The Film Business

Independent Film Financing – The Options

DEVELOPMENT

For those who want to make independent films, the beginning of development is comparatively easy–you do it yourself.

Someone has an idea worth writing. That idea could be original, or perhaps based on a work in the public domain, or based on a pre-existing work. If the latter, the work will need to be optioned. Low-budget filmmakers may think they can’t possibly afford to option a pre-existing work, but if the work is obscure or otherwise not in demand, obtaining a free option is always a possibility.

Since scripts meant for independent production are usually written before a financing party has been identified, filmmakers get to write exactly what they want to write. Of course, the logistics involved in lower-budget independent filmmaking must be considered when developing stories. This generally means developing scripts that have smaller casts and no fancy effects, that run between (usually) 85 and 110 pages and that use at most a handful of locations or just one main location set-dressed to look like multiple locations. Horror has always been a staple of low-budget filmmaking, as have intimate relationship stories such as Before Sunrise and Short-Term 12, which tend to be heavy on dialogue and therefore quicker and easier to shoot.

Once the script is finished, it’s used to attract investors. If the filmmakers find a financing party who likes the script as it is, then development is over. However, just as with studio films, if the financier wants script changes, then that’s what will happen because if the financier doesn’t like the script no checks will be written. Still, some independent film financiers feel incapable of playing script doctor or may be in the game to have fun and take chances, and therefore may be more hands off than their studio counterparts when it comes to development. Often times, script development and finalizing a script are the least of an independent filmmaker’s problems.

FILM FINANCING

Finding money is usually a much bigger problem independent filmmaker’s face. So, where might you find financing?

Studio Financing

I know this chapter is devoted to independent filmmaking, but I thought I would be heretical and mention studio financing, for one reason: As we’ve discussed, the tremendous upside of studios is that, if they produce the movie, distribution is guaranteed.

Make no mistake about it—finding money for independent films is far easier than finding distribution. Neither is a walk in the park, but there are far more wealthy people and institutions in this world that can finance a project than there are distribution outlets that can significantly monetize it. And without competent distribution, all is lost; the investment in time, passion and money has essentially gone down the drain. So, having a built-in distributor come with your financing is a fabulous advantage, and the reason so many professionals who might think about independent filmmaking end up back at the studios. Creative people may gripe about studios, but they still want to work with them because (a) they pay up front, and (b) they distribute.

However, as we’ve discussed earlier in the book, with these great advantages comes a cost. When you accept your studio paycheck, you effectively give up all control over the project unless you have a track record of uncommon success. This isn’t to say that all creative people lose all influence once they sign a studio deal. Your ability to remain involved becomes purely dependent on your relationship with the studio and the other powerful people who work on the project. If you’re in everyone’s good graces, then you may have influence. If you’re not, you could be gone tomorrow.

Okay, let’s say you want to keep as much creative control as possible. Let’s say you’re just starting out, studios don’t know you’re alive and you want to make your film your way, so you’re going the independent route. Where then can you look for money?

Crowdfunding

Actor Zach Braff’s Wish I Was Here, writer Charlie Kaufman’s Anomalisa, director Paul Schrader’s The Canyons and the Veronica Mars film were all crowdfunded. So were many other films and documentaries created by people less well known than Braff, Kaufman and Schrader. In fact, 20 films screened at the 2014 Sundance Film Festival, including feature-length narrative films, shorts and documentaries, were produced in whole or in part with crowdfunding money.

If you can make a compelling case to the public at large about your project, you might consider crowdfunding sites like kickstarter.com, indiegogo.com and Seed&Spark.com. Certainly one advantage of crowdfunding is that donors do not become equity investors entitled to a financial interest in the film’s revenues. Instead, donors usually receive small film-related gifts like posters or “rewards” such as an opportunity to meet the filmmakers, depending on the size of the donation.

Crowdfunding can also be used to finance just part of your project. For example, you might raise some crowdfunding cash to help develop your film and get it off the ground, say by making a trailer, so it might attract the attention of larger investors. Alternatively, depending on your budget, you can try to use crowdfunding to raise all the money you need to make your movie.

Angel Investors

Angel investors are people with halos over their heads, compassion in their hearts and money in their bank accounts. One or a handful of angel investors can make a film happen, provided you know how to reach and entice them.

As mentioned earlier, some people with money will always be attracted to the high-stakes glitz and glamour world of filmmaking. They may like calling themselves “Executive Producer” or “Producer,” titles that come with providing all or a substantial part of a project’s financing; they may like the creative meetings and the fun of being on set, not to mention the theoretical chance to make a huge return on their investment. They may be drawn by a project’s subject matter or its point of view or the actors involved. And they may like the chance to put on the auteur’s hat and provide some significant creative input. If someone puts up the money, they have that right. On the other hand, if the angel investor is not experienced in the ways of filmmaking, then he or she may choose to stand aside, leaving the filmmakers freer to do what they want.

Importantly, angel investors will want something that Kickstarter donors don’t— an actual financial return on their investment. The posters, signed scripts, dinners with the director and set walk-ons that satisfy small Kickstarter donors won’t work with wealthy investors. They will want signed contracts carefully spelling out all of their rights, including their right to receive money from the production’s revenues. We will discuss these contracts later in this section.

Foreign Pre-Sales

Sometimes independent filmmakers have an excellent script, an experienced director and cast members, but no money. The filmmakers may not know any potential angel investors, so where to turn? Foreign pre-sales have historically been one way to get money for production, though in recent years these deals have become harder to negotiate. Nevertheless, they are worth exploring.

