This is part of a series of book excerpts from The Independent Filmmaker’s Law and Business Guide: Financing, Shooting, and Distributing Independent and Digital Films
designed to introduce filmmakers and others interested in creating content on the legal issues involved in the filmmaking process.
In each of the various funding scenarios other than an outright sale to a motion picture studio, the film producer must still bear the burden of both controlling the costs and paying the bills as they accrue. Although the filmmaker may have sold the right to distribute the film (or the copyright) in the completed film, these are future transactions that do not translate into production funds. Instead, the filmmaker must apply to a lender to provide the cash to make the movie.
Although rare, there are some commercial banks who provide this form of independent film lending. Two of the more successful are the Lewis Horowitz Organization (a division of Southern Pacific Bank) and Comerica Entertainment Industries (a part of Comerica Bank). The experience and knowledge of these banks allows them to assess the credit risk of the independent production, and lend funds on the basis of the production’s collateral.
To receive a commercial loan for creation of an independently financed film, the film company must credibly present evidence it will be able to repay the loan, and that it has sufficient collateral to cover the principle amount borrowed. Just as a home purchaser must show the intended property is worth at least as much as the loan, the filmmaker must demonstrate the value of the financed project exceeds the loan requested.
To serve as proof of value and collateral of the loan, the film package must demonstrate to the lender the value of the project. Since filming has not yet begun, the collateral includes the screenplay and story rights; legally binding commitments by the key personnel to participate in the film; the production budget – including a draw-down schedule for the use of the proceeds as they are paid to the filmmaker throughout production; and most importantly, legally binding guarantees for the territory sales, negative pick-up, or other financing arrangement. These contracts must specify the guaranteed minimum the filmmaker will be paid, and that amount can be used as collateral to be pledged against the value of the loan.
For distribution agreements, negative pick-up contracts, or pre-sales involving non-U.S. territories, the financing becomes a bit more complex. Issues involving fluctuating exchange rates, governmental stability, and credit worthiness further frustrate the lending process. Fortunately, to assist with these issues the Export-Import Bank of the United States has entered into a program with U.S. lenders to guarantee those loans made on the foreign agreements. Under the Film Production Guarantee program, a participating bank, such as Comerica or the Lewis Horowitz Organization can provide a loan based on as much as 90% of the value of the collateral, depending on the stability of the purchaser’s home government and currency. Collateral coming from somewhat higher-risk countries can be counted at 60% of the face value.
Of course, the discounts involved in the Film Production Guarantee still require that at least 10% of the financing come from the filmmaker or producer. In addition, the funds are not available based on the non-guaranteed expectations of the film. This will require the filmmaker to use the bank financing and Production Guarantee Program in conjunction with a secondary funding source, whether that be the personal assets of the filmmaker or other sources.
Finally, to get the collateral ready for the bank, there may be significant expenses, particularly with regard to key personnel – cast and crew who require an advance payment to legally bind themselves to the project. This short-term bridge financing may be substantially more expensive than other financing sources, and the cost of the interest payments must be included in the budget for the project.
In addition to the sale of company interests or equity financing, the film company can also seek to obtain commercial loans. Since the only significant asset of the production company is the uncompleted film, the lending practices are essentially those of the negative-pickup financing and distribution deal. The lender will require that a reputable distributor enters into an agreement to distribute the finished film, a completion bond company guarantee that the film will be completed for the agreed-upon budget, a budget reflecting the actual costs of production, liability and other insurance, and commitments of the principle cast. When the filmmaker can package those elements, certain lenders may be willing to provide credit to the film company. Those payments are often made weekly, upon proof of satisfactory progress during the prior week’s shooting. Finally, the bank will require a security agreement which puts a lien against the developed (and the exposed) film stock and the copyright in the film, so that the lender can foreclose on the assets in the case of nonpayment.
For a company that has received significant cash investments, there are some lenders willing to provide small lines of credit to filmmakers. In these cases, the bank or lender may not ask for the completion bond or the weekly updates because the risk to the bank is minimized by the investor’s participation. The creditor will have priority for repayment over the investors so, in the event of default, the bank will be repaid in full before the investors receive any of their funds. The company’s assets, including the copyright in the film and its cash reserves, provide sufficient security for lender to accept the risk of providing the modest loan.
* Jon Garon is admitted in New Hampshire, California and Minnesota.
Adapted from Independent Filmmaking, The Law & Business Guide™ for Financing, Shooting & Distributing Independent & Digital Films, A Capella Books (2d Ed. 2009) (reprinted with permission). Jon Garon is professor of law, Hamline University School of Law; of counsel, Gallagher, Callahan & Gartrell.