In the United States, the value is typically based on a forecast of revenues (generally 10 years for films and 20 years for television shows), beginning with theatricalrelease, and including DVD sales, and release to cable broadcast television networks both domestic and international and inflight airline licensing.[1]
Overview
Film finance is a subset of project finance, meaning the film project's generated cash flows rather than external sources are used to repay investors. The main factors determining the commercial success of a film include public taste, artistic merit, competition from other films released at the same time, the quality of the script, the quality of the cast, the quality of the director and other parties, etc. Even if a film looks like it will be a commercial success "on paper", there is still no accurate method of determining the levels of revenue the film will generate. In the past, risk mitigation was based on pre-sales, box office projections and ownership of negative rights. Along with strong ancillary markets in DVD, cable television, and other electronic media such as SVOD, or streamingvideo on demand), investors were shown that picture subsidies (tax incentives and credits), and pre-sales (discountable-contract finance) from foreign distributors, could help to mitigate potential losses. As production costs have risen, however, potential financiers have become increasingly insistent upon higher degrees of certainty as to whether they will actually have their investment repaid, and assurances regarding what return they will earn.
Past film slate's poor performance records are showing up in public court documents. Property and casualty companies (P&C) like AIG had offered insurance against film slates and the bonds issued to fund them, but now fully refuse to cover film slates. This ended in many lawsuits, starting in early 1999 (with Steve Stabler's Destination Films $100 million bond fund failure and subsequent lawsuit), and continue to this day with Aramid's lawsuit on Relativity's Beverly-1-Sony film slate and the Melrose-2-Paramount slate. Citigroup attempted to wrap the Beverly-1-Sony slate with a property and casualty insurance wrapper (from the formerly bankrupt Ambac Assurance, Corp.). After these "uninsured" slate financing arrangements (SFA) failed to return even the original principal to investors, the market has sought solutions. Traditionally, banks like JP Morgan have an entertainment division that uses proprietary risk mitigation regression analysis to see if future film revenues can meet an exceedance probability (where in the ultimate revenues allow the loan to break even), but this is calculated guesswork, and has caused all of the major national banks to lose millions in bad loans. An alternative to such loss protection was developed by Geneva Media Holdings, LLC (originally as risk mitigation for affluent individuals and "direct investors" under U.S. tax incentive IRC 181). Fully insured media funds are now being carefully reviewed by risk analysts at major hedge funds, banks and institutional pension plans specializing in investor risk mitigation.
Many outside of Hollywood fail to realize the longevity of film and television after-market income streams. Many commercial films and network television shows will make money for decades. For the investor who pays for part of the negative costs, the time value of money is important. For many movie investors the required rate of return for this "risky" investment may be 25% or more. This means that while there may be TV revenues for an additional ten years after the movie is released, the PV (present value) of those revenues is diminished by the required rate of return and the time it takes for these revenues to accrue. Ancillary revenues (VOD, DVD, Blu-ray, PPV, CATV, etc.), tend to accrue to the studio that purchased these residuals as part of their overall distribution deal. For many movie investors in the past, the theatrical box office was the primary place to gain a PV return on their investment.
VaultML has developed technologies usually seen in high-frequency trading to predict box office success and investor risk using artificial intelligence. They claim to analyze over 300,000 elements from screenplay to form a basis for prediction.[2] Based on their published future predictions for 2015 they out yielded the market on a return on investment basis.
Ryan Kavanaugh of Relativity Media offered participation in profits to actors, rather than up-front fees, to lower production costs and keep profits protected. Kavanaugh has attempted to use data from major studios like Sony and NBC/Universal to build a complex Monte Carlo system to determine movie failure rates prior to production. His projects and business models have failed miserably, resulting in $500 million in losses. The box office results of his movies have been mixed, as there is no set ratios, blends, mixtures, method or secret crystal ball that can project movie revenues, investor risk, or rejection parameters.
Slated[3][4][5] is the first dedicated online film finance marketplace for professional equity investing. Combined with Slated's team, script and financial analysis, investors can have ownership in films.