You’ll recall from our discussion of copyright law in Chapter 1 that a copyright owner’s exclusive distribution right can be segmented and licensed to as many different distributors as are willing to make a deal. This is what happens with foreign pre-sales. Before the movie is made, the film’s distribution rights in foreign territories are segmented and licensed to different local distributors around the world. In return, the filmmaker receives a contract guaranteeing a specific license fee from each distributor when the film is delivered. The filmmaker may also receive a cash advance when the agreement is signed. The cash advance can then be used to pay for actual production costs. The distribution contract can be used as collateral for a bank loan, which may also be used to help finance production.

By way of example, let’s assume you have a great low-budget project and both a competent director and an actor who is popular in France, Germany, Japan and several other countries. Given the star’s popularity, a French distributor may guarantee you a specific fee upon delivery of the film. The same sort of deal can then be negotiated with a German distributor, a Japanese distributor, and so on. The distributors nail down the film’s distribution rights before it’s completed at what they hope is a discount price, and the filmmaker gets very valuable distribution agreements that can generate money via a bank loan. These sorts of deals can be complex and negotiated in a variety of ways, but there are foreign sales companies and lawyers who specialize in pre-sale agreements.

Bear in mind, however, that people don’t offer pre-sale money if they don’t believe the project will play well in their territory or if they doubt you can actually deliver a quality film. It’s a good start to have an excellent script in a genre that plays well worldwide, such as action or horror, but that’s not enough. These days, you’ll likely need an experienced director and a recognizable actor. And, since a film’s American distribution often spurs worldwide interest in a movie, foreign pre-sales may greatly depend on a foreign distributor’s assessment of the film’s chances in America.

You’ll also need what’s called a completion bond, since any bank that loans money based on a pre-sale agreement (or any other agreement for that matter) will require one.  A completion bond company, often called a completion guarantor, issues the completion bond and thereby promises the film will be completed and delivered pursuant to an agreed set of specifications. Think of a completion bond primarily as a cost-overrun insurance policy, where the completion guarantor agrees to pay all budget overages should problems occur during filming. Films can go over budget for all sorts of reasons, and completion bonds insure that money will be available should this happen. Sounds great, doesn’t it? Except for this: Completion bonds come with a price, both monetary and creative. These bonds cost money, usually in the neighborhood of 3 percent of a project’s budget. Additionally, if the completion guarantor has to actually get involved in the production, because cost overruns appear likely or have already occurred, or indeed for any other reason, the completion guarantor will have a contractual right to kick you and anybody else it wants off the film and hire other people to complete it.

Tax Incentives

Municipal governments, U.S. states and many foreign countries often entice filmmakers to come shoot in their territory with financial giveaways. Why? Because film companies do two things locally: They hire people and spend lots of money at places like restaurants and hotels. The theory is, if the government gives away “X” dollars to woo filmmakers to come shoot in its territory, the government gets back those dollars and more. It does this, so the argument goes, from a better local economy and increased tax revenues from people who financially benefited from the film company’s presence.

Governments lure filmmakers by providing tax credits, rebates and other money-saving programs. For producers who can take advantage of these offers, more than 20 percent of a film’s budget might be provided by a government entity.

In return for the money, the government entity will not take a financial interest in the film’s subsequent revenues. Instead, the government entity will require the film company to shoot a significant percentage of the film in the location providing the money, and/or spend a certain percentage of the budget in the locality, and/or hire a certain number of actors or crew members, or both, from the region. Every incentive program is different, but they all save productions a lot of money.

It’s worth mentioning that these programs have been the subject of debate recently. Some lawmakers say that the higher rates of local employment, the production money spent in-state and the resulting higher tax revenues more than offset the state funds given to filmmakers. Others cite studies that claim the opposite is true. For example, in Massachusetts, a 2013 state report cast doubt on the efficacy of state tax incentives. That was followed by an MPAA report showing the state’s $37.9 million tax incentive payments to filmmakers in 2011 led to $375 million being added to the state’s overall economy that year.

The same debate recently occurred in Maryland, production site of the Netflix series House of Cards. According to reports, the show’s first two seasons’ combined budget of $119 million was partially offset by as much as $26.6 million in Maryland state tax credits. Some Maryland legislators thought this was excessive and wanted to significantly reduce the available tax credits, leading the show’s producers to warn that they’d produce the show elsewhere if that happened. The producers also demonstrated they’ve learned a thing or two about politics by throwing a party for state legislators. The guest of honor was “Frank Underwood,” a.k.a. Kevin Spacey, who came to the party to “whip votes” for continuation of the tax credits. Spacey obviously proved as adept as his character— a deal was subsequently reached giving the show $11.5 million dollars in state subsidies for its third season.

Gap Financing

Under certain circumstances a bank may loan sufficient funds to close the gap between what a production has raised and what it still needs. Since filmmaking is a risky business, banks are reluctant to get involved, especially with people who don’t have a track record, so obtaining a bank loan is never easy. However, on occasion banks will make up the difference provided the bank is the first party to be paid back out of any subsequent revenues. One advantage of a bank loan is that banks normally want repayment of the loan plus interest and not an equity interest in the film’s revenues.

Negative Pick-Ups

These types of arrangements provide that a distributor will “pick up” a film for distribution from the producer after it’s been made, provided the final film adheres to all sorts of contractual specifications the distributor wants. These specifications usually include the film’s approved script, budget, cast, rating and running time. Where a producer negotiates a negative pick-up deal, the agreement can be given to a bank as collateral for a loan. The loan can then pay for the production costs along with a completion bond that will inevitably be required.

Excerpted from Understanding the Business of Entertainment: The Legal and Business Essentials All Filmmakers Should Know, by Gregory Bernstein. © 2015 Taylor & Francis Group LLC. All rights reserved.

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