9

Financing

Raising money for a movie is like hitchhiking—It could be the first ride, it could the thousandth. But you have to stay out there with your thumb out and just wait. And you also have to know when not to get into the car.

JOHN SAYLES

Director

Shuffle a pack of playing cards. Now spread them out face down and pick one card. If it is the ace of spades, you win; if it is not, you lose. Your chances of getting the right card are 1 out of 52. These odds are better than the odds of finding independent money for your film. Do not be discouraged, though. Many filmmakers face these odds each year—and win.

Film is probably the worst investment anyone could ever make. It is considered risky and capricious. If risks were measured on a scale of 1 to 10, movies would rate a 15. One might as well go to Las Vegas and throw the dice—in fact, those odds are probably better. Why would anyone invest in films, then? From a purely financial standpoint, it is a gamble for which there is a big payoff. In addition, there are many subjective reasons for investing in films, such as personal ideals, creative participation, and being part of the glitter and glamour. The specific people and firms that are likely to fund films change, but the modus operandi remains the same. Some of the different sources of financing will be relevant for your situation; others will not. Some are dynamic; some are static. As studio executives and production companies go through cycles, so do forms of financing.

By this point, you are well on your way to a finished proposal. You have explained the basic information—your company, your film(s), the industry, the market, and the distribution process. You have your goals and objectives well in hand. Now here is the kicker. Popular agent lore (spread by agents) is that if a script is not interesting after the first ten pages, it gets thrown onto the “forget it” pile. Something similar can be said of investors and business plans. Investors typically read the Executive Summary first and the Financing section second. If they are still interested, they read all the delicious text between the two. This does not mean that all the in-between material is irrelevant, just that the primary emphasis is on the ins and outs of financing and how the numbers look.

When thinking about investors, most people picture a singularly rich person who swoops in and says, “Here's an extra $10 million I found in my drawer. Go make a film—no strings attached.” Or they imagine a country suddenly passing a law guaranteeing you 100 percent of your film costs just for showing up. This is the stuff of which movie plots are made. Not impossible scenarios, but improbable ones. You may get lucky early on, but it is more likely that there will be false starts, dashed hopes, and months or years of frustration.

As the saying goes, “If it were easy, everyone would be doing it.” The truth is that finding financing is hard work. If you think otherwise, forget it. There are almost as many ways to finance a movie as there are people reading this book. We will look at specific methods, but note that the full financing of your movie may be a combination of several methods.

With a business plan for a new filmmaker or company, there is an additional struggle. Whether you are asking a money source to invest in one film or several, creating a feeling of confidence is not easy. Any anxiety on the part of the investor about funding one of your films is magnified when committing to finance an entire company. Besides making successful films, you have to be able to run that company. The investor will be looking with great care, therefore, at the production team.

In your Financing section, you will discuss how your films will find financing, but you should do this without restating this entire chapter. Only certain financial strategies will be appropriate for your particular projects or for the type of investor you are going after. Too much irrelevant information will only confuse your reader.

This chapter examines some of the specific sources of money: single investors (rich people), presales, co-production and below the-line deals, negative pickups, limited partnerships, and limited liability companies. In addition, it takes a brief look at bank loans. This chapter is meant to give you general knowledge of how film financing works; the intention is to make a complex subject easy to understand and to give you material for your business plan. It is not meant to be the complete and final word on the subject. For your own knowledge, do additional research on the specific financing techniques that you plan to use.

BEFORE YOU START

Before writing the Financing section of your business plan, there are several guidelines to think about and follow. These concern the following:

•  Seeking reality

•  Finding the best fit

•  Being careful what you promise

•  Being careful what they promise

•  Being able to explain it

•  Seeking reality

The way that one person financed a film yesterday may not be relevant to you today. This statement may appear to contradict what was said earlier about learning from other filmmakers, but it does not. We said it was sometimes the same formula, not necessarily the same people. For example, suppose a filmmaker moves to Cincinnati, goes to play miniature golf, and meets a corporate executive. That very day, the corporation had decided to finance a film, so a deal is struck. That corporation may never fund another film. In fact, no one in Cincinnati may ever fund another film. Do not assume that you will find money in the same place. Learn from the other filmmaker 's method, however; it may prove useful for you.

Finding the Best Fit

Filmmakers often believe that all money is equal; it isn't. Each source sets different requirements or conditions for the delivery of funds. You will be able to live with some of these, but not with others. For example, there may be too many fingers in the pie. Three intermediaries later, you will be paying out large sums to finders. Or prospective investors may have requirements that make getting the money not worthwhile. There may be content, length of time, or rate of return demands you cannot meet.

Worse, at the eleventh hour, Ms. Investor may inform you that her husband has to play the lead in the film. Don't be discouraged. The right source for you is out there somewhere; seek until you find it.

Being Careful What You Promise

Making statements of absolute fact about financial conditions may be dangerous. An investor will hold you to whatever you promise. You might say, for example, “We will seek presales in order to recover at least some of the production financing upfront.” That is not a promise, only a statement of intent. On the other hand, saying to people, “We will obtain presale commitments,” is a promise. Unless you have commitments already in hand, you may be making a promise that you cannot keep. And be careful of implied promises. If you want to tell potential investors the reported Sundance purchase price of Hustle & Flow ($9 million) or Napoleon Dynamite ($3 million), be sure to say that these are festival prices, which tend to be higher than what distributors might pay at an individual screening in Los Angeles or New York. Also, be sure to point out that we don't always know what the actual deal is in reference to the figures quoted. I have seen investors refuse to approve a distribution deal because they assumed that “normal” purchase prices were twice the negative cost of the film. The typical verbiage that I use is:

Deals at festivals vary greatly. The prices announced in the press may depend on specific boxoffice results, be advances against future revenue streams, or be total buyout prices with no further remuneration to the filmmakers and their investors. For most of the publicized dollar amounts, the negotiated agreement is not made public.

Being Careful What They Promise

Always take the stance that you have to see it to believe it. People do not have to be con artists to lead you astray; many just like to hear themselves talk. Even investment bankers are seen bragging at cocktail parties about financing films they didn't. If a money source (finder or actual) is saying, “The check is in the mail,” your mantra should be, “Do not spend any money until the cash is in the production account.” This warning applies to family and friends as well as bank executives. Check the paperwork. If you are not knowledgeable about financial terms and clauses, find someone who is. Look carefully in the fine print for how much cash this source is keeping. Do they have the resources to meet your needs, or are they making a promise on behalf of some other entity that has never heard of you and probably never will?

Being Able to Explain It

If you cannot explain a financing scheme, do not include it. To my constant amazement, I often receive business plans to critique that are based on a complicated financing structure, usually in a foreign country, that the producer does not understand or cannot find someone who has successfully used it. Not just inexperienced filmmakers but longtime professionals will base entire companies on such schemes. Frankly, not only are many of these too complex for me, but a majority either don't work or were fictional to begin with. Be especially wary if an intermediary wants a substantial amount of money in advance. A finder gets paid when you have the money in the bank, not before. Remember to request to see all the documents first. If you have to find an investor to make a deal work, you can bet your bottom dollar that your investor will ask for details about the financing, with examples of films financed. They'll also want a meeting with a principal (person who actually controls the other funding), so be prepared.

RICH PEOPLE: THEM THAT HAS THE GOLD

Investors are gamblers no matter what their reasons, and film is one of the biggest gambles you can find. Others have personal reasons for investing in film. Private investors are equity players.

They take a portion of the profits in exchange for their capital. Until you take in partners, you own the whole pie. As partners come in, you start to slice the pie into little pieces, and as the old saying goes, “Them that has the gold makes the rules.” The nature of an entrepreneur is to be filled with passion to accomplish a certain end. The hardest job for you may be your own emotional involvement when attempting to see things dispassionately from the investor 's point of view.

Who Are They?

The first string of the investment team comprises friends and relatives. Raising development money and the negative cost of films under $1 million is very difficult. Professional investors do not see enough of a return on such small investments. Mom and Uncle Harry are more likely to be willing to give you a chance. Kevin Smith funded the $26,575 budget for Clerks with credit card advances, the sale of his comic book collection, and a loan from his parents. Filmmakers Alex and Stephen Kendrick raised the $100,000 budget for Facing the Giants as donations from church members and others.

Entrepreneurs

Private money comes most often from people in businesses other than entertainment. Entrepreneurial types who have made a killing in almost any industry may feel the lure of film. It takes a high roller at heart to start a firm and prosper with it. You can try the annual Forbes 400 for a listing of billionaires; however, you may have to travel to Hong Kong or Taiwan to speak with them. You don't have to go that far for what you need.

Investors have all sorts of reasons for taking this risk. Some are after big bucks, some are personal fans, and some want to give back to the community. Despite their reasons, investors are seldom seeking to lose money. I have seen scores of creative people forget their dreams rather than face the reality that, whatever the content, these are business deals as well.

