An Overview of Film Finance
By John W. Cones, Attorney
There are so many different ways to finance one or more feature or feature-length documentary films, that it is extremely important for independent producers to focus their efforts on those forms of film finance that are most likely to produce favorable results for their current project. Without this focus of time and effort, the film finance campaign is less likely to succeed.
First, we must recognize that some forms of film finance are tied to distribution. Others are not. This article does not advocate always choosing one of those two approaches over another, since both have advantages and disadvantages for particular films. Sometimes the filmmaker simply has to go with the form of film finance that is available regardless of whether distribution is in place. A more detailed analysis of the advantages and disadvantages of each form of film finance is set out in my book “43 Ways to Finance Your Feature Film – Third Edition” (Southern Illinois University Press).
Secondly, it is important to understand that there are three different stages in the life of a feature film, each of which can be financed separately (i.e., in a different way). These three major stages in a film's life are: (1) the development phase (including the cost of acquisition of rights, developing a script, attaching elements and marketing the package to production financing sources), (2) the production phase (including pre-production, principal photography and post-production) and (3) distribution.
Considerations regarding the manner in which these three stages may be separately financed are sometimes difficult to distinguish in many real world transactions. The combinations traditionally used in the industry tend to fall into one of the following five distinctive film finance/distribution scenarios (or some variation thereof). Each film finance/distribution scenario will typically require that the independent producer engage in a different set of activities and communicate with a different group of people and to seek financing at varying stages in the life of the film. In addition each such scenario tends to work best with different levels of film budgets.
In-House Production/Distribution – The so-called vertically-integrated, major studio/distributors, along with some of the other more established film production companies offer filmmaker support for the development of film projects. In such cases, the filmmaker (who may be a producer, director, screenwriter or actor) is approaching the film entity at the idea stage. The filmmaker may have documented the idea by creating a synopsis, outline or treatment, but usually has yet to complete a screenplay. The filmmaker seeks an opportunity to pitch his or her idea to a creative executive at one of these film entities and is seeking to obtain a so-called development deal from the film entity through which the film entity provides development funding for the project. If obtained, the filmmaker develops the project at the studio under some level of supervision of studio creative executives and hopes to eventually obtain “green-light” (i.e., approval) for studio production funding, although the odds of obtaining production approval for an in-house project are estimated to be in the 1 to 500 neighborhood. If the film is produced, then the film entity that provided the development funding would have the right to distribute the completed film with the studio-affiliated distributor using the distributor's funds to cover distribution expenses. If the filmmaker or others originally involved with the project remain attached, they do so as employees of the studio or project. In this in-house production/distribution scenario, one film entity is providing the funding for all three phases in the life of the film. Usually, the in-house production/distribution deal is reserved for some of the more high-budget pictures, let’s say in the $50 million and up category.
Production-Financing/Distribution Agreement – A filmmaker seeking a production-financing/distribution (P-F/D) deal approaches the film entity at a later stage in the development of the project. The filmmaker is responsible for raising or otherwise providing the funds to cover the development phase financing and puts together a producer’s package before approaching the film entity. The producer’s package minimally consists of the completed script, a budget, evidence of attached elements (i.e., written commitments from a director and lead actors) and chain of title documents. The filmmaker is actually asking the film entity to provide production funding and distribution. Usually, the production funding takes the form of a loan to the filmmaker’s company and the interest on that loan has to be paid back to the funding entity prior to negative recoupment. The film entity’s money is used to produce and distribute the picture. The distribution agreement is entered into (theoretically) prior to the start of production, or at least before the end of production. The distributor will deduct its fee, recoup distributor expenses, collect interest on the production money loan and then reduce the negative cost with remaining gross receipts, if any. In this scenario, the filmmaker was responsible for financing the development phase of the project, then asked the film entity to finance the production and distribution phases. The P-F/D deal at the major studios is typically reserved for the medium-budget pictures, let’s say in the $20 million to $50 million dollar range.
Negative Pickups (and other forms of lender production-money financing) – When a filmmaker is seeking a negative pickup deal, he or she is approaching the film entity at the same stage in the life of the film project as for the P-F/D deal (i.e., after the development phase has resulted in a producer’s package) but approaching an executive in the distribution division of the film entity (as opposed to a creative executive on the production side). And the filmmaker is not asking for production financing from the distributor, rather he or she is asking for a distribution agreement and guarantee to pay a specified sum of money upon delivery of the completed film as described in the negative pickup distribution agreement. That agreement, for example, will state that the film must not significantly depart from the script in any significant way, that the specified actors appear in their respective roles, that the named director direct the film, that the film be produced for a specified amount, that it be limited to a specific running time and that it obtain an MPAA rating no more restrictive than the specified rating.
