Finance agreements: painful but necessary
There is no standard way to finance a film – any deal can be made as long as all parties are commercially satisfied and the deal isn’t in breach of any laws. Gene Goodsell writes
Finance agreements can be painful, but unfortunately, they are also crucial because they start the production funding flowing so that production of a project can begin in earnest.
The reason that screen financing is so difficult compared to other industries is because there are so many types of financiers. There is never just a single lender involved or syndicate of lenders. Entertainment lenders each have a different kind of interest in the project because each is putting its money in for different reasons:
- Lending bank – will be interested in their fee, receiving interest (usually as a first-ranking secured creditor).
- Equity investor – will want to be repaid their investment in the film, as well as share in the profits of the film.
- Rights-based financier – this includes distributors and broadcasters who will contribute funds in order to keep any money they make from distributing the film in their own territory.
- Governments – that give grants/rebates/tax incentives will usually only offer such incentives if a large proportion of the film is made within their jurisdiction. This is because of the positive economic impact that this can have on the local economy.
Entertainment bankers are powerful facilitators in the film business. Usually, where a project is financed with presales, an entertainment lender is involved in some capacity. The lender will have copies of all territory distribution contracts, and a completion bond will be obtained. The lender will use the distribution contracts as collateral.
Banks charge percentages and origination fees to set up loans and charge significant interest rates – often as a result of the high risk that goes with lending to a producer.
In order to make a typical movie, a producer will need to budget for the following amounts:
1 the direct cost of making the project;
2 a completion guarantee;
3 a contingency on the direct cost; and
4 finance costs of the direct cost.
Financing costs include legal fees, and it’s essential that good quality legal advice is obtained in order to ensure that all financing runs smoothly.
Producers should always avoid being personally liable for a production loan. Single purpose companies or limited liability entities should be a party to all finance agreements. All loans should also be of a ‘non-recourse’ nature.
A completion guarantee will be required for nearly all films. The completion guarantor protects the financiers by ensuring that the picture will be completed on time, or that the investors and lenders will be repaid.
If a film runs over budget, the completion guarantor can:
1 loan additional money to the producer to complete the film;
2 take over the picture and complete it;
3 stop production and repay the lenders and investors.
The initial job of a guarantor is to assess the project and decide whether the project can be made within the stipulated budget.
Once the guarantor determines that the direct cost budget is sufficient, they will require a 10 percent contingency fee to the direct cost budget. The guarantor will also require that the producer and director sign off on all material documents such as the budget and production schedules.
Completion guarantor delivery requirements are very similar to those contained in the distribution agreement with the domestic distributor.
Deals with foreign sales agents need to be considered in detail (refer to Sales Agents: Your Window to the World in the May 2010 edition of Encore, or online).
In many countries around the world, there are laws in place to protect investors. In Australia, legislation often requires the use of a prospectus when marketing a film. These documents are required to disclose all relevant matters to potential investors. As with most statutory provisions, there are exceptions to the rule.
Given the high costs associated with the preparation of a prospectus (including legal fees, public and trust company management fees, printing costs, publicity expenses and brokerage fees), only a small proportion of producers aim to raise finance from the public by public offer.
For further information or advice, please contact Gene Goodsell B Bus LLB (Hons) Grad Dip LP FTIA -a trained lawyer with management/agency experience – at ggoodsell@navitasmgmt.com