Epagogix has developed a system using neural networks to assess factors that contribute to box office success. They assess a wide variety of movies of different box office returns. Another film finance analyst, Steve Jasmine, claims to have developed a system for predicting a film's box office success. This system claims to quantify 800 creative elements of billion dollar grossing movies to determine what audiences are most interested in.[6] Worldwide Motion Picture Group offers a service termed "script evaluation" where a team of analysts compare draft scripts to those of previously released movies in an effort to estimate the box office potential of the proposed script. They also conduct surveys and use results of previous focus groups to assist this analysis.[7]
Since the collateral for film financing can be based on intellectual property rights, film finance transactions generally commence with a title analysis.[8]
Producers are encouraged to follow the First Law of Film Finance, which says that the Market Value of a film must be bigger than the Financing Plan, and the Financing Plan must be bigger than the Budget. It first appeared in the book, "Independent Film Finance: A Research-Based Guide to Funding Your Movie" in 2023. [9] Films that follow this law are more likely to earn a return for their investors than films that ignore it.
Public sources
Government grants
A number of governments run programs to subsidise the cost of producing films. For instance, until it was abolished in March 2011, in the United Kingdom the UK Film Council provided National Lottery funding to producers, as long as certain conditions were met.[10] Many of the Council's functions have now been taken over by the British Film Institute. States such as Georgia, Ohio, Louisiana, New York, Connecticut, Oklahoma, Pennsylvania, Utah, and New Mexico, will provide a subsidy or tax credit provided all or part of a film is filmed in that state.[11]
Governments are willing to provide these subsidies as they hope it will attract creative individuals to their territory and stimulate employment. Also, a film shot in a particular location can have the benefit of advertising that location to an international audience.
Government subsidies are often pure grants, where the government expects no financial return, although one notable exception is Canadian federal government film agency Telefilm Canada which provides financing in the form of recoupable equity.[12]
Tax incentives
Some U.S. states and Canadian provinces have between 15% and 70% tax or cash incentives for labor, production costs or services on bona fide film/television/PC game expenditures. Each state and province differs. These so-called "soft-money" incentives are generally not realized until a theatrical or interactive production is completed, all payments are made to workers, financial institutions, and rental or prop companies within the state or province offering the incentives. Many other limitations may apply (i.e., actors, cast and crew may have to take up residence in the state or province). Often, a certain amount of physical shooting (principal photography) must be completed within the state borders, and/or the use of the state's institutions. This would include rental facilities, banks, insurance companies, sound stages or studios, agents, agencies, brokers, catering companies, hotel/motels, etc. Each may also have to be physically domiciled within the state or province's borders. Finally, additional incentives (another 5% to 25% on top of the already generous soft money), may be offered for off-season, low-income area, or family entertainment projects shot in places of economic impoverishment or during poor weather condition months in a hurricane-prone state or Arctic province.
A number of countries have introduced legislation that has the effect of generating enhanced tax deductions for producers or owners of films. Incentives are created which effectively sell the enhanced tax deductions to wealthy individuals with large tax liabilities (e.g., IRS code sections 181 and 199). The individual will often become the legal owner of the film or certain rights relating to the film. In 2007 the United Kingdom government introduced the Producer's Tax Credit which results in a direct cash subsidy from the treasury to the film producer.
German tax shelters
A relatively new tactic for raising finance is through German tax shelters. The tax law of Germany allows investors to take an instant tax deduction even on non-German productions and even if the film has not yet gone into production. The film producers can sell the copyright to one of these tax shelters for the cost of the film's budget, then have them lease it back for a price around 90% of the original cost.[13] On a $100 million film, a producer could make $10 million, minus fees to lawyers and middlemen.
This tactic favors big-budget films as the profit on more modestly budgeted films would be consumed by the legal and administrative costs.
Despite its frequent use in the past, the above schemes are all but gone and are being replaced by more traditional production incentives.[14]
The main production incentive is the German Federal Film Fund[de] (DFFF). The DFFF is a grant given by the German Federal Commissioner for Culture and the Media. To receive the grant a producer has to fulfill different requirements including a cultural eligibility test. The film finance calculator[15] on germanfilmfinance.com[16] checks online if the project passes the test as well as it shows the individually calculated estimated grant.