There have always been wealthy people attracted by Hollywood. Many of them invested with studios in the early years. One of the first investors in DreamWorks was Paul Allen, co-founder of Microsoft. Over the past 15 years, however, a growing number of communications, real estate, Internet, sports, finance, and other billionaires have made pacts with experienced producers to start independent production and distribution companies. Phillip Anschutz, chairman of Qwest Communications International, has started several production companies, now combined into Walden Media. He also bought United Artists, Regal Cinemas, and Edwards Cinemas, which currently controls over 6,000 theater screens. Jeff Skoll, a co-founder of eBay, founded Participant Media, which has invested in both studio and independent films. Mark Cuban and Todd Wagner, the founders of www.broadcast.com, formed 2929 Productions and Magnolia Distribution, and bought the Landmark Theaters. The partners in Google have co-financed a film; they are also early investors in various areas of high-definition entertainment. Bob Yari, a real estate developer, formed several independent production companies that were combined into the Yari Group in 2005. Gary Gilbert, co-owner of the NBA's Cleveland Cavaliers, along with Usher and the chairman and vice chairman of Quicken Loans, has financed several movies, among them Garden State. Sidney Kimmel, a founder of Jones Apparel Group, has formed Sidney Kimmel Entertainment, which has produced several films and has more in development. Beastie Boys’ Adam Yauch formed Oscilloscope Laboratories, which became a film producer and distributor in 2008. Bill Pohlad, the son of self-made billionaire Carl Pohlad (owner of the Minnesota Twins baseball team), formed River Road Entertainment and in 2009 financed Bob Berney's new distribution company (still unnamed in June 2009).

These are only a few of the people who have come into the business because they have a commitment to films with a message, because they want to develop new technology frontiers, or because it is fun and they can. However, they are all individuals spending their own money. There are many in other countries of the world; and, presumably, there are more out there waiting for the right opportunity. How do you find them? I wish I could tell you. One thing I do know is that these are people who recognize that film operates on a different risk level than the businesses that made them rich. Over the years, several finders working with real estate investor groups have approached me about film, thinking that they could sell the idea to their syndicates. They couldn't. As a group, real estate investors are putting their funds into projects with less risk than film. However, individuals from those syndicates have expressed interest in investing in LLCs and limited partnerships on their own.

Art

Some investors want to be associated with “art.” What constitutes art is in the eye of the beholder. Normally, the term is assigned to films that appear to be based on a higher level of expression and writing, but also with a limited level of audience appeal. Over the years people have held up Merchant-Ivory's A Room with a View as an example of an art film compared to film with more mainstream appeal. Even now, they will tell me that they want to finance a film like the Merchant-Ivory classic A Room with a View. Unfortunately, they want to make it at 1986 prices ($850,000) and reap the box office of My Big Fat Greek Wedding ($600 million worldwide), which is an entertaining and successful film but not art. Using standard inflation rates, the View film would have cost $1.5 million to make in 2005. In such a case, the investor 's goals are unrealistic. Even if they made the film, having a windfall like $600 million goes into the extraordinary category. You should make an attempt to create realistic expectations for him. If you are lucky, his desire to be associated with quality will outweigh the high return he wants for his investment. On the other hand, if he cannot afford more money and does not want to join with additional investors, move on. Put your energy into finding partners whose outlook and resources are a match for your project.

Special Interests

The line between business and altruism can be a thin one. Few people will become involved in a feature film without considering its commercial possibilities, but investors often have other reasons for funding. If you can find an investor whose sensibilities agree with the theme or purpose of your film, you may be able to create a workable collaboration. Jeff Skoll, for example, formed his company to make films on current social and political topics with the express purpose of inspiring social change. On the other hand, the company intends all films to be profitable.

Then there are nonprofit organizations. Many foundations and similar organizations have funded all or part of fiction feature films that fit with their particular mandate. The increase in the number of inspirational films with themes of good versus evil and redemption have brought more charity-based religious and nondenominational organizations into the market. Having been involved with writing several business plans for filmmakers who were seeking money from such organizations, I caution you to be careful. In order to get a substantial number of people to see your film, your first goal should be to entertain. Paul Haggis, director of Crash, said, “Film is an emotional medium, not an intellectual medium, so you have to move people. You can't just lecture them.”

Foreign Investors

We hear a lot about European and Japanese investment in the American film community. In the early to mid-1990s, most of the foreign money went to studios or the formation of large production companies with experienced studio executives; $100 million was a favorite startup amount. From the late 1990s to 2002, German investment funds grew like crazy. Investors looking for prestige, profits, and extraordinary tax breaks began funding as much big-budget output as they could. Some funds existed to fund studio films; others financed independent companies, such as the UK firm Intermedia (Iris, K-19: The Widowmaker, The Quiet American). As some high-budget films failed and the economy started to collapse worldwide, many of these funds closed. However, new ones came along to take their place. Any detail presented here would be out of date before you bought the book.

Generally, this money doesn't go to novice filmmakers. In tracking foreign money, you often run into finders who claim to have a special relationship with foreign money. Some do; many do not. Remember to check these people out. A finder should be paid a percentage of the money you receive from the investor, and only after the cash is in your bank account, as in any interaction with an intermediary. And, at the beginning of this journey, ask how many people there are between the finder and the money. If that person is going through two other people to obtain the money, have them agree to split one fee. For example, if your finder 's fee is 5 percent, then all three split that money; otherwise, you are paying 15 percent in finders’ fees. Naturally, this is always your choice. But don't get backed into a corner to pay out three times what you intended simply because you didn't get the facts straight upfront. And I can't stress enough, do not give them any money in advance.

Where Are They?

Your own backyard is the first place to look for financing. Few filmmakers are born in Los Angeles; they migrate there. Nor are all the investors born in Los Angeles. They are born and live in Ohio, Michigan, Iowa, Oslo, Sydney, Hong Kong, and so on. At least those are areas where many of my clients have found investors. (Don't call me for a list; it's proprietary—nonpublic, company-owned—information.) You may find untapped markets of entrepreneurs with lots of money from very unglamorous businesses, to whom the lure of the film world may be irresistible. Your best chance is in an area where there is not a lot of competition from other filmmakers—if there still is such a place. The entire financing deal can be conducted without anyone living in Tinsel Town.

Giving a party is another strategy that I have seen some producers use to find interested investors. Since I am not an attorney, check the details with yours before proceeding. I have paraphrased some of the rules set out by Morrie Warshawski in his book The Fundraising Houseparty (available at www.warshawski.com). Although Morrie is focusing on raising money for nonprofit events, the same principles can be used for film fundraising:

•  Potential investors receive an invitation to come to a private home.

•  The invitation makes it clear that this is a meeting to launch a film.

•  Participants arrive and are served some sort of refreshments.

•  The host or hostess explains why they personally feel it is a worthwhile project.

•  Participants sit through a brief presentation—appearances by actors in the films, script reading, etc.

•  A peer (we might say shill) in the audience—someone articulate, respected, and enthusiastic—stands up and explains why she wants to be part of the project.

•  Once you have established an individual's interest, you can contact her later with your documents about investing.

What You Get

Equity investors will want at least a 50 percent cut of the producer 's share in the film; some may even want a higher percentage. In recent years, filmmakers have offered the incentive with a return of 110 to 120 percent of the original investment before any split of net profits. No matter how many years you spent writing the scripts or how many hours you spent talking deals, it is their money. Before you start complaining, be glad your investors don't want 80 percent. Venture capital companies and professional film investors often require that much equity to put in seed money.

Filmmakers have a habit of promising “points” and film credits to people for their work in finding investors, making introductions to potential actors, or other steps involved in getting the project made. Directors and stars who are too expensive for the film's budget often are given points as a deferment of part of their salary. These points all come out of the filmmaker 's share, unless an agreement is reached with investors. Besides points, filmmakers like to give away credits. Be careful what you promise. If you have one investor for the entire budget, he may want the title of executive producer (and deserves it). Some may want to remain anonymous, so all the other filmmakers wanting money don't contact them. In addition, be careful about the producer title. When your film is nominated for the Best Picture Oscar (I never said you couldn't indulge yourself with some fantasy), only three people can be listed according to the 2007 Academy of Motion Picture rules.

Reasonable Risk

Entrepreneurs often want money from investors with no strings attached as a reward for their creative genius. They do not want to be responsible for how the money is spent or for whether investors realize a gain. No doubt, you are a genius. But do not expect to get financing without showing the investor what kind of risk she is taking.

Early in this business, I tried to get financing for an entrepreneur who had a new idea for making films that would have a nontheatrical distribution in malls. One investor thought the idea was “sexy” and that the films could be taken national but that the business plan was so-so. The investor proposed to invest $5 million and then raise additional money from other investors; however, he wanted a revised business plan. My client would have none of this. “After all,” he said, “investors are supposed to take a risk. If these people are not willing to take one, who needs them? I'm not going to waste all this time. Big guys in New York are interested.” You can probably guess what happened. The client never heard from the “big guys,” never got the first film made, and went back to his old job, never to be heard from again.

