a typical CDN$1.67 to only CDN$1.25 or so. While most Canadian benefits to US producers have been doubled in recent months, it’s not enough to totally adjust for the change in exchange rates.
Thus, most non-US government entitlement programs have become a windfall to productions that would likely have shot their films in that locale anyway, for one reason or another, and are not really attracting new productions.
So where is the best place for most independent producers around the world to shoot their films? Currently, it’s the US!
For European based companies, there are a number of financing and production advantages. Most major stars are based in the US, and right now they are effectively ‘on sale’ for 35% off their rates from a few years ago. Factor in the same savings on the cost of production. After years of so-called runaway production, production in the US, thanks to ‘the value of the dollar’ and some state incentives, has made shooting in the US attractive, especially for European based companies. A producer can save 35% of the budget over the costs of shooting in Europe, and can take advantage of incentives of 10-15% of the budget. A camera package in LA that might have cost approximately Euro 3,500 per week a few years ago, now only costs Euro 2,500. There are professional and experienced crews and production companies that can have a production up and running in a few weeks. US based companies shouldn’t think that 45-50% of the budget is covered. It’s only 10-15%. That 35% savings is for not shooting in Europe. But Europeans do get that cost savings, making shooting in the US very very attractive. For foreign companies that 10-15% in rebates is comparable to a UK sale-leaseback. Counter in hassle free work environment, legal fees, and time, and there is every reason for producers worldwide to consider shooting in the US. Nevertheless, whether you are a US based filmmaker trying to take advantage of local benefits, or a European trying to shoot in the US, most of the financing for your film will come from equity.
While finding equity is still extremely difficult, the fact that so much equity is once again flowing into independent film production is very significant.
Equity (or venture capital) normally precedes traditional financing, such as bank debt, which takes lower risks and receives lower rates of return. Equity seeks out opportunities that are willing to pay higher rates of return, given the associated risks. As those risks fall, such as by more presales being available and the market to sell finished films having improved, debt financing starts to replace equity. (As a producer, if you have a choice between third party equity or a bank loan, you would pick the bank loan since you know that with the bank loan you have fixed interest and a finance charge that is included in the budget, while with equity you could give up the majority of the profits, not to mention executive producer fees, other charges and control.)
So why has equity again jumped into the market for Independent films? Many reasons. Over the last two years there was a surge in stock prices, leaving profits available for reinvestment. Interest rates are relatively low and not an attractive investment. With the market for independent films tightening, supply and demand have stabilized, which in turn has lead to a stabilization in film prices. Moreover, films are always ‘sexy.’ Having made money in other areas, investors always look for something ‘fun’ with the potential for huge returns. Most equity investors apply the same principals that they applied to make their fortunes. That being, taking calculated risks. So most of the films invested in by equity have tended to be commercial films with more certainty of results, or non-genre films, but with the reduced risks of soft money benefits and acceptable cast.
The ebb-and-flow cycle of independent production over the past 25 years is characterized by the independent film recession that occurred in late 2000. There was an oversupply of film, which caused prices to drop significantly. As time went on, the demand for films also retreated, causing further deterioration in prices. With prices falling, and many films not finding buyers at any prices, banks retreated from their gap financings of 50% or more of a film’s budget. Insurance backed deals also disappeared as the insurance companies took huge losses. With an oversupply of product, buyers did not need to pre-buy, and waited to see the finished product. With less presales and lower gap, the possibility of obtaining a bank loan became more and more remote.
As presales, gap financing and traditional bank loans became hard to come by, producers had to seek out equity and pay higher rates of return than what they were used to with banks.
Today, equity can take many forms. It may be as simple as an investor writing a check, or it maybe a non-official co-production where a local production company is supplying goods and services in the local market where the film is being shot.
Thus, combining soft money benefits, finding the holy grail of equity, and even shooting in such “low cost” locations such as the US, are the modus operandi of today’s independent producers.
Footnote: Last year, of the 18 films my law firm alone was involved with, all were financed in whole or in part by equity. Five years ago, that was not the case.
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