7 Ways To Screw Up Your Film Budget-Reason #1: Finance

Writers Need To Become Film Producers

 Many times, when a producer or a writer hires me to create and producer a schedule and budget, they have very similar misconceptions or omissions upon outlining their projects’s probable Film Budget.

In a series of videos and articles, I am going to cover two subjects. One, how can you do some quick Media Math about your film to see if it’s on target in what I call Conversational Math.

What is “Conversational Math” you say? This math comes about when a person picks up a script and says that you “can do that film for $5 Million.” Or you can do that film for $10 Million or $20 Million.” My first thought is: “How much do you know about physical film production to make such a statement  about a Film Budget with all the ramifications of production?”

In a number of cases, I question the experience of this producer or writer or executive and ask them about their production experience in relation to budgeting, unions, rates, agreements, overtime, special rules and more.

Physical Production Skills are Unique

More often than not, the producers or writers usually do not work much in physical production day-after-day dealing with IATSE, SAG, DGA, Teamsters, AFM and other unions.   Most directors concentrate on their visual efforts, working with actors – and not the daily grind of physical film production.

While not every Producer is a Writer, every Writer should consider themselves a Producer. What do I mean by that?   With enough chaos in the media industry (enough so that I no longer say the film industry but the ever-changing media industry), a writer too must take charge of his efforts dealing with producers who promise the Promised Land of a massive script sale, agents who don’t return phone calls and managers who drop you as a client.

With this embrace of the Producer’s Hat, you are going to require a Schedule and a Budget. When I am hired to do a schedule and a budget, I see these omissions or misunderstandings made over and over in our initial conversation and in the immediate Scheduling and Budgeting process to make an accurate Film Budget.

Some writers think that they don’t need to know about schedules, budgets and other production knowledge. I beg to differ. I think that if a writer can learn more about physical production then they can offer solutions and insights to a producer about ‘Why it’s possible to make the script that I’m submitting to you into a movie” rather than just hope for the best. Writers should have a plan to offer producers.

 

Reason #1 – Finance Costs

Financing Feature Films requires a lot of hoops to jump through – Budgeting, Minimum Guarantees, Pre-Sales, Gap financing, Deferrals, Box Office Bonuses, etc., to put together a film that can actually be financed and then sold into the marketplace.

Most film financing these days requires some if not all of the above steps. In a number of cases, I have had producers not consider all the ramifications of their financing structures. That’s a lot of moving parts, especially when a producer is into pitching the excitement of the project and not the drudgery.   This period of a Producer’s sales work (selling the project, the director, himself, the project’s attributes) is also called ‘selling the sizzle not the steak’.

Now let’s be clear: Film Finance is a very complex topic to cover in a short article.   But if you can at least become familiar with the terms and understanding each component’s place in the Big Picture, you will be that much farther ahead in a Writer becoming a Producer who knows about a Film Budget.

Gap Financing? Debt? Equity? Pre-Sales? Production Loans? Bridge Loans? Sales Agent Advances? Tax Credit Loans? Finishing Funds?

 

What are the Risks and Rewards?

Each phase of this financing ‘pipeline’ has various risks and rewards.

  1. Presales Guarantees – Generated by a distributor, these presales are ‘monetized’ by a bank for fees and interest. Little risk to the bank. Risk to the distributor who wants to maintain their banking relation. And risk to the Buyers who want to make sure a good film results from their investments.
  2. Equity – The best item to have is cash because it’s, well, cash. No banking, no discounting, etc., Just money to put into the film. One question I would ask is: In what form is the equity? If it’s in Euros and you are shooting in the U.S. (like I did on the “Taken” series), then the currency exchange rate may have a considerable effect on your budget. Not to mention that the currency exchange might last for a year or so during production. Equity has the strongest position and takes on the greatest risk.
  3. Gap Financing is the single loan which is above existing pre-sale guarantees and usually the final step for completing the film’s final finance package. Gap lenders take few risk and receive interest and fees.
  4. Deferrals – any deferrals from talent or service companies in your Film Budget.
  5. Tax Credits/Incentives – when making a film, a key is to have enough support for a strong accounting team and also plan for the requisite and anticipated audit from State authorities.
Sales projections can be structured for the Film Budget.
Sales can be collated into a structured spreadsheet – though DVD sales have fallen through the floor.