British tax shelters
In British tax shelters, the same copyright can be sold again to a British company and a further $10 million could be raised, but UK law insists that part of the film is shot in Britain and that the production employs a fair proportion of British actors and crew. By using British tax shelter methods, many American films like to shoot at Britain's major film studios like Pinewood and Shepperton and why a film such as Basic Instinct 2 relocated its action from New York to London.[citation needed] These are commonly referred to Sale & Leaseback deals; they were discontinued in March 2007, though those initiated prior to Dec. 31, 2006 were grandfathered in.[citation needed]
Private sources
Debt financing
Pre-sales
Pre-sales is, based on the script and cast, selling the right to distribute a film in different territories before the film is completed.[17][18] When the deal is made, the distributor will insist the producers deliver on certain elements of content and cast; if a material alteration is made, financing may collapse.[19] In order to gain the “marquee names” essential for drawing in an international audience, distributors and sale agents will often make casting suggestions.[20] Pre-sales contracts with big-name actors or directors will often (at the insistence of the buyer) have an "essential element" clause that (as per the example above) allows the buyer to get out of the contract if the star or director falls out of the picture and a marquee equivalent cannot be procured.
The reliance on pre-sales explains the film industry's dependence on movie stars, directors and/or certain film genres (such as Horror).[20][21]
Typically, upon signing a pre-sale contract, the buyer will pay a 20% deposit to the film's collection account (or bank), with the balance (80%) due upon the film's delivery to the foreign sales agent (along with all the necessary deliverable requirements.)
Usually a producer pre-sells foreign territories (in whole or part) and/or North American windows/rights (i.e. theatrical, home video/DVD, pay TV, free TV, etc.) so that the producer can use the value of those contracts as collateral for the production loan that a bank (senior lender) is providing to finance the production.
Television pre-sales
Although it is more usual for a producer to sell the TV rights of this film after it has been made, it is sometimes possible to sell the rights in advance and use the money to pay for the production.[citation needed] In some cases the television station will be a subsidiary of the movie studio's parent company.
Negative pickup deal
A negative pickup deal is a contract entered into by an independent producer and a movie studio wherein the studio agrees to purchase the movie from the producer at a given date and for a fixed sum. Until then, the financing is up to the producer, who must pay any additional costs if the film goes over-budget.
Generally, a producer will have a bank/lender lend against the value of the negative pickup contract as a way to shore up their financing package of the film. This is commonly referred to as "factoring paper". Most major North American studio and network contracts (incl. basic cable) are collateralized/factored by the bank at 100% of the contract value, and the lender just takes a basic origination/setup fee.[citation needed]
Splitting the roles of studios and networks necessitated a means for financing television series appropriate to the varied risks and rewards inherent in the separation. A practice known as "deficit financing" consequently developed – an arrangement in which the network pays the studio that make a show a license fee in exchange for the right to air the show, but the studio retains ownership. The license fee does not fully cover the costs of production – hence the "deficit" of deficit financing.[22]
Deficit financing developed after the varied risks and rewards were determined and carried out through film financing. Deficit financing occurs when the license fee for a show doesn't fully cover production fees. A studio has ownership of the production, but as license fees are handed out in exchange to air a show, the phrase deficit financing comes into play as costs were not being met and paid.[22]
From the late 1960s through the mid-1990s special regulations from financial regulation's and syndication's rules created relations between television networks and independent production companies. These rules stated that ownership of the rights to the programs reverted to the producer/production company after a specified number of network runs (syndication). Profits from any other sales, including syndication, generally benefited the production community. Because of this, production companies produced original shows at a loss, hoping that they would eventually be run by syndication and make their money back.[23]
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.[citation needed] 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;[citation needed] 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. This is still an unpredictable practice. Domestic distribution is also 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.) Any certainty in the entertainment business, lending against foreign value estimates is preferable to betting on strictly a domestic success (comedies and urban films being two notable exceptions: they are referred to as "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 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 US$1,000,000.)[citation needed]
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 is 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 principle: put down 20-30% cash/equity and borrow the rest.
Bridge financing
Bridge finance has increased in prevalence in filmmaking in recent years. Bridge financing is an answer to the common "catch-22" problem of needing funding to get the actors, but not being able to get the funding without actors. Bridge financing, for example, can be used in scenarios where a filmmaker has a promissory note from an investor to finance a film provided the filmmaker can attach an approved actor, however without money to escrow for the actor's payment, the filmmaker is unable to meet the investor's criteria. In this instance, a short-term lender can provide a bridge loan to secure the actor with the promissory note as collateral; once the actor's payment is escrowed, the equity investment would be triggered, and the bridge loan would be paid back with a small interest.[24] In Canada, this form of financing is more commonly known as "greenlight financing".
