Wanna get Your Indie Film Funded? Money experts Reveal the Steps at American Film Market 2023
A Practical Guide to Successfully Finance Your Independent Film from American Film Market 2023
Moderator: Eric Paquette, CEO, Meridian Pictures
Panelists:
Andrew Kramer, Chair, Motion Picture, Television and Entertainment Finance practice, Willkie Farr & Gallagher LLP; 
Brian O’Shea, CEO, The Exchange; Mr. O’Shea is the CEO of The Exchange, an international sales company founded in 2011.
Prior to The Exchange, Mr. O’Shea was President of Worldwide Sales and Distribution for Affinity International, creating the entity five years ago then called Odd Lot International, In his role at Affinity, Mr. O’Shea was directly responsible for all international acquisitions, business affairs, sales, financing, and all distribution activities.
Mr. O’Shea was previously Senior Vice President of Worldwide Distribution at Media 8, Senior Vice President of International Sales at First Look International and Vice President of Legal Affairs and International Sales at Concorde-New Horizons. During his tenure at those companies, Mr. O’Shea was instrumental in securing, financing, and selling such films as Monster, Upside of Anger, Before Night Falls, and Waking Ned Devine.
Guillaume de Chalendar, SVP, Head of Media & Entertainment, Banc of California;
Fred Milstein, CEO, Media Guarantors
“We live in a time where studios only make Comic book movies and horror movies. There’s a lot of people out there who want to make something else. And a lot of filmmakers who want to make something. This panel will tell us how.”
Eric Paquette
We live in a time where the major studios seem to only make two kinds of movies. They make comic book movies and horror movies. And we know that there’s a lot of other great screenplays, a lot of other great filmmakers and producers and directors that want to make their movies. And so hopefully this panel can provide a little bit of insight into doing so.
So as you’re walking around AFM, you see a bunch of booths. For countries and states that have tax credits. Guillaume, what does it mean when someone comes to you and says Saudi Arabia, Neom, or Malta has a tax credit. How does an independent producer then take that information and work with you to help finance their movie?
Guillaume de Chalendar
This is one of the most important aspects of financing at this point in time, where there’s pressure on the revenue side. People are not buying the way they used to, and you can speak to that, obviously. And the costs of the budget still are not coming down. Inflation and interest rates are up. So you need to find a way to obviously reduce the net cost of your budget.
So that’s what’s on screen is really there on finance. A tax credit helps you reduce that cost.
For those who are not familiar, the very broad principle of how this works is a particular jurisdiction wants to attract “spend” in the that particular territory. It could be a region of a country. It could be a country itself.
And in exchange for particular qualifying “spend”, you’re getting rebate, you’re getting cash back, once the film is finished. So that’s a great thing, but you actually, as a filmmaker need the cash through the production process, we all know it’s expensive to make a movie. And so we come on and get involved by saying okay, we know what the value of that rebate is going to be.
We know the cash is going to come at the end of the process. Why don’t we give you the cash now so you can spend it, make the movie and we’ll get repaid by collecting that payment. I oversimplified dramatically, but that’s the concept and it works.
Eric Paquette
So let’s just take a $10 million hypothetical budget of a film.
You’re shooting in Atlanta, they have a 30 % tax credit. So now your net number is $7 million, right? It’s [genre is] an action thriller.
Now you go to Brian [O’Shea, foreign pre-sales agent at The Exchange]. Brian what will you do?
Brian O’Shea
We’ll take a look at the package, the script and the attachments that are with the project. And then we do an evaluation of what we think the marketplace will pay for it. I focus on international [pre-sales], but do domestic [pre-sales] as well.
So we run estimates. High, medium, low [estimated sales returns]. Based upon the low numbers we have to show market validation provided that you can allow me to sell the picture. Then we negotiate our deal. I will come back with some sales, a lot of sales, few sales, and then we run a business model and we figure out how we fill the gaps of what’s not covered through the tax credits or through my pre-sales.
Eric Paquette
So now we’ve got $5 million more dollars because Brian couldn’t sell [the full amount needed, wish is] $7.
We’re $2 million short.
So now you go to Andrew [Kramer, Entertainment Finance Practice, Wilkie, Farr, Gallagher LLP], who represents some of the most important equity financiers who are going to provide and to talk about the gap [financing]. What your clients are looking [for], what kind of projects? Is it prestigious? The likeliness of return on capital to fill the gap?
Andrew J. Kramer
The type of projects differ based upon the appetite of the particular equity investor, equity investment company. They all have different tastes.
There are some clients and equity investors who prefer the horror genre.
There are some who prefer drama with female protagonists or female elements to it.
They all have different missions.
Some want inspirational and faith based films. But they’ll come to me with a finance plan after speaking with Brian [O’Shea] and showing sample sales or a finance plan that shows the $10 million plus the $3 million of the tax credit and $5 million in pre-sales. And there’s a gap of $2 million.
So how do we fill that gap?
That’s where equity comes in and fills the gap. Whether it’s one or more equity investors. They’ll take an ownership position in the picture. It’s risk capital for the most part. They get a return on their investment, usually anywhere from 15 to 20%, 20% is generally the standard premium.
Generally on independent pictures, 50% of the back end is participation.
So as the waterfall would go first, Brian [int’l and domestic pre-sales] would take his sales fee, then Guillaume [bank lending] gets repaid. Then the equity investors get repaid plus their premium. The balance is split between the producers and the talent and the equity investors.
That’s a typical independent film financing plan and waterfall.