The moral here is not that people in New York are unreliable. Serious investors, whether they are in New York or Des Moines, will seldom make a final decision based on flash and dash. They want to see substance and detail. Even if someone likes your project, chances are you will hear, “Come back when you have a business plan.”

The Big Payoff

The low-budget, big-return films are the hooks that lure many high rollers into the film business.

Films like Once, Fireproof, and Napoleon Dynamite can be irresistible. Very few other ventures, outside of Las Vegas, offer the potential of a 500 to 1,000 percent return on investment. At a lower percentage rate but nevertheless as alluring are Slumdog Millionaire, La misma luna, and Juno. As a filmmaker you must be ready to show prospective investors that the chance of making a killing may outweigh the risk of losing their money. Remember, though, that you can never promise a risk-free investment. And you do not want to tell them, “Ten million dollars is typical of advances and/or buyouts for $1-million films.”

When all is said and done, it is the projected bottom line that builds the investor 's confidence. You need to find similar films and track their dollar returns. Whether you are looking at a single film or a company, you must project your revenues and expenses, boxoffice grosses and rentals, and cash flows over the next three to five years. (You will learn how to do that in the next chapter and through doing the exercises provided in the Financial files on Focal's companion web site for this book.)

PRESALES

There are two main activities at markets like AFM and Cannes: seeking presales for as-yet-unmade films in order to finance production, and selling finished films. We are concerned here with the former. The seller (you or your U.S. distributor) has a booth or room and entices the buyers from each territory and medium (theatrical, DVD, VOD, satellite, broadcast, and so on) to buy the ancillary rights (domestic or foreign) to your film in advance. (This is also called a prebuy.) In return, you receive a commitment and guarantee from the prebuyers. The guarantee includes a promise from that company to pay a specific amount upon delivery of the completed film. If deemed credible by one of several specialized entertainment banks that accept such “paper,” the contract can be banked. Then the bank will advance you a sum, minus their discount amount.

In exchange for the presale contract, the U.S. or foreign buyer obtains the right to keep the revenue (rentals) from that territory and might also seek equity participation. The agreement can be for a certain length of time, a revenue cap, or both. The time period can be anywhere from 5 to 15 years, with 7 being customary.

Many filmmakers are under the impression that “in perpetuity” (forever) enters into this negotiation. These terms are not unheard of, but they are more likely to surface if you are transferring the copyright, or ownership, of the film. There is nothing to keep people with money in their hands from demanding as much as they can get. The buyer tries to make the length of time as long as possible, and the seller tries to make it as short as possible. Be careful of the stance you take. Some foreign companies have told me that if the filmmaker balks at 7 years, they will change the term to 10.

The “revenue cap” is a certain amount of money in sales, up to which the buyer gets to keep all the money. When negotiating these terms, 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.

Being the sole source of financing gives people much more power than if they are one of a group of funders. Yet any of these negotiations still depend on the “eye of the beholder.” Any leverage depends on the desire of the buyer for the film.

Advances

In the past, cable, home video, and television syndication companies were major sources of production financing. Through advances, they funded all or part of a film's production in exchange for an equity participation and the rights to distribute the film in their particular medium. Although advances do not occur as frequently as they did in the early 1990s, particularly in video, they are still a potential form of production financing. As noted earlier, most domestic distributors prefer not to see fractionalized rights.

Always weigh this fact against the benefits of having an ancillary company as your main investor. The advance for a finished film is another matter. It may be a total buyout, have a revenue cap, or combine any number of characteristics common to presales.

Advantages and Disadvantages

The primary advantage of presales is that they offer you the chance to make your film. This source of money continues to be a workable one for new filmmakers. In addition, if you manage to reach your production goal over several territories, it lessens the impact that someone else can have on your film. Presumably, the fewer territories in which you presell or from which you receive advances, the more money you will be able to keep on the back end after distribution.

There are two disadvantages to this source of funding. First, you sacrifice future profits in order to make the film. Selling your film in advance puts you at a negotiating disadvantage. Companies that use presale strategies often give away much of the upside cash flow and profit potential from hit movies. Second, not all paper is bankable. You have to do a lot of research before accepting this kind of contract. Things change quickly, particularly in difficult economic times.

INTERNATIONAL CO-PRODUCTION

International co-production deals are the result of treaty agreements between countries. Qualifying films are permitted to benefit from various government incentives provided by the country in which production will take place. However, co-production agreements are not a charity event. A number of requirements may be imposed on the film by government treaty, including the following:

•  The producer must be a resident of the host country.

•  A certain percentage of above-the-line talent must come from the host country.

•  A certain percentage of the technical crew must be residents of that country.

•  Distribution must be done by a company located in the host country.

•  A percentage of the revenues from the film must remain in that country.

Advantages and Disadvantages

The first advantage of co-production is that the total budget may be smaller because of the advantages of filming in a cheaper locale. Second, because of the readjusted budget, you will have to find a smaller amount of hard cash. The right deal will cover most, if not all, of your below-the-line costs. Many films would still be only a gleam in the producer 's eye if part of the actual cash burden had not been removed by a co-production deal. In terms of disadvantages, you will still need to have hard cash for the above-the-line payroll—that is, the cast, director, writer, and production office staff. No film is made without these people, and they will not take I.O.U.s, although some take deferred salaries. Another disadvantage is that finding enough skilled personnel in a host country could be a problem. If you end up having to fly key technical people from the United States to another country, you may end up with a budget burden that offsets the advantages of the co-production deal.

FILM INCENTIVES

Federal Film Incentive

In 2004, Congress passed the American Jobs Creation Act. Section 181 of that act provides for an incentive for film and television productions. The incentive was to end in December 31, 2008; however, it was extended until December 31, 2009. Attorney Hal “Corky” Kessler is currently working with the government on a possible further extension and additional amendments. He has contributed the following explanation of the incentive to include in your business plan.

Under Section 181 of The American Jobs Creation Act, 2004, any taxpayer, company or individual who invests in a qualifying film or television project under the act can deduct 100 percent of the investment as a loss in the year or years the money is spent. Regardless of budget, filmmakers can take advantage of the first $15 million (or $20 million in specific depressed areas). For Television it is either $15 or $20 million dollars per episode for the maximum of 44 episodes. The triggering effect is when the money is spent. The original act has been extended to the end of 2009. This applies to films beginning January 2008. As to how to characterize the loss, you should check with your tax advisors or attorney. In addition, under Section 199 and not dependent on Section 181, you can adjust your taxable income as follows for any taxable revenue you receive as a return on an investment in a film. From now until 2010 you can deduct 6% from your taxable income received from a film or television project and only pay tax on 94% of the taxable income. Starting 2010 the deduction increases to 9%.

The paragraph is also downloadable from Focal's companion web site for this book. Check there for any future revisions.

State Film Incentives

Currently, 37 states and Puerto Rico have incentives for certain qualified films. The incentives vary from rebates, tax credits for the film company, transferable tax credits (for local individuals/companies enabling them to deduct all or a portion of their investment in the film), and other refunds of expenses. What line items are covered (salaries, below-the-line production spending) and the amount of the incentives (normally expressed as a percentage of the costs covered) differ from states to state. As states have been very competitive in trying to draw films to their communities, similar legislation is being drawn up in many of the remaining states. In addition, some states have assigned all their money for the next two to three years. If you know in which state(s) you want to film, go to their web site to check all the details of the incentives. Print off the files and go over them with your line producer/unit production manager (UPM) and your attorney to see if the fit is good for you. If you aren't familiar with which states have incentives, consult the web site of the Association of Film Commissioners International (www.afci.org).

A checklist of items to consider:

1.  When will the incentive be paid? Most states do an accounting at the end of production before agreeing to a specific dollar amount; therefore, you need to raise your entire budget before you start filming.

2.  If bringing crew from another part of the country is necessary, how does that cost mesh with the amount of incentive you hope to receive?

3.  What has been the experience of other filmmakers dealing with the state's incentive regulations?

NEGATIVE PICKUP

In the days when film companies had more cash, there were many negative pickups. The premise is that a studio or independent production company promises to pay the cost of the film negative (production costs) upon delivery of the completed picture. This agreement is taken to the bank, which then provides cash for production at a discount to the total value of the agreement. A discount is a reduction in the stated value of the note.

The catch-22 here is that the bank has to believe that the studio or distributor will be able to pay off the loan upon delivery of the film (often a year from the date of the agreement). In the past, this was not as difficult to do as it is now. In the late 1980s, banks could count on the Majors, a few of the mini-Majors, and a very small number of distributors to make good on negative pickups. The entire situation has changed in the past several years. The financial problems of many of the large production companies are well known. In addition, the troubles and, in some cases, complete collapse of many financial institutions have created an even more dismal picture. Nothing can be taken for granted. Although there are still companies that will give you negative pickups, this is not a financing strategy that I would count on. As with distribution deals, show the documents for your negative pickup to a bank to see if the deal is acceptable.

Advantages and Disadvantages

One advantage of negative pickups is that the film is made without giving away a share of the company to someone else. In addition, a negative pickup with a major studio or distributor removes the angst of searching for a distributor.

