First in a series of posts dedicated to describing the most common forms of film financing. Based on “How to Fund Your Film” by Robert C. DiGregorio, Jr. imageMATTE Executive Producer

Part I:

Soon after an idea for a project first comes to you, start thinking about distribution for the final film. Your hopes for distribution (film festivals, in theaters, television, DVD, online, cable/satellite, etc.) will shape where and how you seek funding. In addition to the distribution platforms, the next step is to consider the range of potential distributors. These options may range from major studios, to independent studios, television stations or cable networks.

The most common type of film funding is industry financing. This umbrella term can include several potential sources. Studio Development Production Deals are in-house studio production financing. A studio creative executive approves your pitch and then thus begins the long road towards production.

The studio production deal is a vanishing breed and almost impossible for first-time filmmakers to obtain. However, several of the indie film divisions of the major studios are on the lookout for new talent. They sponsor contests, screening programs, and workshops or labs. For example, take a look at Searchlab from Fox Searchlight.

Contributed by Christina Chen,
UC Berkeley student

The terms Gap Financing and SuperGap financing have been getting a lot of play lately. As these concepts are sometimes hard to succinctly define, I was impressed by this pithy description from the Wikipedia:

Gap/SuperGap Financing

 

In motion pictures, Gap/Supergap financing is a form of mezzanine debt financing where the producer wishes to complete their film finance package by procuring a loan that is secured against the film’s unsold territories and rights. Most gap financiers will only lend against the value of unsold foreign (non North American) rights, as domestic (North American: USA & Canadian) rights are seen as a “performance” risk, as opposed to more quantifiable risk that is the foreign market. In short, this means that the foreign value of a film can be ascertained by a Foreign Sales Company/Agent by evaluating the blended value of the quality of the script, its genre, cast, director, producer, as well as whether it has theatrical distribution in the US from a major film studio; all of this is taken into consideration and applied against the historical and current market tastes, trends, and needs of each foreign territory of country. Surprisingly, this is fairly predictable to a certain degree of certainty. Domestic distribution, on the other hand, is very unpredictable and far from ever a sure thing (e.g. just because a film has a big budget and a commercial genre and cast, it could still be unwatchable and thus never receive a theatrical or television release in the US, thus being relegated to being a big budget, direct-to-video film.) So, in as much as there can ever be any certainty in the entertainment business, lending against foreign value estimates is almost always going to be a much better bet than banking on domestic success (comedies and urban films being two notable exceptions: they’re referred to a “domestic pieces” or “domestic plays”.)

 

True to its mezzanine nature, in the pecking order of recoupment of investment, generally, gap (or supergap) loans are subordinate to (recoup after) the senior/bank production loan, but in turn, the gap/supergap loan will be senior to (recoup before) equity financiers.

A gap loan becomes a supergap loan when it extends beyond 10-15% of 100% of the production loan required to shoot the film (or in other words, when the percentage of the gap required to complete the film’s financing package becomes greater than a bank is willing to bear, which is traditionally 10-15%, but can sometime be a flat dollar threshold like USD$1,000,000.)

Gap/Supergap lending is a very risky form of capital investment and accordingly the fees and interest charged reflect that level of risk. But at the same time it’s not unlike buying a house: nobody pays 100% of the purchase price with cash; they pay about 20% in cash and borrow the rest. Supergap financing works by the same principal: put down 20-30% cash/equity and borrow the rest.

Over the years, because of the high risk nature, many supergap companies have come and gone, but a few established players have survived the ups and downs of the markets: Screen Capital International is arguably the gold standard in the industry, with Grosvenor Park, Blue Rider, Newmarket Capital, and 120db also being significant “players” in the debt financing space.

[All text is available under the terms of the GNU Free Documentation License. (See Copyrights for details.) ]

You can also find some useful reference books at the Writer’s Store: film funding

A few worthy additions to your bookshelf:

The Filmmaker`s Handbook, 2008

Edward Pincus|Steven Ascher

The authoritative guide to funding, preparing, shooting, lighting, editing, finishing and distributing your film or video Widely acknowledged as the “bible” of film and video production and used in courses around the world, this indispensable guide to making movies is now updated with the latest advances in high- definition formats. For students and teachers, the professional and the novice filmmaker, this clear and comprehensive handbook remains the reliable reference to all aspects of moviemaking.

