Financing the Film Industry

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Financing the Film Industry

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• Karen Niwinski
• April 5, 2002

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Ways and means to finance your film

• Investing in a motion picture is risky business.
  Unless a film was fortunate enough to garner
  sufficient advance sales, to cover at least the
  movies production cost, there is no guarantee
  and little promise that the investors will recoup
  their investment or earn a small profit.
• Film is probably the worst investment anyone
  could make. One might as well go to Las Vegas and
  throw the dice- in fact, those odds are probably
  better!

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Ways and means to finance your film

• Investor Financing
• Partnerships
• joint venture
• limited partnership
• Corporation
• Industry Financing
• Studio Development Production
• Foreign Financing
• Lender Financing
• bank financing
• presales financing

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Investor FinancingPartnership joint venture

• Any partner may pool their monetary, creative,
  and business resources
• all partners, or a combination of partners are
  considered active
• every one of partners has agency power- one
  partner can bind all members in a joint venture-
  if one partner incurs debts related to the
  project the partnership is involved with, all
  partners are liable.

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Investor FinancingPartnerships joint venture

• Each partner individually can perform any service
  necessary to conduct business
• Each partner is personally liable for the debts
  and taxes of the partnership if the partnership
  assets are insufficient to pay any creditors
  and/or IRS claims, each partners personal assets
  are subject to attachment.

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Investor FinancingPartnerships joint venture

• Unless partners agree to share profits and losses
  equally, they have to agree on a sharing ratio.
• Partners cannot compete amongst each other in the
  business.

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Investor FinancingPartnerships limited

• Limited partnership is composed of a group of
  limited partners (the investors) and one or more
  general partners (the producer, or producers).
• Risk only the capital the invested.
• Never pay if picture goes over budget

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Investor FinancingPartnerships limited

• invest because of tax benefits
• interest payments are deductible
• expenses are passive
• if capital gain, gains will be taxed as regular
  income.
• equivalent to having a share

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Investor FinancingAdvantages and disadvantages
of partnerships

• Advantages
• limited partners do not necessarily have to put
  up funds, but guarantee the bank loan by issuing
  letters of credit
• partners are more easily set up than a
  corporation
• partnerships can be set up from film to film
• among reliable partners, all working for the same
  goal, a venture makes a great production team

• Disadvantages
• the general partner (producer) is liable for a
  films over budget and other debts
• limited partners lose then their limited
  partnership status if they become actively
  engaged in the limited partnerships business
• In a joint venture, partners are agents for each
  other and liable for each others debts incurred
  in the management of the business
• limited partner shares cannot be solicited
  publicaly

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Investor FinancingCorporation

• Right to issue stocks
• corporation v. partnerships
• ownership in corporation is evidenced by stock
  certificates, but ownership of stock certificates
  does not give a stockholder the right to
  participate in the corporations management.

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Investor FinancingCorporation advantages v.
disadvantages

• Advantages
• corporation rather than directors are responsible
  for debts
• corporate shares may be more readily transferable
  than interest in partnerships if there is a
  market for them
• shares can be sold publically.

• Disadvantages
• costly to set up
• have to adhere to stringent rules and regulations
  (i.e. stockholder meetings, directors)

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Industry FinancingStudio Development Production

• Development Deal Memo
• Step Deal
• i.e. Warner Brothers, Disney, Sony, Universal,
  Paramount, 20th Century Fox

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Industry FinancingStudio Development Production

• Advantages
• use studios money and studios development
  companies
• studios can provide for bigger pictures because
  they have a higher production budget.
• Collaborative process

• Disadvantages
• odds are not good
• Hollywood System
• theft
• lose material to studio if project is delayed
• can be laid off at any time

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Foreign Financing

• All countries insist on the following
• picture must be a major production
• U.S producer may bring in an American director
  and two American stars, all others must be hired
  within the country
• all key personnel must be hired within country
• must have national content
• certain percent of revenues from the film must
  remain in that country

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Lender FinancingProduction Loans

• Lender financing is process of obtaining a loan
  from a lending agency to finance the development,
  production, and/or distribution of your film.
• Bank Loans
• banks can only lend money based on measurable
  risk, and only credit they can take is collateral
  or assets being offered to secure the loan
• resource loan loan made only if an endorser
  (producer) is made personally liable for payment
  in the even the borrower (production company)
  defaults
• debt or equity transaction important to make
  clear how intended loan is to be characterized.
• Equity investment- the lender becomes an investor
  whose investment is at risk.

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Lender FinancingProduction Loans

• Cost of loan is tied to the prime rate, which is
  the rate of interest the bank pays to borrow from
  the Federal Reserve
• floating number that fluctuates
• in commercial lending, loans to low-risk firms
  (major studios) are 1/2 to 1 above the prime
  rate
• small production companies pay 3 above the prime
  rate
• EX.
• Say the bank charges 2 percentage points above
  the prime rate and the prime rate is at 9.
  Total the rate is 11. On a 1 million loan, the
  bank removes 110,000 (1 million 0.11)
• To hedge risk the bank retains another 1-2
  incase prime goes up
• if the bank charges 1 , another 10,000 is added
  to their retained amount, now down to 880,000.

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Lender FinancingProduction Loans

• Advantages
• lender does not share in the net profits
• lender does not have any creative control
• option of a non-collateralized loan, which is not
  supported by collateral and therefore may be
  suitable for development money or for financing a
  low budget picture

• Disadvantages
• have to be paid back
• may lose collateral and non-collaterized loans
  are limited
• loans have a specific term, where they are
  repayable on or before a specific date,
  regardless of whether the film made it

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Lender Financingpresale financing deals

• Presales- funding of a films production costs
  through the granting of a license for the films
  rights by a producer to a distributor in a
  particular media or territory before the
  completion of a film.
• Take forms of
• funds
• guarantees
• commitments
  
• EX if you have a contract for the presale of
  your film to a distributor, then you may be able
  to present the contractual commitments to a bank
  or lender and walk away with cash

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Lender Financingpresale financing deals

• Revenue cap
• a certain amount of money in sales, up to which
  the buyer gets to keep all the money.
• Buyers try to estimate the highest amount that
  the movie will make and then try to make that
  amount the cap
• after the revenue cap is reached, the seller may
  start receiving a percent of the revenue or may
  renegotiate the deal

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Lender Financingpresale financing deals

• Advantages
• Can provide for a big portion of financing.
• Less creative intervention.
• If you arent confident in the economic upside
  potential of your picture, then a presale
  arrangement is a viable option.

• Disadvantages.
• Difficult to collect the money from the lenders.
• Increase the number of films produced a year, and
  the demand for and cost of various film elements
  that are limited in supply.

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Recap

• Four basic ways to finance a film
• Investor Financing
• Partnerships
• Corporation
• Industry Financing
• studio-based Independent Production Company
• Foreign Financing
• Lender Financing
• bank financing
• presales financing

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Financing the Film Industry

• THE END