Eric Paquette
So staying along those lines, how does Avi Lerner [who owns Millennium Films] his library has been for sale for a number of years and we gather he wants $200 or $300 million for his library.
Who owns the copyright of an independently made movie?
Andrew J. Kramer
Generally the equity financier would own the copyright. It also depends on the scenario. There are scenarios where projects have been developed for years. An equity investor is just a passive investor for a contractual participation as opposed to an equity ownership position. So really there’s no set rule.
Most equity investors generally have an ownership interest in the copyright in the picture and the library value of the picture. There are contractual rights for participations on both sides. The producers and the equity investors in perpetuity.
There are some scenarios where equity investors are funding equity without copyright ownership with just a “quasi equity”, meaning it’s a contractual participation.
So in this scenario, I’m the producer, Guillaume was the bank, you don’t own anything. You just get your money back. You’re just selling foreign [pre-sales]. You bring in an equity guy for a couple million bucks. You would not own the movie in most scenarios. The equity owner would own the movie.
You’d have a contractual participation rights or the revenues in the movie. But it also depends on who’s going to be responsible to Guillaume [the bank] and who’s going to be the borrower on that loan.
Eric Paquette
So it’s just generally the borrower against the foreign sales and against the rebate. They’re the owner?
Guillaume de Chalendar
If it’s a loan out to you as the producer, you’d probably create a special purpose vehicle, a clean company that does only one thing: the production and the exploitation of the particular film.
That entity technically will be entitled to receive the tax credit because it spends the cash. It will receive the proceeds of the commercial exploitation.
So commercially it will be entitled to receive the revenue. So we’re going to lend to that entity because that’s where our collateral, the source of repayment for the loan, is situated. So that’s the borrower vehicle you actually own.
Eric Paquette
So I go on Legal Zoom and you start a company of which I own 100% of and we’re making a movie called Banc of California and that’s it.
Now, Fred [Milstein, CEO, Media Guarantors], we’ve got our movie financed. So you and your partner, Scott Nicolaidis, who are among the most gifted people in production. You’re presented with a film.
Talk about the level of risk you’re willing to take. For two scenarios, 1) quality of the project, and then 2) the experience level of the folks involved with the movie.
Fred Milstein
So before I deal with that point, two important things: everybody here is either putting money in or making sales or lending. You’ve got an equity investor.
It all depends on one thing that there’s actually a ”there” there at the end of the day, because the only way everybody gets their money back or even makes a profit is that the film’s actually completed and delivered.
If you never finished the movie, there’s nothing to sell.
Eric Paquette
Are you responsible for that?
Fred Milstein
We are responsible for that. So the ultimate liability of completion and delivery is what the bond company is responsible for. Basically, in a way, it’s insurance. But what it’s based on, as you were suggesting, is our risk analysis of how those elements of the project: script, budget, schedule, experience of the director, who’s your first AD, who’s the line producer, where are you shooting? The quality of the crew that you’re hiring, who’s the accountant?
We get involved in all of those details to make sure that the risk we’re taking on that the film can actually be finished and finished on time and on budget is achievable.
Because when we sign a completion guarantee our risk is pretty defined.
If the film goes over budget, our ultimate responsibility is to finish the movie. So we get tagged with the overcost.
If the film can never be finished for some reason. Not, a cast member getting sick or someone, God forbid, dying – that’s covered by production insurance. But for a non uninsured reason, the film can’t be finished in accordance with the specifications that the distributors are requiring, we would have to pay everybody back.
So those are two big risks that we want to make sure when we do step into a film, the project’s achievable.
We look at projects both from a production, commercial perspective. That’s a pretty straightforward look to the elements.
But, I love movies and I love a lot of movies. Sometimes you read a script or you meet a director or you see a project and you say, “Okay, on this one we can stretch a little bit”. It’s not a quality stretch.
Eric Paquette
What do you mean “stretch”?
Fred Milstein
There may be risks involved in the project that sometimes we wouldn’t be willing to accept, but in the right combination of a project we might be willing to go a little further.
We might be willing to take a risk that we wouldn’t ordinarily agree to take. That isn’t crazy stuff, it would be a bit of a stretch beyond where we would normally have our normal comfort zone in terms of physical production.
We might go to a location that we hadn’t been to before. Malta or Saudi Arabia, right? Where we did a picture where we hadn’t worked before. We’re not very many people had worked before.
We agreed to do a movie, but we had confidence in the director. We have confidence in the line producer.
We went along with it and we said, okay, you’re planning as well as you can plan. And they’re going to be a bunch of unknowns. Every film is going to have a contingency built into the budget.
We had everybody put up a little more contingency than we normally would have asked to cover that.
But beyond that, we knew we were on risk and we went to the location, we monitored it very carefully and they did a good job.
Eric Paquette
In all independent films, unlike studio movies, there’s a contingency, right? There’s a line item in the budget that’s an insurance policy for the investors.
Fred Milstein
It’s a deductible, the same way with your car insurance. If you have a $500 deductible, your premium’s a little higher. If you have a $2,000 deductible, your premium’s a little lower. It works the same way.
Eric Paquette
So by the end of the movie, do you recommend that responsible producers use all of their contingency?
Fred Milstein
Not all of it. Ultimately we have to approve the use of contingency. We always hold a bit of contingency. Even when the movie’s completed, even when post [-production] is completed for last minute fixes in delivery, which these days, it’s on every film.
There’s always a technical glitch. So every company, every distributor, has high technical standards.
They run it through a very rigorous set of tests. So you always keep a little bit of money to do those technical fixes at the very end.
