Film finance


Film finance is an aspect of film production that occurs during the development stage prior to pre-production, and is concerned with determining the potential value of a proposed film.
In the United States, the value is typically based on a forecast of revenues, beginning with theatrical release, and including DVD sales, and release to cable broadcast television networks both domestic and international and inflight airline licensing.

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 streaming video on demand), investors were shown that picture subsidies, and pre-sales 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 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, 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. After these "uninsured" slate financing arrangements 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, 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. 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 of those revenues is diminished by the required rate of return and the time it takes for these revenues to accrue. Ancillary revenues, 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. 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.
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. 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.
Since the collateral for film financing can be based on intellectual property rights, film finance transactions generally commence with a title analysis.
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. 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. 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.
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, stimulating tourism.
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.

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. Often, a certain amount of physical shooting 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, 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. 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. 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.
The main production incentive is the . 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 on germanfilmfinance.com checks online if the project passes the test as well as it shows the individually calculated estimated grant.