Film finance
From Wikipedia, the free encyclopedia
Film finance is a very secretive and little understood aspect of film production. It is a subset of project finance, meaning that the cash flows to repay investors are generated from the film project, and generally not from external sources.
Contents |
[edit] The main challenge of film finance
It is difficult to predict with any accuracy the revenues that any one film will generate. 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, et al. 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.
Due to the uncertain cash flows financiers are faced with a high degree of uncertainty as to whether they will actually have their investment repaid, and if it is repaid, what return they will earn.
[edit] Typical methods of raising finance
There are four main methods of raising finance for the production of a film: (i) government grants; (ii) tax schemes; (ii) debt finance; and (iii) equity finance.
[edit] Government grants
A number of governments run programs to subsidise the cost of producing films. For instance, in the United Kingdom the British Film Council provides funding to producers provided certain conditions are met. Territories such as New Mexico, with provide a subsidy provided all or part of a film is filmed in that territory.
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.
[edit] Tax schemes
A number of counties have introduced legislation that has the effect of generating enhanced tax deductions for producers or owners of films. Schemes are created which effectively sell the enhanced tax deductions to wealthy individuals with large tax liabilities. The individuals pay the producer a fee in order to obtain the tax deductions. The individual will often become the legal owner of the film or certain rights relating to the film, but the producer will in substance continue as the real owner of the economic rights to exploit the film. Governments are beginning to recognise that enhanced tax deductions are an inefficient way of supporting the film industry. Too much of the tax benefit is siphoned of by promoters of the tax scheme. Also, films with little commercial or artistic merit are produced simply to generate tax deductions. 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.
[edit] 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. 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.
That being said, the above schemes are all but gone and are being replaced by more traditional production incentives [1]
[edit] 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. This explains why 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.
[edit] Debt finance
[edit] Pre-sales
Selling the right to distribute a film in different territories before the film is produced based on the script and cast is the primary means of film financing. Once the deal has been made, the distributor will insist the producers deliver on certain elements of content and cast; if an alteration is made, financing may collapse (as happened on Terry Gilliam's The Man Who Killed Don Quixote when lead actor Jean Rochefort fell ill). Often a distributor will suggest a casting alteration in order gain the “marquee names” essential for drawing in an international audience.
The reliance on pre-sales explains Hollywood's dependence on movie stars and the huge salaries they are paid. Their agents and lawyers - realizing their importance in pre-selling a movie - can ask for fees ranging from $10 million to $30 million, plus perks and a percentage of the gross profits.
[edit] Television pre-sales
Although it is more usual for a producer to sell the TV rights of his 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. In some cases the television station will be a subsidiary of the movie studio's parent company.
[edit] 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 also pay any additional costs if the film goes over-budget. Superman and Never Say Never Again are examples of negative pickups.
