Production Financing

The Most Common Film ScenariThere are so many different ways to finance one or more feature films, that it is extremely important for independent producers to focus their efforts on those forms of film finance that are most likely to produce favorable results for their current project. Without this focus of time and effort, the film finance campaign is less likely to succeed.

It is important to understand that three different stages in the life of a feature film can be financed separately. These stages are:

1. Acquisition and/or development/packaging
2. Production (including pre-production, principal photography and post-production)
3. Distribution

Each may be separately financed and are sometimes difficult to distinguish in many real-world transactions. The combinations typically used in the industry today tend to fall into one of the following five distinctive film-financing scenarios (or some variation thereof). Each scenario will typically require that the independent producer engage in a different set of activities and communicate with a different group of people. In addition each such scenario tends to work best with different levels of film budgets.

Scenario 1 – In-House Production/Distribution

The selected studio/distributor to which the project has been pitched or submitted provides the acquisition and/or development financing. The independent producer then develops the project at the studio under some level of supervision by the studio’s creative executives. The studio gives a ‘green light’ to studio production funding and distributes the completed film with the studio-affiliated distributor using the distributor’s funds to cover print and advertising expenses. An independent producer (or screenwriter, director, actor or actress) may have originally submitted the idea, concept, underlying property, outline, synopsis, treatment or screenplay to the studio, but the rights to produce the property as a motion picture were then acquired by the studio. If the producer or others remain attached, they do so as employees of the studio or project.

Scenario 2 – The Production-Financing/Distribution Agreement (PFD)

The independent producer provides the acquisition and/or development financing (or raises such funds from investors) and takes the deal to a studio/distributor with a fairly complete package (i.e., significant elements are attached such as the director, the principal stars, the supporting stars, the writer, a production budget, etc.). The studio/distributor’s money is then used to produce and distribute the picture. The distribution agreement is entered into (theoretically) prior to the start of production, or at least before the end of production. The distributor will deduct its fee, recoup distributor expenses, collect interest on the production money loan and then reduce the negative cost with remaining gross receipts, if any.

Scenario 3 – Negative Pickups (and other forms of lender production-money financing)

Once again, the independent producer provides acquisition and/or development financing (or raises such funds from investors) and obtains one or more distributor commitments and guarantees to purchase the completed picture (for the worldwide, domestic or international markets, or individual territories) if the finished film meets specified delivery requirements (as set forth in detail in the distribution agreement). The producer takes this or these distributor commitment(s) to an entertainment lender to secure production funds using the distributor’s contract(s) as effective collateral. In this instance, the only part of the financing provided by the distributor relates to distribution expenses (i.e., the so-called P&A monies). The negative pickup and other forms of these distribution/finance agreements associated with lender financing are typically entered into prior to the production of the film. Other variations on lender production financing include foreign pre-sales, gap financing, and partly or wholly insured sales estimates.

Scenario 4 – The Acquisition Deal

Yet again, the independent producer raises acquisition and/or development as well as production monies, often from investors outside the film industry, but distributor funds are used to distribute the movie. The distribution agreement is entered into after the film is produced. Some in the industry still erroneously use the term ‘negative pickup’ to describe this transaction which is clearly different from the true lender-financed ‘negative pickup’ described above. This ‘pure acquisition’ approach to film finance and distribution generally provides the producer and creative team with the most creative control (over scenarios 1 – 3), but involves greater financial risk for the producer and/or the producer’s investors.

Scenario 5 – Rent-A-Distributor

The independent producer raises acquisition and/or development, production and some or all of the money needed to distribute the film. This type of distribution agreement is generally entered into after the film is produced. Distributor fees are generally at their lowest with this transaction, (e.g., 15%).

In any given year, these five film financing scenarios will typically be represented on the film slates of each of the so-called major studio/distributors, although in terms of numbers, the PFD, negative pickup and acquisition deal combinations probably generate most of the films appearing on such slates. On the other hand, almost all of the major studios will have one or more in-house productions each year (typically, their hoped-for blockbuster or ‘tentpole’ films) and the rent-a-distributor scenario is probably the least commonly used. The major studio/distributor sales representatives tend to use their coming blockbusters as leverage to gain favored treatment from exhibitors for the mediocre to poor films on their annual slates, thus partially explaining why many independent features of equal or superior quality get squeezed off theatre screens in favor of major studio product.