Monday, January 25, 2010

Production Finance

This is the holy grail of filmmaking.  MONEY.

Outside of having a studio deal, there are only three ways to finance a film:  Private equity, debt or some combination of the two.  But wait, you say, there are all sorts of new models out there.  Well, yes there are.  Web 3.0 is creating all sorts of ways to get a movie made, but regardless, having a sound understanding of how motion pictures are funded in the "Old School" way is extremely important.

We will put a pin in the discussion of financing in the new era for now.  At this point in time, the majority of films are financed using traditional methods.


Equity, as I said in a previous post, can involve securities.  Depending on how many people you are asking to invest, you will need to know what the rules are in your state or country.  Some states will allow you to ask a dozen or so people to become members in an LLC or partners in an LP without registering as a security.

Before you ask anyone to invest, get a business plan together, put together your marketing materials and marketing plan and then get a lawyer to create the investment vehicle - whether an LLC or LP or a C Corp if you are planning on selling securities.

I like LLC's but that is just my preference.  I personally like to have a litigation attorney who has a corporate law partner set it up and have them caution me relentlessly about the securities rules so that I don't violate them.

Equity involves risk to all parties that are involved.  I am not giving you legal advice here, so don't just go by what I am saying.  HIRE A LAWYER!  This is not a game.  Make sure you know what you are doing.  You can get in trouble.

Whether you are asking your rich uncle to put up all the money or creating securities to sell to the general public, you still need a legal entity to be created and maintained.

Let's say you have all of the elements necessary in place to solicit investments.  How much do you ask for?  Well, how much do you need to make the film and operate the entity for three to five years?  Don't get crazy, but once you make the movie, you will have revenues coming in and out of that entity for at least several years unless you sell it outright to someone.  You will need to file taxes annually and there is a cost to this.  You will also need a bank account (cost there too).  Accountant - get the picture.

What does the investor get?  I am not going to touch this subject in specifics.  That is between you and the investor.  There are many schools of thought on this.  In my view, the investor should be paid back first out of revenues since you will presumably take a fee during production and some sort of maintenance fee for managing the entity for the foreseeable future.  And what exactly do I mean by revenues?  Money going into the entity - in other words, net of distribution fees and marketing expenses.


Many films are financed just like a house is financed - though a bank.  You provide the bank with collateral that is acceptable to them and they will loan you the money.  Many banks in the industry will take pre-sales as collateral.  With credit tight these days, you may need collateral and equity of some amount to get a deal done.

With debt financing you need to make sure that you consider the cost on the money when determining your budget.  If you borrow $1 million, what will that cost when you add in the interest charge?  Lets say it ends up being $1.3 million.  Can you get back that much from the marketplace in the time given to pay off the loan?  If not, you may lose your film to the bank just like when someone loses their house in foreclosure.


As I mentioned, you can do deals with a mix  of equity and debt.  The machinations of what these deals look like are endless.  For example, I did a deal where investors in another country bought tax credits valued at 100% of their investment and were allowed to get back over half of their investment penalty free provided they had a guarantee in the form of a letter of credit.  They would essentially front the money for the entire budget.  So I got the L/C, which I collateralized using sales that a production lender accepted.  The lender also gave me a gap.

A simpler version would be something like your uncle Tom invests 20% of the budget, you sell the movie to a studio in the US for 35% and you get tax credits from the state of Michigan for 40%.  Your sales agent says that foreign is worth 100% of your budget and based on all of this, the bank lends you the money to make the movie in anticipation of collecting the tax credits and the US sale.

This discussion, again, is not meant to give legal advice.  It only touches the tip of the iceberg.  Since this is a blog meant to spark discussions, this should be seen as a starting point.


  1. Hey Phil. Just recently found your blog. Great post and glad to see these out here to inform filmmakers! Just want to point out to all the filmmakers out there that whether or not the "equity investment" in your film constitutes a security or not doesn't only depend on how many people you are asking to invest. A more important test is actually whether the invstors you are seeking are going to be "active" or "passive" investors- that is to say whether your investors are going to be active participants in decisions such as which actors you are ultimately using, budgeting decisions, etc.

    The precise tests are beyond the scope of this post, but so glad to see you suggesting to your readers that they hire a qualified entertainment attorney....and that's not just because I am one. Its actually vital to a filmmaker's project that they start thinking about the legal aspects right up front when they are beginning the creative process.

    Keep the posts coming! Great blog.

  2. Peter,

    Thanks for chiming in on this. Not only is it great to have an attorney add some insight, but one from a top, if not the premier, firm in the industry is invaluable.

    So, if the investor is "passive" does that make it a security? Where do LLC's and LP's fit in to that mix in terms of being considered a security?

    I am not as familiar with limited partnerships (LP's) as I am limited liability companies (LLC's). I assume there are some similarities, but any additional insight you can shed is appreciated.

    In an LLC, there are Members and Managers. The Members are passive investors who have no say on the direction of the company. The equivalent would be the Limited Partner in the LP.

    The Managers of the LLC are sort of like the General Partners in the LP. Conceptually, both are the people who run the business. They take on certain liability due to the decisions they make on behalf of the business.

    On the other hand, the Members are limited in their liability to the amount of money they invest. In other words,if the entity is sued, the Members are not liable for additional damages unless they are making "active" decisions (and that is whole other discussion).

    Managers can also be Members but would still be liable for their decisions made on behalf of the company as Managers.

    Since we are talking in the original post about finance let me add a few more points as it relates to the organization of an entity.

    If you borrow money from a bank, they will want you to create a stand alone entity which will borrow the money. This makes it easy for them to take over the asset in the event of a default and protects them from getting embroiled with other creditors in the case of a bankruptcy of a production company with many assets.

    If you set up an LLC, you also have the advantage of passing on losses (as well as profit) to the investor for tax purposes.

    It would be great to get additional input from an accountant on these issues and also from both an attorney and accountant on how what we are discussing relates to the use of Section 181 of the Federal codes and the use of the various State tax incentives available for film production.