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Financing the Film
Industry
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Corporate
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4/5/02
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 movie’s
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!”
4/5/02
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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 Financing
Partnership: 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 Financing
Partnerships: 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 partner’s personal assets are subject
to attachment.
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Investor Financing
Partnerships: 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 Financing
Partnerships: 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 Financing
Partnerships: 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 Financing
Advantages and disadvantages of
partnerships
• Advantages
• Disadvantages
– limited partners do not
– the general partner
necessarily have to put up
(producer) is liable for a film’s
funds, but guarantee the bank
over budget and other debts
loan by issuing letters of
– limited partners lose then
credit
their limited partnership
– partners are more easily set
status if they become
up than a corporation
actively engaged in the
limited partnership’s business
– partnerships can be set up
from film to film
– In a joint venture, partners
are agents for each other and
– among reliable partners, all
liable for each other’s debts
working for the same goal, a
incurred in the management
venture makes a great
of the business
production team
– limited partner shares cannot
be solicited publicaly
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Investor Financing
Corporation
– 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
corporation’s
management.
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Investor Financing
Corporation: 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.
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• Disadvantages
– costly to set up
– have to adhere to
stringent rules and
regulations (i.e.:
stockholder meetings,
directors)
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Industry Financing
Studio Development Production
• Development Deal Memo
• Step Deal
• i.e.: Warner Brothers, Disney, Sony,
Universal, Paramount, 20th Century Fox
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Industry Financing
Studio Development Production
• Advantages
– use studio’s money and
studio’s development
companies
– studio’s can provide for
bigger pictures because
they have a higher
production budget.
– Collaborative process
4/5/02
• 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 Financing
Production 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 Financing
Production 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 Financing
Production Loans
• Advantages
– lender does not share in
the net profits
– lender does not have any
creative control
– option of a noncollateralized loan, which
is not supported by
collateral and therefore
may be suitable for
development money or
for financing a low
budget picture
4/5/02
• 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 Financing
presale financing deals
• Presales- funding of a film’s production costs through the
granting of a license for the film’s 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 Financing
presale 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 Financing
presale financing deals
• Advantages
– Can provide for a big
portion of financing.
– Less creative
intervention.
– If you aren’t confident in
the economic upside
potential of your picture,
then a presale
arrangement is a viable
option.
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• 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
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