Slate financing
A relatively new method of financing, slate financing "involves an investment in a specified number of studio films ranging from a mere handful to dozens of pictures", typically by private equity firms and hedge funds. Slate financing's proliferation typifies the "complex relationship that has developed between the studios and Wall Street". Between 2005 and 2008, hedge funds invested an estimated $4 billion in studio film slates and private equity firms invested $8 billion.[25]
The idea for slate financing came from "multifilm credit lines" that banks and investment firms created for studios in the late 1990s. There were three main advantages to this strategy: risk mitigation (since funds covered a pool of movies rather than one film), less interference from investors, and freeing up studio equity towards "big-budget franchises" for which they do not have trouble fundraising. In 2005, Relativity Media CEO Ryan Kavanaugh built upon these points to structure the first slate financing deal, a 17-picture joint deal with Sony Pictures and Universal Studios called Gun Hill Road that was backed by $600 million from hedge funds. Slate financing preserved the benefits of the earlier credit lines, as it allows them to risk less of their own capital when financing high-budget films. After deducting production costs, including prints and advertising (P&A) and residuals, studios split remaining box office revenue with investing partners; oftentimes they also split revenue from DVD and merchandise sales.[25]
Generally tax-advantaged theatrical film and television investment for affluent individuals comes with little risk. In general, production costs can be recouped through federal and state tax incentives, thereby eliminating most of the risk. Capital is still required as a direct investment (partnerships can be used), but must also be "at risk", which allows § 181 IRC write-offs. For example, if a private equity source is found (individuals with capital or a private wealth management firm representing personal funds), the investor pays for the film or TV production, and in return receives an equal amount of capital in tax-incentives, pre-sales, and state tax credits, thereby making the investment and recoup a wash. This is a highly specialized tax play, and is often looked upon as risky by those who do not understand the risk mitigation offered through state tax and federal tax incentives like § 181 IRC.[citation needed]
Individual investors
One of the hardest types of film financing pieces to obtain is private investor funds. These are funds invested by an individual who is looking to possibly add more risk to their investment portfolio, or a high-net-worth individual with a keen interest in films. While there are a few steps to cover between development funding and capital funding, with regard to the latter, any capital funding that is approached, whether that source is private equity (private individuals and /or funding groups), or debt financing (finance institutions and /or banks), is going to require that you have certain necessary elements in place before they consider financing your project. These elements include marketplace analytics, audience analytics, a bondable schedule and budget, and a distribution plan.[26]
With a rising popularity of online crowdfunding more and more films are getting financed directly by their consumers this way.[27] The crowdfunding platforms Kickstarter[28] and IndieGoGo[29] have their own categories dedicated to films.
Crowdfunding films gives the consumer a voice in what films are being produced, allow for riskier, more socially relevant, more innovative, less profit-oriented independent films with smaller and marginal target audiences that can't be found in mainstream cinema and lower the entry-barrier to new filmmakers.[30][31][32] Crowdfunded films include Iron Sky, Kung Fury, Veronica Mars, Code8, Star Trek: Renegades, Manthan and Anomalisa.
Seed money, also known as seed funding or seed capital, is a form of securities offering in which an investor puts capital in a startup company in exchange for an equity stake or convertible note stake in the company. The term seed suggests that this is a very early investment, meant to support the business until it can generate cash of its own, or until it is ready for further investments. Seed money options include friends and family funding, seed venture capital funds, angel funding, and crowdfunding.
A financial analyst is a professional undertaking financial analysis for external or internal clients as a core feature of the job. The role may specifically be titled securities analyst, research analyst, equity analyst, investment analyst, or ratings analyst. The job title is a broad one: In banking, and industry more generally, various other analyst-roles cover financial management and (credit) risk management, as opposed to focusing on investments and valuation.
Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses its internal reserves to satisfy its necessity for cash, while the term financing is used when the firm acquires capital from external sources.
A collateralized debt obligation (CDO) is a type of structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing mortgage-backed securities (MBS). Like other private label securities backed by assets, a CDO can be thought of as a promise to pay investors in a prescribed sequence, based on the cash flow the CDO collects from the pool of bonds or other assets it owns. Distinctively, CDO credit risk is typically assessed based on a probability of default (PD) derived from ratings on those bonds or assets.
A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as lead arrangers.
In finance, leverage, also known as gearing, is any technique involving borrowing funds to buy an investment.