The filmmaker then takes that negative pickup distribution agreement and guarantee to an entertainment lender (the entertainment division of a bank) and seeks to obtain a production loan from the bank, effectively using the distribution agreement as collateral. The bank will require the filmmaker to obtain a completion bond so that the bank will not be exposed to the risk that the film will go over budget. In this scenario, if the loan is made, the film is produced and delivered to the distributor per the terms of the negative pickup distribution agreement and guarantee, the distributor will then pay the specified sum and the money flows to the bank to repay its principal, interest and fees. In this scenario, the filmmaker was responsible for financing the development phase of the project (i.e., he or she created and approached the distributor with a producer’s package), a bank loaned the production funds and the distributor pays for the distribution expenses. Three different entities paid for the three phases in the life of the film.
The negative pickup and other forms of these distribution/finance agreements associated with lender financing are typically entered into prior to the production of the film and are most commonly used to finance the production costs associated with low to medium range budgets (e.g., $5 million to $15 million). Other variations on lender production financing include foreign pre-sales and gap financing (for additional information re these specialized forms of film finance see my book “43 Ways to Finance Your Feature Film”).
The Acquisition Distribution Deal – In one sense, all of these five so-called film finance/distribution scenarios are, from the distributor’s point of view, different ways to acquire product. But, for the filmmaker to better understand how film finance relates to distribution, it is important to look more closely at the nuances of each of these deals. When the filmmaker is seeking to approach a distributor with a completed motion picture and the distributor is seeking to acquire the rights to distribute that motion picture, the independent producer has already been responsible for financing both the development and production phases in the life of that film. Quite commonly, some form of investor financing (aka equity) is involved in the financing of such projects, often from investors outside the film industry. But, if the distributor acquires the film, distributor funds are typically used to distribute the movie. The distribution agreement is entered into after the film is produced. As a general rule, there is less risk for a distributor in acquiring a completed film, but more risk for a producer in waiting until the film is complete to seek distribution. On the other hand, at least theoretically, the producer with a quality film should have less difficulty attracting a distribution deal and negotiating a favorable agreement.
Some in the industry still erroneously use the term “negative pickup” to describe this transaction which is clearly different from the true lender financed “negative pickup” described above. This “pure acquisition” approach to film finance and distribution generally provides the producer and creative team with the most creative control (over scenarios 1 - 3), but involves greater financial risk for the producer and/or the producer's investors. Although there is no legal limit ultimately on how much money can be raised from investors, investor financing is most commonly used to fund the low and ultra-low budget projects (e.g., $100,00 to $4.5 million or so).
Of course, investor (equity) financing may also be used in conjunction with other forms of film finance to raise the equity component of a film finance plan. Such plans may, for example, call for raising 50% of the film’s budget from equity investors, 15% from foreign or domestic tax incentives, 20% from foreign pre-sales, 10% with gap financing and 5% from cast and crew deferrals. Both the percentages and the combined sources for a film finance plan may vary. The film resulting from such a film finance plan still may need to find one or more distributors to acquire the rights to distribute the film on an acquisition basis in specific markets or media, other than in the foreign territories where the film’s rights have already been acquired in conjunction with a foreign pre-sale.
The much talked about crowd-funding scenario which is generally only suited for film’s of $100,000 budgets or less would also fall into this acquisition distribution arrangement. True crowd-funding involves contributions (i.e., gifts) not investments (i.e., no profit sharing is offered). Crowd-funding may also be useful for startup funds relating to a film project.
Rent-A-Distributor Deal – In this situation, the independent producer is responsible for raising acquisition/development, production and some or all of the money needed to distribute the film. The producer is hiring an established distributor and its staff expertise to do all of the things distributors do (i.e., design and implement a marketing campaign, book the film in theatres, monitor and collect film earnings, calculate, report and pay all profit participants, etc.). Usually the producer will be able to provide more significant input to the distributor with respect to the marketing of the film in this arrangement. This type of distribution agreement is generally entered into after the film is produced. Distributor fees are generally at their lowest with this transaction, (e.g., 15%).
Conclusion – In any given year, these five film finance/distribution scenarios will typically be represented on the film slates of each of the so-called major studio/distributors, although in terms of numbers, the P-F/D, negative pickup and acquisition deal combinations probably generate most of the films appearing on such slates. On the other hand, almost all of the majors will have one or more in-house productions each year (typically, their hoped-for blockbuster/tentpoles) and the rent-a-distributor scenario is probably the least commonly used. The major studio/distributor sales representatives tend to use their coming blockbusters as leverage to gain favored treatment from exhibitors for the mediocre to poor films on their annual slates, thus partially explaining why many independent features of equal or superior quality get squeezed off theatre screens in favor of major studio product.
The independent distributors tend to rely more heavily on the acquisition and rent-a-distributor arrangements. Some of the more recent distribution approaches that work on an acquisition or rent-a-distributor basis include a distributor focusing on digital family films for theatrical release to the so-called second-run theatres in small towns across the country, a specialized sub-distributor that focuses on the hand-held device market and the non-profit distributor seeking to help filmmakers find markets for their films.
After reviewing this overview of film finance, hopefully, filmmakers will have a better sense of direction with respect to the type of film financing they should pursue for their current projects.
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