On the other hand, the standard negative pickup agreement contains two loopholes that favor the distributor. First, the agreement has a built-in escape clause that says, in effect, “You must deliver the film we were promised.” Any change in the script, even if it seems minor to you, can cause cancellation of the contract. Second, the contract also states that the finished film has to meet the distributor 's standards of quality. Even if the movie is, shot-for-shot, the same as the script, the distributor can always say that the film's quality is not up to standards.

LIMITED PARTNERSHIPS

Until the mid-1980s, limited partnerships were all the rage. Subscribers could deduct losses calculated at many times the amount of their original investment; taxwise, therefore, the losses sometimes were more beneficial than making profits. In 1986, the Tax Reform Act removed most of these benefits, however, and now the investors have to pray for successful films.

A limited partnership has two kinds of partners. The general partner has unlimited liability with respect to the obligations of the partnership and is active in management. The general partner chooses the investments and does not have to ask for the advice or agreement of the other partners. The limited partners, who provide all of the capital, share any profits or losses and are not actively involved in management. In addition, their liability is limited to the amount of their investment. Gains and losses flow through directly to the limited partners.

A public limited partnership must be registered with the SEC (Securities and Exchange Commission), and, in the case of a public or private limited partnership, there must be a properly prepared prospectus that includes all the facts about the partnership. The overall package should include a business plan (be still, my heart!) and offering with subscription documents.

DO NOT WRITE YOUR OWN LIMITED PARTNERSHIP. In order not to pay attorneys, film producers are fond of cutting and pasting someone else's partnership agreement. I think I just emphasized that this is a bad idea. When it comes to fraud, working with unofficial documents is only one aspect. Any misrepresentation about the company's plans also constitutes fraud. The SEC and the Internal Revenue Service are not known for their sense of humor, and ignorance is not an acceptable defense.

Advantages and Disadvantages

On the plus side, the limited partners have no right to interfere with the creative process. Private placements provide a means to raise funds from multiple investors without having to negotiate different deals with each one. The subscription documents contain all the deal information.

There are disadvantages as well. Because of the complicated nature of all SEC regulations and the differences between public and private offerings, participating in one of these formats requires research and expert advice from an attorney. The law is complex, and ignoring any filing regulation (each state has its own requirements) may bring an order for you to cease and desist in your sale of the offering. Another disadvantage is that the producer or the purchase representative must have a previous relationship with the investor before approaching her with a specific offering.

Limited Liability Companies

In the past few years, a new financial structure, the limited liability company, has become widely used. LLCs are a hybrid combination of the partnership and corporate structures. They are an attractive alternative to partnerships and corporations because the LLC provides limited personal liability to the investors, who are referred to as “members.” They have a share in the profits as outlined in the offering document. The LLC also provides a single level of tax. In the standard limited partnership, general partners (read “filmmakers” here) have personal liability for partnership debts, whereas limited partners in an LLC have no personal liability. Theoretically, the worst thing that happens is that they lose their investment. In addition, the limited partners cannot participate in management without jeopardizing their limited liability status.

In addition, an LLC member can participate in the entity's management without risking loss of limited liability. For federal tax purposes, the LLC generally is classified as a partnership. The same is true in most states—the operative word here being “most.” I have clients who have formed an LLC in Michigan, for example, but not in Florida, where the LLC is taxed as a corporation. As there is no uniformity in the LLC statutes across states, creating an LLC with members in more than one state may be complicated.

The same rule that I stated for limited partnerships exists here: DO NOT WRITE YOUR OWN. Can I say that too often? From what I have seen, the answer is a resounding “No!” When you hire an attorney, however, be sure that he is someone with experience with both film and the particular form of Investor Offering that you are using. You do not want to pay for an attorney's learning experience.

When pass-through of revenue is of primary concern, strict conformance to IRS and state revenue accounting criteria should be considered before the LLC is chosen over other organizational structures. With new tax credit schemes (both state and federal) appearing on a regular basis, you also may need to consult with a CPA familiar with IRS statements.

Los Angeles attorney Michael Norman Saleman prefers the limited partnership structure to limitedliability companies (see below). As he explains,

The reasons that I prefer the limited partnership to the LLC have to do with the fact that the law does not adequately protect the LLC Member investors by limiting them to their investment as the total amount of their potential losses, as it does for the limited partner investors in a limited partnership. For example, California law creates personal liability for LLC members if the LLC “veil” of protection is pierced, in the same manner as a corporation. That cannot happen to a limited partner. Also, there is nothing in the law that separates the control of the business from the managers and the members in the LLC as it does between the general partner and the limited partners in a limited partnership. In a limited partnership, should the limited partners attempt to involve themselves in the day-to-day operations of the partnership (i.e., production of the film), they would, by law, run the risk of assuming unlimited liability. With this safeguard in place, the producer may make the picture without having to worry about investor interference or attempts to wrest the production from the producers.

Limited Liability Companies

The limited liability company has become one of the most favored business structures for independent film investment. Producers frequently set up their own production companies separately as closely held corporations in which investors do not participate. LLCs are a hybrid combination of the partnership and corporate structures. The LLC is an attractive alternative to partnerships and corporations because the LLC provides limited personal liability to the investors who are referred to as “members.” The LLC owns all distribution rights to the film and investors have a share in the profits as outlined in the offering document. The LLC also provides a single level of tax like a partnership however unlike a formal partnership the filmmakers as managers of the LLC have no personal liability for business debts. The worst case for investors is the loss of their investment but there is no liability for any business debts. Limited partner investors cannot participate in management without jeopardizing their limited liability status, but if an investor becomes a manager, the member can participate in the entity's management without loss of limited liability. For Federal tax purposes, the LLC may elect at the time of its formation to be treated as either a corporation or as a partnership. Most states afford the same tax treatment to an LLC as its Federal status. The operative word here is “most.” As there is no uniformity in LLC statutes across states, creating an LLC with members in more than one state may be complicated.

The same rule that I stated for limited partnerships is applicable to the formation of an LLC. DO NOT CREATE YOUR OWN. The Operating Agreement for an LLC, which governs its business operations, is a complex document far more complicated than simply filing basic Articles of Organization and must be drafted with the assistance of legal counsel and often accounting advice.

Being Fair to Your Investors

When people invest in an LLC or a limited partnership, there is a payback schedule that is agreed to by both the filmmaker and investors. The investment agreements which are included in the financing package include the budget which you have prepared. Production Attorney and Producer William L. Whitacre of Orlando, whose clients include Haxan Films (The Blair Witch Project and Altered) and the Pamplin Film Company, says,

In a limited liability company investors are passive; however, once the investment structure is determined and funds have been accepted, there can be no change in that structure, since doing so would dilute the interests of the initial investors. Accordingly, it is extremely important to budget accurately in the beginning, and to establish an investment structure that will get you to the finish line (including postproduction and completion of an answer print or master) before accepting investment funds into a limited liability company, since your only alternative to raise additional capital would be to sell your own Producer's shares.

BANK LOANS

Bank loans are not associated with business plans per se. However, this discussion focuses on what you will tell potential investors, and bank financing may be relevant to your situation.

Banks are in the business of renting money for a fee. They have no interest in the brilliance of your potential films; they do not care that you are a nice person and have a sparkling reputation. By law, commercial banks (the ones that give you checking accounts) can only lend money based on measurable risk, and the only credit they can take is the collateral, or the assets being offered to secure the loan. The contracts that have already been discussed—negative pickups, distribution agreements, and presales—are such collateral (assets offered to offset the bank's risk). The bank does not have to worry about when you deliver the film or how the box office performs; it is the distributor who has that worry.

The cost of the loan is tied to the prime rate, which is the rate of interest that banks pay to borrow from the Federal Reserve. It is a floating number that may fluctuate significantly. Home lending rates, also based on the prime rate, are a good example. When the prime rate falls, everyone rushes to refinance their mortgages. In most commercial lending, loans to “low-risk” firms (e.g., major studios) can be 0.5 to 1 percent above the prime rate. On the other hand, a small production company, which represents a higher risk, would pay up to 3 percent above prime. Let's say that the bank is going to charge 2 percentage points above prime and that prime is 9 percent. The total would be 11 percent. On a $1-million loan, therefore, the bank removes $110,000 ($1 million multiplied by 0.11). To hedge their risk, the bank also retains another 1 or 2 percent in case the prime rate goes up. If the bank charges 1 percent, another $10,000 is added to their retained amount. Now you are down to $880,000 for the film. The bank is not through with you yet, however. It also charges you for its attorneys’ fees, which can range from $15,000 for a simple contract to six figures if several companies are involved. Of course, you will still have to pay your own legal fees.

Once again we come back to the subject of attorneys. The one who represents you must know the ins and outs of all these contracts, so you should hire an experienced entertainment attorney. Costs go up drastically if your attorney is charging you an hourly rate to learn how the entertainment industry works. General corporate attorneys may mean well, but they can be an expensive choice.