Find it at an independent bookseller: Filmmakers Handbook

Don’t Try This At Home!: The Physics of Hollywood Movies

Adam Weiner

A fresh look at the basics of physics through the filmmaker’s lens. It will deconstruct, demystify, and debunk popular Hollywood films through the scientific explanations of the action genre’s most dynamic and unforgettable scenes. Sample movie sequence and related physics concepts: In “Speed,” a city bus going over 50 mph jumps over a 50-foot chasm–successfully. An examination of force, acceleration, Newton’s Laws, impulse, momentum, and projectile motion follows…

Find it at an independent bookseller:Physics of the Movies

[Read more]

Readers of the Film Funding Blog often ask, “are studios and distributors spending marketing money wildly?” This really speaks to an underlying question, is theatrical distribution unprofitable for independent films?

To address this issue, I thought it might be helpful for me to contribute some perspective on the forces that can shape the P&A budget. My analysis is based on my years as a film distribution executive at Fox, Warner Bros., and New Line Cinema. I mention my background so that you can judge circumstances for yourself, without any undue spin.

(Photo by atp_tyreseus)

When a national theater chain decides to buy a picture, we usually consider that to be a good thing. But, one of two things may happen. First possibility is that the picture opens wide. This means that P&A is needed to support a large release (more prints, local newspapers, radio/TV, etc) and, before a single ticket is purchased, potentially millions of marketing dollars have been spent. If the film does not open well, the marketing spend will look hugely out of proportion to the results. Unfortunately, the final outcome is only knowable after most of the money has been spent.

Alternatively, it is possible to “platform” a film release. However, this usually works best in cases where you think the word of mouth will be very strong. Problem with a platform release is that you may never get a chance to open wider. Your theatrical distribution costs are lower, and your theatrical release may be profitable on a percentage basis, but you could wind up leaving millions in profit on the table.

Given the chance to open on say 500 screens (still far from a mega release), and a platform (2-20 screens), most people will choose to open wider because the revenue and profit tend to be higher (higher risk/higher return). Also, if a theater chain offers a wider release, if you suggest a smaller one you may be signaling a lack of faith in the motion picture.

Usually, as a producer/financier, you have almost no control over how the picture rolls out. Even if you pay the P&A cost, you are at the whims of the marketplace (actually, you are just facing more powerful players with stronger leverage). This means that your distribution strategy faces a complex set of dynamics, and you are forced to play the hand you are dealt.

As a footnote, the advertising for domestic releases is also tracked by the video retailers. They know that if the film did not have much market support, there is unlikely to be much awareness. This can limit the DVD sales.

There can be more upward pressure on a film’s marketing spend. Other ancillary markets (like airline sales) are frequently pegged to the US Box Office. It can often pay to buy a larger box office opening by spending more on theatrical marketing. Theatrical will run at a loss, but the goal is to build profit from DVD, television, and other distribution channels.

I would say that the typical film does not break even from theatrical. Even the most successful independent releases make only a very small profit from theaters. Could the marketing money be better spent? There is always the old adage that half the marketing budget fails to produce the desired result. It just isn’t that easy to figure out which half. Theatrical is not always a money loser, but it does tend to be a loss-leader.

Moving Pictures Magazine published a useful step-by-step overview covering how to sell your project at the AFM. The article summarizes the kind of coaching Sharp Angle provides to its clients. Here is the quick overview:

• “Identify the elements that constitute your package and be able to pitch it in a brief period of time.”
• “Of the 400 companies at the AFM, it’s unlikely that any film would suit any more than 25 or 30. Put together your list.”
• Utilize the screenings, pitch sessions, locations expo, and other resources
• With your research complete, buy a half-market badge and start making the rounds

Take a look at the full article for additional details. Moving Pictures Magazine

Visit ifta-online for more information on the American Film Market.

The 2007 AFM takes place October 31 - November 7, 2007.

UTA is one of the leading agencies in Hollywood. Their online effort to identify new talent is a real departure from standard operating procedures. Here is some background:

UTA Online represents the most original and successful artists emerging from the Internet, and this channel is designed to showcase some of their work. For more information about UTA Online, or any of our represented artists, please visit: www.utaonline.net.