Bringing a Film Budget Structure Together

Of all the financing elements above, the Incentive has become amongst the easiest to obtain because usually it involves filming in a certain location. Luc Besson was very adept at utilizing the American tax credits, then French ones and then even Spanish ones for filming “Taken 3”. He utilized his famed Le Cite du Cinema stages for the interiors, garnering French tax credits and subsidies. The key for incentives is to read the State, Territory or Country requirements very carefully. Then make sure to adhere to rules and regulations as well as any reporting requirements.

Pre-Sales Guarantees have become more and more rare and difficult to obtain in the American and International markets.   As content has become more pervasive including feature films, the value of talent has declined – except for the top drawer “A” list talent. The American Film Market has become a much tougher game. Equity rules. You can see a lot of films that are very low budget with the same talent over and over.

Gap Financing is very unique. Any Gap lender will usually rely upon major territories (France, Germany, UK) with strong companies in the mix. They will not consider smaller territories as collateral for gap financing. In addition, the gap loan will also require a 1.5 – 2.0x ratio of the collateral in relation to the loan.  Gap financing also requires that you have actors with consistent sales records who can generate excitement for overseas distributors.   Gap Financing is available when you’ve closed your financing to about 70 or 80 of the total budget and can qualify for a Completion Bond for your Film Budget.

Each of these financial components represent a substantial piece of the film finance puzzle. And each component will require financial and legal oversight to conclude correctly with critical timing.

How Do They Impact the Film Budget?

Bank loans and its attendant legal work have certain budget minimums in terms of films that are budgeted at $10M and higher. Gap financing for a low budget film may not be cost-effective for the banks – legal fees and bank fees are about the same not matter the budget. Ultimately, this situation means that a low and modest budget film might underestimate the cost for bank and legal fees in their particular financing structure.

What are the numbers for banking for your budget process?

First, check the London Interbanking Offer Rate. This is the LIBOR which is used throughout the world for many financial transactions including home mortgages. You need to check the ‘spread rate”.

Second, figure out your budget. If your film is budgeted at $10 Million and that’s the loan, then your bench rate will be about 0.25 percent. Your bank loan would be at the interest rate of LIBOR (find the rates here: http://www.global-rates.com/interest-rates/libor/libor.aspx) and add one or two percent to that rate.

The bank fee is about 2%. The legal costs are estimated between $60k to $85k.

Finance Structures can clarify your Film Budget.
Film Finance structures can be complicated, especially with Debt structures and multiple parties.

 

If your project requires a bank loan against pre-sales, gap financing, etc., then you can see the toll such interest, fees and legal costs can take against your overall budget. In the above calculation (which will vary with rates and legal fees), the Grand Total cost for the loan is $820,000 or 8.2% of your overall budget.

Summary

When you add in the standard contingency of 10% and a Completion Bond fee of 2%, then a little over 20% percent of your budget is already dedicated to these specific categories. No, you haven’t YET spent your contingency but that is a Contingency fund.   The Contingency is not meant for planned production. The Contingency is meant for exactly what it means:

con·tin·gen·cy kənˈtinjənsē/  noun: contingency; plural noun: contingencies

  1. a future event or circumstance that is possible but cannot be predicted with certainty.

“a detailed contract that attempts to provide for all possible contingencies”

synonyms: eventuality, (chance) event, incident, happening, occurrence, juncture, possibility, fortuity, accident, chance, emergency

“we’ve tried to imagine and provide for all possible contingencies”

  • a provision for an unforeseen event or circumstance.

“a contingency reserve”

 

Financing a film can be a complicated process. But if you enter the process with knowledge and planning, you can put the pieces together in a thoughtful and clear manner. By having your budget properly include the necessary fees for banking and legal, your budget will accurately reflect your plan to get your Film made.

Thanks for your time.