Second mortgages, commonly referred to as junior liens, are loans secured by a property in addition to the primary mortgage. Depending on the time at which the second mortgage is originated, the loan can be structured as either a standalone second mortgage or piggyback second mortgage. Whilst a standalone second mortgage is opened subsequent to the primary loan, those with a piggyback loan structure are originated simultaneously with the primary mortgage. With regard to the method in which funds are withdrawn, second mortgages can be arranged as home equity loans or home equity lines of credit. Home equity loans are granted for the full amount at the time of loan origination in contrast to home equity lines of credit which permit the homeowner access to a predetermined amount which is repaid during the repayment period.
Real estate investing involves the purchase, management and sale or rental of real estate for profit. Someone who actively or passively invests in real estate is called a real estate entrepreneur or a real estate investor. In contrast, real estate development is building, improving or renovating real estate.
Private money investing is the reverse side of hard money lending, a type of financing in which a borrower receives funds based on the value of real estate owned by the borrower. Private Money Investing (“PMI”) concerns the source of the funds lent to hard money borrowers, as well as other considerations made from the investor's side of the equation.
The following outline is provided as an overview of and topical guide to finance:
A mortgage loan or simply mortgage, in civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any purpose while putting a lien on the property being mortgaged. The loan is "secured" on the borrower's property through a process known as mortgage origination. This means that a legal mechanism is put into place which allows the lender to take possession and sell the secured property to pay off the loan in the event the borrower defaults on the loan or otherwise fails to abide by its terms. The word mortgage is derived from a Law French term used in Britain in the Middle Ages meaning "death pledge" and refers to the pledge ending (dying) when either the obligation is fulfilled or the property is taken through foreclosure. A mortgage can also be described as "a borrower giving consideration in the form of a collateral for a benefit (loan)".
Film and TV financing in Australia refers to government assistance to TV and cinema in Australia. Over the past 30 years, government assistance has involved a mixture of government support, distributor/ broadcaster involvement and private investment. To a significant extent, government policies have shaped the form and scale of financing.
Karen Robson is an Australian entertainment lawyer, producer and briefly an actress, best known for her portrayal of the mysterious brunette Irma in the Peter Weir cult classic Picnic at Hanging Rock. She is based in Los Angeles and is a partner in the law firm Pryor Cashman LLP, where she specializes in film finance.
Carried interest, or carry, in finance, is a share of the profits of an investment paid to the investment manager specifically in alternative investments. It is a performance fee, rewarding the manager for enhancing performance. Since these fees are generally not taxed as normal income, some believe that the structure unfairly takes advantage of favorable tax treatment, e.g. in the United States.
Relativity Media, LLC is an American independent media company founded in 2004 by Lynwood Spinks and Ryan Kavanaugh. The company brokered film finance deals and later branched into film production and other entertainment ventures. The company was commercially successful prior to bankruptcy.
On March 23, 2009, the United States Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the United States Treasury Department announced the Public–Private Investment Program for Legacy Assets. The program is designed to provide liquidity for so-called "toxic assets" on the balance sheets of financial institutions. This program is one of the initiatives coming out of the implementation of the Troubled Asset Relief Program (TARP) as implemented by the U.S. Treasury under Secretary Timothy Geithner. The major stock market indexes in the United States rallied on the day of the announcement rising by over six percent with the shares of bank stocks leading the way. As of early June 2009, the program had not been implemented yet and was considered delayed. Yet, the Legacy Securities Program implemented by the Federal Reserve has begun by fall 2009 and the Legacy Loans Program is being tested by the FDIC. The proposed size of the program has been drastically reduced relative to its proposed size when it was rolled out.
American Homeowner Preservation is an online real estate crowdfunding platform which purchases pools of nonperforming loans from banks and other lenders and then offers borrowers who want to stay in their homes debt restructuring options with reduced payments and discounted principal balances. If homes are vacant or families want to move, AHP offers deficiency waivers and incentive payments to cooperate with short sales in order to put the homes back into service.
The Macquarie Film Corporation was a short-lived Australian film finance company that operated from 2002 to 2006. It was an offshoot of Macquarie Bank Limited.
Solar Mosaic is a clean energy fin-tech company based in Oakland, California. Founded in 2010, Mosaic created its initial business model using crowdfunding principals to offer loans for commercial solar development projects. After shifting its model in 2014, Mosaic is now focused on financing residential solar projects by leveraging third party capital partners. Through this model, the company aims to democratize the social and environmental benefits of clean energy.
Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and alternative finance. In 2015, over US$34 billion was raised worldwide by crowdfunding.
This page is based on this Wikipedia article Text is available under the CC BY-SA 4.0 license; additional terms may apply. Images, videos and audio are available under their respective licenses.