They have information and video from clients here:

http://www.veoh.com/channels/UTAOnlineshowcase

I was flamed in the pages of Going Private, a memoir blog chronicling the insights of a private equity professional. Nothing better to do? Read the latest musings here. Short on time? This sort of sums it up:

But, then again, they don’t seem to know the difference between revenue and net income (in my not entirely limited experience a very common problem in Hollywood).

And then there is:

I’m not sure they understand the structure of film production financing, or the nature and purpose of the many preferences that plague such financings. Clearly, the ramifications of changes in these structures in the Cruise case and way they give Cruise a major pay and status cut are lost on the authors. This is a pity, since they purport to be experts on the subject.

Ouch!

Making my job as a hard working Film Funding Blog author rather easy, Going Private provides the data to refute their own argument:

Budget estimates on the film vary, but range between $150 - $220 million in production, marketing and development costs.

I actually think the total costs are much higher than this, but let’s use that range for discussion. The share of box office flowing to the studio from domestic theatrical distribution on a film like MI3 is likely to be approximately 50%.

As an aside, initial exhibition terms probably started out more favorable to the studio, but the contract was likely revised downward. I agree that expectations for MI3 were not met (but maintain that the film will likely still turn a profit.)

Distributor share of box office on international distribution will probably come in closer to 48%, a little lower than U.S. share due to greater “off the top” deductions for box office taxes and theater checking (ticket audits).

Based purely on worldwide theatrical, studio revenue (their share of the box office) would be approximately $225M ($133.5 x 50% plus $330 x .48%). Pretty good for a “flop!” It is rare that a tentpole release breaks even on theatrical distribution. While I think costs are more than $225, coming this close, prior to ancillary releases, is actually a very positive indicator. That means the film will carry over a negative balance, but there are ample opportunities to recoup this shortfall in home video, television, and all other ancillaries.

Low and behold, MI3 is racking up huge sales with its DVD release. The Hollywood Reporter, well, reports:

Studio sources peg first-week sales at 3.7 million units, more than either of the two previous releases in the franchise. And that’s not counting an additional 20,000 units sold on the two next-generation formats, HD DVD and Blu-ray Disc — making “M:I 3″ the biggest-selling next-gen title since HD DVD’s April launch.

http://tinyurl.com/ymbqhr

My revenue estimate for DVD is $144M to $180M with a net of $116M to $145M. In an arcane twist, the studios can capture up to 75% of these DVD revenues without sharing the proceeds with talent, the film’s producers, or other net profit participants.

Even so, with only 25% of the DVD revenues (referred to as a royalty, the base used for revenue calculations in participation agreements) MI3 will still start to cross over into positive territory. DVD sales, TV, and other downstream distribution will trigger contractual residual payments to the writers, actors, and the director. However, I’m fairly confident that DVD revenues and income from the super-secret television output deals will easily cover those costs.

The bottom line? The studio will be fully reimbursed for all costs and stands to earn a distribution fee of 12-15% of total revenues, plus the 75% of DVD (minus replication and marketing). This is very conservatively north of $100M in profit to the studio. Final figures could easily be double this when all distribution channels are considered.

For profit participants, they may see somewhere over $50M depending on distribution, marketing, and overhead costs allocated to the picture. For Tom, he’ll make more money from his points on the film than from his $20M salary.

On a closing note, the latest rounds of hedge fund deals in Hollywood have done away with the stacked deck. Fund investors participate on equal footing with the studios, the portfolio of films include (many of) the crown jewels, and the revenue and cost estimates are fully vetted. (For example, fund investors share in the full pot of DVD revenues.) Come on Going Private, cut us a break! We may not be the sharpest tools in the drawer, but give us credit for at least being able to add and subtract (with an occasional ability to multiply and divide.) Could it be that maybe this time, you’re just wrong? Perish the thought.

We do not recommend do-it-yourself legal work for key production contracts. Properly securing the rights to a script or other literary material can be critical. In many cases, if you obtain a distribution deal with a major studio, they will require a clean “chain of title.” This is often a delivery requirement, an item on the checklist that you must comply with before your film is considered “delivered” to the distributor.

From time to time, we do receive requests for sample templates. While we cannot vouch for their legal appropriateness, we try to share information and links.

For those of you looking for an Option Agreement, Script Sales has made one available online .