Advantages and Disadvantages

The first advantage of bank loans is that the producer is not personally liable for the loan; the bank can't take your house. A company is established for the production of the film, which is its only asset. In addition, many producers prefer to pay back a loan rather than give up equity. On the down side, the process to obtain a loan is expensive, and several parties and miles of paperwork are involved. Also, if the distributor defaults on the loan, the bank takes possession of the film.

COMPLETION GUARANTORS

Misunderstood by neophyte filmmakers is the role of the completion guarantor. This is not the person you go to for the rest of your production money; the guarantor 's role is to provide an assurance that the film will be completed and delivered to the distributor. The contract with the producer or distributor allows the guarantor to take over the film to complete it, if need be. For the bond itself, the guarantor charges a fee based on the film's budget. The charges have been flexible over the past few years, depending on the state of the completion business. The bond is not issued until after funding is in place, however, and this fact is often difficult to explain to investors. To make matters worse, small films have trouble getting bonded anyway. The risk is too great for most guarantors to bond low-budget films. In the past few years, several of the biggest bond companies lost their financing from insurance companies when high-budget films failed. The active companies had their hands full with major productions, leaving them little time or inclination to consider your $1-million film. New companies have come into the market, making the completion bond more accessible for some smaller films. However, their staying power depends on the insurance companies that back them.

In many business plans for low-budget films, I no longer mention a bond, as I know they have no chance of getting one. Bonders seem to be constantly going in and out of the market and changing their requirements. Check the market before deciding what to say in your business plan. One suggestion is that you say you will “seek” a bond. If you say that you “intend” to get a bond, it implies a promise to the investor. Never promise what you don't already have, whether it is a financial document, an actor, or a director.

A completion bond is always desirable to protect both you and your investors financially. Accidents and bad weather can happen, but investors have the right to decide what exposure they want to have. As always, honesty is the best policy with your investors and yourself.

WHAT DO YOU TELL INVESTORS?

A section on financing assumptions is required as part of your business plan package. Give investors only relevant information, not everything in this chapter. Based on the assumption that your readers are not film sophisticates, you should explain what constitutes a presale agreement, a negative pickup, or whatever form of financing you will pursue. Be prepared to answer investors’ questions.

They may ask you about the forms of financing that you have not included. You should be conversant enough with the pros and cons of various strategies to explain your choices intelligently. As mentioned earlier, it is unproductive to include financing methods that you do not plan to use. If you plan to use a limited partnership, for example, the business plan will be part of the offering; otherwise, there is no reason to discuss this form of financing. To do so would be to create a red herring for investors, confusing them with a nonexistent choice.

Along the same lines, you should be careful about considering options that may no longer exist. What Canada or Australia is doing in 2006 may not be relevant in 2008 or later. Financing patterns, like everything else in our culture, can be in or out of vogue from year to year. It is important to keep current with the business climate through the trades and other sources while writing your plan.

FILMMAKERS SHARE THEIR INVESTOR EXPERIENCES

I asked a group of filmmakers and fundraisers to relate their experiences when raising money from equity investors. The participants included Joslyn Barnes, co-founder of Louverture Films with Danny Glover; Joel Eisenberg and Tim Owens, EMO Films; Patricia Payne, NoHo Films International; April Wade, Woman On Top Productions; and Jay Spain, producer, Moving Midway.

LL: What are the top questions that investors asked?

Joslyn: Who's in the film from a talent standpoint? How are you going to get my money back and when? More recently we've been getting sophisticated questions about soft monies, tax incentives, and various gap and super gap lending frameworks. Investors are quite savvy that their equity participation is a hard thing to find at this time, and therefore equity financing is becoming more expensive.

Joel and Tim: Our potential investors didn't know what questions to ask. Since they had already worked with Tim in real estate investing, they had a comfort level with him and his advice. As experienced investors, however, they wanted to know all the risks. Joel spoke several times about studio films and independent films. He did general education about film and the entertainment industry being sure they knew all the risks in independent film. He also told them there were several thousand films a year that don't get any distribution, and the worst-case scenario that they might not make any money.

Patricia: Who are the actors? Who is the director? Have your previous projects made money for investors? Give me reasons why I'd want to invest in films. Why do you want to make this film? Who is your audience? Do you have a distributor? They also ask about what type tax write-off or benefits they will get; will there be any income generated from the project and when will it start and how much to expect. Is there information available to substantiate their backgrounds? Is there a prospectus and material supporting this project, and is it currently available? As an investor, do I get the first right of refusal on any subsequent projects? Would there be a role for my daughter/son/wife?

April: These are basic, but they are pretty much the only questions I get asked when looking for money: Who is in it? Who is directing it? Where are you shooting? They don't ask me about myself, and they ask about the movie only generally. I find that with the one that I am currently working on getting funded, they have a lot of specific questions about the mood of the piece, since it is a “nontraditional rock-film” about a very dark topic. Otherwise, “who is the audience,” “what are your plans for distribution,” etc. has not really been asked of me yet.

Jay: Most of our investors are North Carolinians. Moving Midway had tremendous local appeal to them. They either knew the family or wanted to participate in history, or both. Having said that, the questions we got most were: How much money do you need? How much have you raised so far? Who else has invested? How much did this or that person invest? During the first round of fundraising, we told everyone we had a business plan—with, of course, your credentials, the LLC paperwork, and who our attorney was. I know a few of them read the paperwork, but I don't think most did. Only a few asked about return on investment. I don't think most cared. One of them told me that he thought it was just the right thing to do.

Otherwise, there were a lot of reasons: the Academy Award potential, preserving history, education, and race relations. There were a lot of reasons that were not about making money. I think our biggest investor did it mainly for the arts.

During the second round of fundraising after we asked you to update the plan, more people read it and commented. Most of the questions then were making sure they understood what was there. Between the plan and the LLC and the distribution deals, I feel like I got an Entertainment Law degree. [LL: As happens in many documentaries, events prevented finishing the project in the original timeframe planned; therefore, we updated the financial tables.]

LL: Is there a difference between U.S. and European/Asian investors?

Joslyn: Yes, mainly it is the expectations that are quite different. U.S. investors expect to recoup against all world sales on a pro rata pari passu basis, and expect to be in first position behind only the standard P& A expenditures, sales fees, and taxes. They also expect a premium on their investment upfront and to see their names prominently displayed in the credits.

European investors expect to recoup against specific territories and are used to international co-productions with many producing partners. There does not seem to be as much of an emphasis on personal credits, though there are arguably many people interested in being involved with quality, prestige vehicles, red carpet opportunities, and networking with film stars. This last applies to the United States, as well.

The other significant difference is the approach to content. European and American investors and filmmakers have cultivated different tastes and audience bases over the decades. Europeans are used to auteur-driven filmmaking as much as they can also appreciate a Hollywood blockbuster. I don't think the reverse can be said of Americans, and American audiences are notoriously allergic to subtitles and dubbing—English language rules, despite emerging successes in the Spanish-language market, which is finding its clout. As a result, U.S. investors tend to shy away from foreign films. And the American indie market, with its white bourgeois male 20to 30-something bias, has also shrunk dramatically.

On the doc side, you will find engaged U.S. equity investors ready to put up monies for issues they sincerely care about if they feel the films have a chance of being distributed/seen. In Europe equity investors for docs are extremely rare, as most docs are for broadcast and funded via broadcast networks and the many soft monies available to filmmakers in Europe. U.S. filmmakers do not have access to as much soft money, few foundations support film at a level that really makes a difference, and those that do tend to fund at the seed stage or the outreach stage rather than to fund production itself. This is actually I think a smart approach given the limited funding available and the demonstrable need; but the lack of soft money in general in the United States to support the arts is egregious and frankly outrageous when compared with other industrialized nations.

LL: How did you find your investors?

Joslyn: When we launched our company we were quite clear about our intentions, and we have been fortunate to work with producer colleagues and superb filmmakers who have realized those intentions successfully. We have been able to attract investors as a result.

We are of course in a privileged position as Mr. Glover is a well-known and well-respected film star, so it has been easier to navigate the usual channels of social networking than would likely have been the case otherwise. The key, however, has been building a brand, and we have done that through clarity of intent, adhering to certain principles, and sheer sweat equity!

Joel and Tim: We didn't solicit investors at the group. The first person who put money in came up to us after the meeting. That led to another and to another, etc.

Patricia: That's a difficult one for me to be specific. Having been in the industry for many years working in several countries I have gathered contacts both in and out of the film industry. I never ask a relative or friend to invest in my own projects. It's been doctors, dentists, real estate developers, hoteliers, actor/estate agents, government film agencies, an advertising company, commercial radio, and television stations. I also have approached banks for gap financing. There were professional fundraisers at a brokerage firm (in Australia) where I worked some time ago who raised several million dollars for me from 147 investors. In the latter deal there were a few substantial investors seeking a tax break and many smaller investors along for the ride and a tax break. However, the tax structure has changed in Australia since this project was funded. They didn't solicit investors at the group.

