How to Finance Your Film: Part 2
Sun, 11/01/1998 - 02:00
Part Two of this article takes you through the ways of financing your films, considering the pros and cons of each. Also see part 1 of this article.By Robert C. DiGregorio, Jr.
Lender financing is one of the best ways for a filmmaker to secure funding for a picture without going through the studio system. Though lender financing is time-consuming and complicated, it is a great resource for independent producers.
Third-party feature film development loans or non-bank loans may be secured by some form of hard asset and are usually recourse to the borrower. In other words, the lender may seek repayment directly from the borrower, personally, in the event of a default. Now, if a corporate production company is the borrower, the lender may make the principals of the corporation personally liable. Also, other grantors may be required to assure repayment of the loans principal and interest. In other words, one lender may hold a fellow lender responsible for repayment under certain circumstances.
With both bank and third-party lenders, you have a choice of loans. First, there is a resource loan, which is a loan made only if an endorser or guarantor (e.g., the producer) is made personally liable for payment in the event the borrower (e.g., the production company) defaults.
Second, there is a debt or equity transaction. With debt or equity transactions, you will have to make clear how the intended loan is to be characterized. For example, a loan to be used for development or pre-production expenses is classified as debt. The following are considered before a transaction is determine to be either debt or equity:
1. Is it a recourse or non-recourse loan?
2. Has a fixed repayment date been established?
3. Is the loan secured?
4. Is the rate of interest on the loan tied to the amount of profits earned by the film?
5. Does the lender exercise substantial control over production?
6. Does the lender take a subordinate position to third parties with respect to payments made from the films revenue?
7. Does another lender have lent funds on the same or similar basis?
What is an equity investment? In equity investment, the lender actually becomes an investor whose investment is at risk. As a result, there may be no obligation for you to repay the loan. Transactions resulting in equity participation may result in your having to sell an
unregistered security to a passive investor. In addition, the creation of an entity (e.g., joint venture or association) may have to bear tax consequences.
words, they are repayable on or before a specific date, regardless of whether or not the film made money! Another disadvantage is that as producer, you may be personally liable for the repayment of the loan along with the liability of the corporate production company. Finally,
sophisticated lenders will require that you contract with a completion guarantor to protect the lender against the risk of budget overruns.
Negative Pickup Deals
When using the negative pickup method for financing your production, you will sell and/or license the film to a distributor in exchange for the distributors promise to pay an agreed-upon price. You can then take the negative pickup distributor commitment to a commercial bank, use the pickup letter as collateral, and borrow production funds from the bank. This same tactic can be used to secure funding from investors. The letter demonstrates a distributors strong interest in your production and provides the investor with an improved chance of recouping their investment.
Variables of Negative
1. Did you receive an advance payment after signing the agreement?
2. Did you get paid after delivering the completed film?
3. Did the distributor provide a guarantee to you?
4. Finally, did you obtain perpetual participation in the films revenue stream?
for Negative Pickup Deals
Other important considerations relating to Negative Pickup deals are listed below:
1. Delivery requirements. You and your attorney must examine the distributors description of delivery requirements for the film, as well as required production element requirements. If these elements are not followed the distributor can refuse to pick up the film and the negative pick up agreement will not be acceptable to a financier.
2. Laboratory letter. A laboratory letter is a letter drafted by the film lab stating that the finished film is of acceptable quality, that the script adhered to the agreement, and that the pre-approved cast members appear in the final film in their proper roles.
3. Security for production loan or comfort for investors. You may be able to use the negative pickup as collateral on a production loan.
4. Distributors requirements.
5. Your net profit participation.
6. Criteria for delivery.
7. Distribution agreements similar to a P-F/D (Production-Financing/Distribution) deal. (The difference between the two is who provided the production financing.)
Negative Pickup Deal Advantages
distributor does not share in the risk of the film running over budget, because the completion guarantee is provided by the producer. The distributor in this arrangement holds little financial risk if the film is not delivered as agreed. Negative pickup deals can provide some assurance that the film will be released domestically. Finally, negative pickup deals removes the risk relating to the lack of distribution in financing.
Negative Pickup Deal
complete as opposed to after the film is finished. From the distributors point of view, the negative pickup is a speculative deal. Negative pickup deals are very complex transactions and time-consuming. Also, negative pickup deals go to producers who have a proven track record and
established relationships with studios, distributors, and lenders. Negative pickup loans are generally only available through banks or other lenders. (Firms with the most expertise in this area and are based in either New York or Los Angeles.)
Presale Financing Deals
Presales Used to Finance
With this agreement in hand, you may then go to a lender and use it in conjunction with distribution agreements and guarantees, other presale agreements, or other forms of collateral to obtain a production loan. You may borrow money by pledging the presale agreement itself. In general terms, a letter of credit is considered more bankable than a contract to pay the same amount of money.
Ultimately, a lender will decide to lend on a given presale agreement independently based on the reputation and track record for the presale purchasing entity and the terms of the agreement. Also, once the lender determines the amount, the lender then discounts the loan amount to get the production funds.
The quality of the picture, the competitive environment, and the demand for that genre of picture will determine whether or not the sales agent can sell your picture. Genre, censorship, the amount of deposits paid by the buyer to the sales agent are the primary concerns that relate to what rights are included in the presale agreement.
It is best to contact a sales agent as soon as possible. The sales agent will need a completely packaged film before he/she will be taken seriously by a potential purchaser.
Presale Financing Advantages
Cones, John W. "43 Ways To Finance Your Feature Film A Comprehensive Analysis Of Film Finance." Southern University Press, 1995.
Cones, John W. "The Feature Film Distribution Deal A Critical Analysis of The Single Most Important Industry Agreement." Southern University Press, 1997.
Litwak, Mark.. "Dealmaking In The Film and Television Industry From Negotiations To Final Contracts." Silman-James Press. 1994.
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