Jay: Our investors were mostly friends of the executive producer, Bernie Reeves, or Godfrey's [Cheshire, the director] or mine. Many also came in by word-of-mouth from our investors. Each had to have a net worth of $1 million minimum. We did have some donations also through our fiscal sponsor, the Southern Documentary Fund in Durham.

LL: What suggestions do you want to make to filmmakers in approaching investors?

Joslyn: Do your due diligence. Make sure that your project is sound. Do you have a great script, a feasible production schedule, an accurate budget? Do you have people with the necessary talent and skills to execute your project at a professional level? Are you sure of your financial model insofar as possible? Have you tested your sales estimates? Have you vetted your investors? Are you 100 percent sure they are for real? Do they have the monies they say they do? What is their reputation? Have they worked in film before or not? What business do they work in?

Seek investors with common interests and goals to your own so that expectations at all levels dovetail. Most people in a position to invest monies in films have made those monies because they are quite savvy businesspeople. In our experience, such investors appreciate down-to-earth, informed presentations where risk is laid out honestly alongside efforts to mitigate that risk. You may need to educate them about the film business and the kind of flexible mindset it requires.

Build long-term relationships. Don't focus on short-term quick fixes. If you burn through investors, you are not helping anyone, including yourself. Building long-term relationships implies honesty, respect, transparency, delivery, and accountability.

Joel and Tim: You have to know what you are doing or work with someone who understands and can explain the business and marketing of film. Before we took any money, we had an operating agreement for our LLC and a PPM with subscription docs. We also decided to become investors by leaving our finder 's fees for raising the money in the film. [LL: As executive producers, they raised the money for April Showers, a film that April Wade produced. It is coincidental, however, that I have answers from all three. Patricia, who has known her for a long time, asked her to participate in this section.]

Patricia: Know your stuff, and be able to present it cogently. Many potential investors invest for a living or a tax break. The filmmaker 's responses should be substantial and relevant; your enthusiasm for the project should be coherent. It helps to have name actors, a director with some experience, and personnel— creative and production—on board who have track records. Not only do these people help get the film finished, but also they are pitch points up front when raising money. Less detail about the script itself is better, as it often loses something in the telling particularly to nonindustry folk. Just hit the main pitch points and know them backward. If the investors want to know more about the script, they'll ask.

Other potential investors may be real estate developers, doctors, dentists, or a neighbor. Many of these folks don't know much about the film or television industry other than viewing the finished product. Be prepared to explain the project and the deal in terms each individual can understand.

When dealing with tax incentives, you are dealing with governments and taxpayer funds. Film commissions need to answer to their state or federal government as to why this production and investment is worthwhile for their state or country. All government agencies want to see the merit of investing taxpayer dollars, and they want all the reassurance they can get.

Jay:Three words: DO YOUR HOMEWORK!

EUROPEAN FILM FINANCING^*

^*This section is courtesy of and written by Thierry Baujard and Frauke Feuer, Peacefulfish, a consultancy for financing the Content Industry, Berlin, Germany.

In Europe, co-production is the most used option to finance projects within a country or with other countries. The term can be misleading as co-production can simply be a collaboration between two companies or a collaboration that follows very strict rules that are indicated in an official contract between two or more countries.

This chapter is trying to give some background information and issues on how to develop co-production financing in Europe for independent producers. Peacefulfish, a consultancy based in Berlin, Germany, can help you better understand the process, identify the right partners to raise the money, and develop the right business and finance plans that will make the most of the co-production opportunities in Europe.

For more information, please log on to www.pecefulfish.com or contact [email protected].

Co-Productions

One way to finance your film is to look for a co-producer. Co-production means sharing production costs, rights, and profits with another production company either from the same country or a foreign country. In the case of a foreign country there are two possible reasons: either the co-producer can access additional funding in the form of public subsidies such as grants, interest-free loans, or tax incentives, or the co-producer offers very low production costs.

If the main goal is to access public funding in the foreign territory, then there needs to be a co-production agreement or a treaty between your country and the foreign one. Regarding Europe, there are two types of agreements to keep in mind: the European convention and bilateral treaties.

European Convention on Cinematographic Production
(Council of Europe¹)

The European Convention aims to support European co-production by enabling a film production to benefit from all national supports available through the participating producers. There have to be at least three established producers from different countries. Only these countries are relevant, which have ratified the Convention. If a producer from a nonmember country is involved, her contribution must not be more than 30 percent of the total budget.

Bilateral Treaties

There are numerous bilateral treaties between European and nonEuropean countries, which also enable co-productions to benefit from both countries’ support schemes. For the latest information visit:

•  United Kingdom: http://www.culture.gov.uk/what_we_do/creative_industries/3269.aspx (accessed May 19, 2009).

•  France: http://www.cnc.fr/Site/TemplateA2.aspx?SELECTID=35& id=36& t=1 (accessed May 19, 2009, French only).

•  Germany: http://www.bundesregierung.de/nn_25188/Webs/Breg/DE/Bundes regierung/BeauftragterfuerKulturundMedien/Medienpolitik/Filmfoerderung/InternationaleFilmfoerderung/internationale-filmfoerderung.html (accessed May 20, 2009,German only).

•  Canada: http://www.telefilm.gc.ca/04/43.asp?lang=en& (accessed May 20, 2009).

Public Subsidies

In Europe, subsidies are playing a key role in film production. There are state-funded grants on three levels: the European level (provided by the European Union and the Council of Europe), national level, and regional level. Subsidies have to be applied for and are granted if a project is approved by a board or commission depending on business and creative criteria.

European Level

At the European level there are two relevant schemes: the MEDIA 2007 program (EU, duration 2007 to 2013) and EURIMAGES (Council of Europe). The European Union (EU) is a community of currently 27² European member states that collaborate to a level where some national sovereignty is handed over to EU bodies in order to make democratic decisions on specific matters of joint interest. The Council of Europe (COE) is an organization of currently 47³ European states that aims at increasing the awareness of a European identity and providing control and monitoring for human rights and democratic processes. The COE has no legislative powers.

Media 2007 (EU)

The MEDIA 2007 program supports the audiovisual industry in Europe in the areas of training, development, distribution, promotion, and cinematographic festivals. For aspiring filmmakers, the areas of interest are mainly support for development. To be eligible for support, the applying company has to be registered in a country that participates in the MEDIA program. Currently the MEDIA 2007 program has 32 members. The scheme could there- fore also work for non-European companies in case they enter into co-production with an eligible company. Apart from geographical eligibility there are also requirements regarding the existence of the applying company (registered for at least 12 months) and proof of previous experience. However, there are no specific requirements of a company's turnover or profit. The amount of support granted can be up to 50 percent or even 60 percent of a part of the budget, depending on the kind of support and the respective threshold. For application forms as well as more information and deadlines, visit the EU's MEDIA website at http://ec.europa.eu/information_ society/media/overview/2007/index_en.htm (accessed May 26, 2009).

Preparatory Action Media International/MEDIA MUNDUS

The PREPATORY ACTION is a funding scheme by the EU for audiovisual activities between EU and third countries. It is undertaken in preparation of the MEDIA MUNDUS program, which is planned to run from 2011 to 2013 with a budget of EUR 15 milion for funding of submitted projects. It is a broad international cooperation program for the audiovisual industry to reinforce the cultural and commercial relations between Europe's film industry and filmmakers from third countries. For more information, visit http://ec.europa.eu/ information_society/media/mundus/index_en.htm (accessed May 26, 2009).

Eurimages (Coe)

EURIMAGES is a funding program initiated by the Council of Europe aiming to support co-production, distribution, and exhibition of European cinematographic works. Support is divided between co-production, distribution, and exhibition for feature films, documentaries, and animation projects of at least 70 minutes in length. To be eligible for co-production support the project needs at least two producers from different EURIMAGES member states and has to have a European origin. Financially that means that at least 51 percent of the funding has to derive from EURIMAGES member states and no more than 30 percent of the funding can originate from non-European sources or one non-EURIMAGES country. For filmmakers outside EURIMAGES member countries this means that the program becomes only of interest in the case of minority a co-production. For more information, visit http://www.coe.int/Eurimages (accessed May 26, 2009).

National Level

Throughout Europe most countries provide state support for the audiovisual industry. Foreign filmmakers can benefit from these support schemes through being part of a co-production with one or more of these countries. If the participating countries have agreements with one another, national subsidies are accessible for international co-productions as well. In the following, different schemes are outlined based on their support budget, eligibility and selection criteria, funding aspects, and recoupment strategies.

United Kingdom: UK Film Council

The UK Film Council has an annual budget of about GBP 55 million derived from the National Lottery and Grant-in-aid. Support is available in the areas of development, feature film production, distribution and exhibition, and short films, as well as in a range of other related fields. Applicants need to be production companies based in the United Kingdom or the EU. In case of an EU applicant, if funding is awarded it can only be paid to a limited liability company registered in the United Kingdom (either a company incorporated in the United Kingdom or a company incorporated in the European Economic Area and registered as a branch in the United Kingdom). For non-EU applicants co-production is an option taking into account the requirements above.

For feature films the UK Film Council offers two schemes: the Premiere Fund and the New Cinema Fund. The Premiere Fund invests (usually up to 35 percent of the budget⁴) in mainstream, commercially driven films, and encourages the participation of British creative talent. The New Cinema Fund finances films (participation between 15 and 50 percent of the budget⁵) that “communicate unique ideas, demonstrate an innovative approach or showcase new voices” but are still commercially viable. The budgets of the two funds have so far been about GBP 8 million (Premiere Fund; support for eight to nine films per year⁶) and GBP 5 million⁷ (New Cinema Fund).

The Film Council's executives assess eligible projects for their creative merit and, depending on the scheme, also on commercial prospects. Once funding is offered, the actual amount granted depends on the individual project depending on the support scheme and the individual case. In most cases funding will not be higher than 50 percent of the budget. All support is given in the form of an equity investment and will be recouped on a pro rata pari passu basis with those offered to other equity investors. For more information, visit http://www.ukfilmcouncil.org.uk/ (accessed May 26, 2009).

Germany: FFA (German Federal Film Board) and DFFF (German Federal Film Fund)

The German Federal Film Board is funded by a film levy from video exhibitors and distributors and has an annual budget of about EUR 76 million.⁸ Support is available in the areas of production, script development, and distribution, as well as in a range of other related fields for feature films of at least 79 minutes or children's films of at least 59 minutes as well as short films. To be eligible the responsible producer or the production company has to be registered in Germany, or in the case of an international co-production, the German co-producer has to have the majority. Furthermore, the producer has to come up with at least 15 percent of the budget. Support is only granted if the project deems to improve the quality and profitability of German cinema. The decision is made by a board on the basis of screenplay, budget, financing plan, cast and crew lists, and, if applicable, the distribution contracts. Selected projects can receive EUR 250,000 on average and up to EUR 1 million in special cases. The grants are conditionally repayable, interest-free loans, and recoupment sets in at 10 percent of the revenues accruing to the producer after his initial recoupment of 20 percent of the FFA-recognized production costs from the film's exploitation.

The FFA has also been responsible for running the German Federal Film Fund (DFFF) since January 1, 2007. It was initially planned for three years until 2009 and has since been extended until the end of 2012.⁹ This local spend-based funding model for theatrical feature films that can qualify as “German”¹⁰ was initiated by the federal government and provides annual subsidies of EUR 60 million. For more information, visit http://www.ffa.de/ (accessed May 26, 2009).

France: CNC

The National Centre for Cinematography (CNC) offers support in the areas of development, feature film production, distribution, and short films, as well as in a range of other related fields. For first-time feature projects, a selective support scheme is available. Applying projects need to be shot in French and are either completely produced by a French production company or they can be international co-productions. The CNC's executive director and a commission of industry professionals assess eligible projects. Funding is offered either as an advance against takings before completion or an advance after completion and amounted to about 12 percent of the budget on average. The actual amount granted depends on the individual project, and the conditions of repaying the advance are also based on the individual case. There is also a support scheme for foreign-language films, which still demands a French production company to be involved but can be shot in a language other than French. For more information, visit http://www.cnc.fr/ (accessed May 26, 2009).

Regional Level

Most European countries also have film-supporting agencies on a regional level. In the following, the biggest three regional agencies in the three biggest markets—United Kingdom, Germany, and France—are outlined.

United Kingdom

The United Kingdom has nine English regional support agencies and one each in Scotland, Northern Ireland, and Wales. Among the biggest are Northern Ireland Film & Television Commission (up to GBP 600,000 per project¹¹), Screen Yorkshire (up to GBP 350,000 per project¹²), and EM Media (up to GBP 250,000 per project¹³). Mostly eligibility depends on local money spent and/or residence in the area while the involvement of local talent/cultural relevance is often preferable but not obligatory. Selection is made by the funding agencies and individual contracts are then set up. Most agencies do not give grants, so money has to be repaid. All film boards also help with other aspects of production such as location scouting. For further information, visit http://www.ukfilmcouncil.org.uk/contactscreenagencies, http://www.northernirelandscreen.co.uk/, http://www.screenyorkshire.co.uk/, and http://www.em-media.org.uk (all accessed May 27, 2009).

Germany

There are nine regional film agencies plus other regional institutions that support film and audiovisual production. The biggest three are Filmstiftung North-Rhine-Westphalia (EUR 36 million annual budget¹⁴), FilmFernsehFonds Bavaria (EUR 30 million¹⁵), and Filmboard Berlin-Brandenburg (EUR 29 million¹⁶). Who can apply for support differs between funds. Requirements can include a German-registered company, a certain percentage of money spent in the region, a certain percentage of the budget invested by the producer, etc. Eligible projects are then assessed for their cultural, artistic, and commercial value by the board and a selection is made. Selected projects mostly receive an interest-free loan, which is repaid only on the basis of success. All film boards also help with other aspects of production such as location scouting. For further information, visit http://www.filmstiftung.de/, http://www.fff-bayern.de/, and http://www.medienboard.de (all accessed May 27, 2009).

France

There are 19 local and regional supports in France. The biggest three are Ile-de-France (EUR 14,550,000 annual budget in 2008¹⁷), RhôneAlpes (EUR 3,771,500¹⁸), and Nord-Pas-De-Calais (EUR 2,657,240¹⁹). Support is available for screenplay writing, development, production, and postproduction of feature and short films as well as other formats. Only French companies can apply and the application needs to be in French as well. Support ranges from subsidies over co-financing to co-producing and is mostly granted before principal shooting has begun. The actual conditions and obligations depend on the region and individual project and will be stated in a contract between the applying (and selected) company and the administration. When planning to produce or fund your project in France, it is very handy to know the French language since a range of web sites are available only in French so far. For more information, visit http://www.filmfrance.net, http://www.centreimages.fr//production_guide.php, http://www.iledefrance.fr/cinema, http://www.rhone-alpes-cinema.fr/, and http://www.crrav.com/ (all accessed May 27, 2009).

Tax Incentives

Besides state subsidies, many European countries have set up tax incentives to attract film production to their territories. In the following, some of the most popular schemes are introduced from the United Kingdom, France, Hungary, and Ireland.

United Kingdom

In 2006 the popular sale-and-leaseback scheme, also known as “Section 42” and “Section 48,” was replaced by the new tax relief system for film. For lower-budget films (< GBP 20 million) there is a net tax relief of 20 percent; for higher-budget productions (> GBP 20 million) it is 16 percent. Both reliefs only apply to the qualifying UK spend of the budget. There is also a threshold of minimum UK spending, which is 25 percent of the budget. In addition, there is an enhanced deduction available of 100 percent of qualifying UK spend for lower-budget productions and 80 percent for higher-budget productions. The payable cash element is 25 percent of surrendered losses for lower budgets and 20 percent for higher budgets. Furthermore, in order to get support, films have to pass a test in order to qualify as culturally British, which is composed of cultural content, cultural hubs, and cultural practitioners. For more information, visit http://www.ukfilmcouncil.org.uk/qualifying, http://www.ukfilmcouncil.org.uk/ taxrelief, http://www.hmrc.gov.uk/manuals/fpcmanual/Index.htm, and http://www.culture.gov.uk/what_we_do/creative_industries/3269.aspx (all accessed May 28, 2009).

France

The French have set up two schemes, one called SOFICA, which are film investment trusts aimed at tax deduction, and the other calledcredit d'impot, which is a tax credit. Individuals or companies invest in SOFICA to qualify for tax deductions. The SOFICA invest in production or production companies on the basis of individually contracted recoupment conditions. The credit d'impot aims at nourishing production and postproduction activities in France; thus the production or postproduction has to take place in France. French producers can choose between a cash rebate or a lowering of corporation tax of up to 20 percent of below-the-line costs.

In December 2008, the French Parliament passed a new law creating the Tax Rebate for International Production (T.R.I.P.). It is aimed at film production and postproduction services of movies of which the “dramatic content” has links with the “culture, heritage or territory of France.” To fulfill these conditions a cultural test has to be passed. In addition, shooting has to span at least five days in France and EUR 1 million of eligible costs in France have to be incurred. Although the procedure is not yet official by the time of writing (June 5, 2009), producers whose activities have started after January 1, 2009, and that qualify under the scheme can claim the benefit. The rebate, worth 20 percent of all eligible costs, is capped at EUR 4 million (U.S. $5.3 million²⁰). For more information, visit http://www.filmfrance.net/telechargement/FranceCoprodGuide08.pdf and http://www.filmfrance.net/v2/gb/home.cfm?choixmenu=taxcredit (both accessed May 28, 2009).

Hungary

The Hungarian tax incentive scheme is service production oriented. The model involves a service agreement or co-production agreement between a foreign and a Hungarian production company and a Hungarian corporate company. The corporate company sponsors up to 20 percent of the Hungarian production budget and qualifies for a reduction of its corporate tax. In order to qualify the production has to be registered at the National Film Office (NFO) in Hungary, which assesses the Hungarian production costs. If approved, the NFO gives out a tax certificate to the Hungarian corporate company. Due to European legislation on state aid, film projects also have to pass a European cultural test to qualify for this scheme. For more information, visit http://filminhungary.com/object.ed29a811-0146-4ef1-81ce-202d4be8f428.ivy and http://www.nemzetifilmiroda.hu (both accessed May 28, 2009).

Ireland

The Irish tax incentive scheme for film and television is called “Section 481” and was set up in 1993. It is spend based and worth up to 28 percent of eligible spending. The incentive is paid up front in cash on the first day of principal photography, net of all fees, and has a cap of EUR 50 million of eligible spending. The way to access this incentive is through an Irish co-producer, and a list of producers is available on the Irish Film Board website: http://www.irishfilmboard.ie/filming.php?id=7 (Los Angeles, CA, office) and http://www.irishfilmboard.ie/filming/Tax_Incentives/18.

Distribution

Regarding distribution in Europe there are similar structures to the United States in terms of theatrical distribution. In addition, the TV broadcasters play an important role. Most TV broadcasters are buying finished films or are involved in presales. Thus, when looking for funding, take the relevant TV markets into consideration.

United Kingdom

In the United Kingdom the most important player in the TV market is the BBC. Through its film production arm, BBC Films, it sup- ports British productions and British-International co-productions. Film4 has also played an important role in film financing. However, due to the financial crisis in 2008/2009 the parent organizations of both entities have been facing budget reductions and/or restrictions. For more information, visit http://www.bbc.co.uk/bbcfilms/ who/ and http://www.channel4.com/film/ffproductions/team.html (both accessed June 2, 2009).

Germany

The German TV market is the largest in Europe and the second largest in the world. In Germany there are about 30 nationwide free TV broad- casters, among them 15 TV channels under public law and 8 private ones. One channel, which is especially active in film co-production, is "arte," itself a co-production between Germany and France aimed at cultural understanding. Language is not an issue, presuming that the production budget of an English-language film includes dubbing into German. Subtitling is occurring but rarely on main channels and during primetime. For more information, visit http://www.arte.tv/fr/70.html (French and German available) (accessed June 2, 2009).

France

All European countries are held to dedicate the majority of airtime to European productions following the European directive “Television without Frontiers” from 1989, revised in 1997 and 2005. In France, the government even set the quota to 60/40 in favor of European works. This also enhances French-International co-productions. The main player in production is Canal Plus. For more information, visit http://www.canalplus.fr/ (French only) (accessed June 2, 2009).

Banking

Only the five big European countries have developed film banking markets: France, Germany, United Kingdom, Spain, and Italy. The main film banking services that are provided are Interim Finance, Tax-Incentive Financing, Gap Financing, Working Capital/ Corporate Finance, and Bank Guarantee.

Due to the financial crisis in 2008/2009 many financial institutes across Europe are reconsidering their engagement in film financing, which has led to the closure of some divisions (temporarily).

In the United Kingdom, Barclay's Bank, Coutts, and Allied Irish Bank were still active in film financing in the middle of 2009.

Two French credit institutions specializing in the audiovisual sector are Cofiloisirs S.A. and Natexis Coficiné S.A. As a security for the banks there is the Institute for the Financing of the Cinema and Cultural Industries (IFCIC). Banks can apply for a financial guarantee of 50 to 70 percent of the loans they are granting to production companies. The IFCIC assesses the film projects and issues the guarantee if the project is approved.

There are also activities in other countries such as Germany (namely Commerzbank, Deutsche Bank, and HypoVereinsBank) or Hungary (mainly aimed at prefinancing funds based on the Hungarian tax credit), even though these activities are moderate in the latter case.

On a European level there is a development, which sees the European Investment Bank getting involved in film financing. So far it is active in France, but support for specialized banks in other European countries is possible.

CASE STUDY (FICTIVE)

Let's do a short walk-through example of how you could fund a film project in Europe. Before we flesh out the example with some numbers, here is a list of questions you may like to consider when looking at co-productions:

  1.  Where is the main production company located? If you are located in the United States, consider co-producing with Canada, since Canada has a range of agreements with European countries.

  2.  Is your country part of a bilateral agreement of a European country or member of the European Convention on Cinematographic Production?

  3.  Is your country part of the European Union?

  4.  Has your country signed the EURIMAGES agreement?

  5.  Are there national subsidies in your country?

  6.  Are there regional subsidies in your country?

  7.  Are there tax incentives in your country?

  8.  Are there broadcasters involved in presales or co-production in your country?

  9.  Are there banks specialized in film financing in your country?

10.  Which countries are most promising in entering into a co-production with (choose your candidates and go through the previous questions for each of them)?

The Example

Our fictive film project involves four production companies from France, Germany, Canada, and the United States. The budget is EUR 4 million.

As in every co-production, be it national or international, involved companies have to decide on their individual share of rights, territories, profits, recoupment positions, revenue corridors, etc. In a traditional co-production, the co-producer from a certain country normally received the rights for that particular country and neighbor countries using the same language. The co-producer can also look for distribution (theatrical and TV) in the country.

France and Germany both have a bilateral agreement with Canada and are members of the European Convention on Cinematographic Production. The bilateral agreements and the convention secure the same option: to benefit from the co-producing countries’ national supports. But if the convention is applied, the share of the total budget (and thus shares of rights, profits, etc.) for the United States and Canada can only be up to 30 percent (EUR 1.2 million). Through the co-production treaty, you will be able to access funding from the other country but do not forget that you will have to spend at least 150 percent in the country or region where you will get the subsidies from.

That might not be enough considering the efforts such a multiinternational production causes. However, even under the bilateral agreements with European countries, the obligation is that the majority needs to be held by European producers.

France and Germany are both part of the European Union as well as members of EURIMAGES and are thus eligible for European subsidies. Both have national and regional subsidies. France has a tax shelter and two tax credits. Germany has the German Federal Film Fund. Both countries have cultural tests linked with their subsidies. The German-French broadcaster “arte” could be involved in presales or co-productions. France and to a lesser degree Germany have banks involved in film financing.

This is only a very rough idea of the complexity of international co-productions.

Don't forget that there are extensive rules and obligations for each country referring to each financing tool. Due to local spend, majority requirements and cultural relevance finance might not be as easy to get as it seems at first glance. Many funds on a national level are selective aids; however, this can also be an advantage for producing in Europe since funding is not primarily aimed at commercial projects.

In addition, there are excellent production facilities and professional staff capacities available in central Europe for a fraction of the price of the ones in established countries. If you are going to produce in or with Europe it will be wise to get some professional help in dealing with the business plan, the financing strategy, and the legal aspects involved, as well as to benefit from an already established net- work of contacts in the European film industry. For more information, visit www.peacefulfish.com or send email to [email protected].

After this initial financing strategy, the next step is to work on the cash flow for the project, which is basically the same as in American productions and explained in the “Financial Worksheet Instructions” on Focal's companion site for the book.

¹ The Council of Europe is not the European Union/European Commission; these are two completely different organizational entities.

² Source: http://europa.eu/abc/keyfigures/index_en.htm.

³ Source: http://www.coe.int/aboutCoe/index.asp?page=quisommesnous& l=en.

⁴ Source: http://www.ukfilmcouncil.org.uk/media/pdf/i/q/Premiere_Fund_guidelines updated_ March_2009_.pdf (page 2).

⁵ Source:http://www.ukfilmcouncil.org.uk/ncfavailable.

⁶ Source:http://www.ukfilmcouncil.org.uk/premiere.

⁷ Source:http://www.ukfilmcouncil.org.uk/media/pdf/5/8/HC_714_web_PDF.pdf (page 10).

⁸ Source:http://www.ffa.de/start/index.phtml;?page=profil.

⁹ Source:http://www.ffa.de/start/index.phtml;?page=dfff_start.

¹⁰ Based on a cultural test similar to the British and French tests.

¹¹ Source:http://rsu.ukfilmcouncil.org.uk/?pf=& low=& c=16& y=2007& s=.

¹² Source:http://rsu.ukfilmcouncil.org.uk/?pf=& low=& c=16& y=2007& s=.

¹³ Source:http://rsu.ukfilmcouncil.org.uk/?pf=& low=& c=16& y=2007& s=.

¹⁴ Source:http://www.filmstiftung.de/fist/download_pdf/diverses/die_zahlen_2008.pdf.

¹⁵ Source:http://www.fff-bayern.de/fileadmin/user_upload/FFF_Bayern_Jahresbilanz_2008_Factsheet.pdf.

¹⁶ Source:http://www.medienboard.de/WebObjects/Medienboard.woa/wa/CMSshow/1436390?wosid=.

¹⁷ Source:http://www.centreimages.fr//Syntheses2008.pdf (page 304).

¹⁸ Source:http://www.centreimages.fr//Syntheses2008.pdf (page 304).

¹⁹ Source:http://www.centreimages.fr//Syntheses2008.pdf (page 304).

²⁰ Rate: €1 = U.S. $1.32838 (April 9, 2009).