“The Reel Deal” Workshop

This coming weekend I’m looking forward to spending both days in San Francisco at an IIFF workshop entitled “The Reel Deal – Getting Your Indie Film Financed, Produced & Distributed Without Getting Ripped Off.”  The workshop will be given by Jeffrey Brandstetter, an entertainment attorney, financier, producer, and distributor.  

I first met Jeffrey about a year ago.  We attended the same seminar given by a venture capitalist.  I blogged about it in a post I wrote last March entitled Film Financing From a VC’s Perspective.  For the afternoon group assignment, Jeffrey was on the same team as I was.  It was great to have someone with his experience on our team.  We ended up beating all the other teams with our project.

Jeffrey makes the best argument I’ve ever heard for why films are not necessarily the poor investment that they are commonly painted to be.  Yes, he admits that most films don’t recoup the investor’s initial investment.  However, when you compare films to the typical Silicon Valley startup, there are some noteworthy differences.  Many startups have nothing to show after 18 to 24 months and, if they fail, the most that an investor can often get is whatever the fixtures sell for at auction.  In other words, pretty much nothing.  However, when it comes to films, if you are able to raise the full production budget, which will enable you to complete the film and get it in the can, you now have a real asset…something that is worth far more than used furniture.  If the film is a big hit, there can be big rewards; but at the very least, an investor will receive back a significant portion of his or her investment.  There won’t be fire sale.  That can’t be said for most Silicon Valley startups.  Following that line of reasoning, this makes film an investment that is very worthy of consideration. 

If the business of filmmaking interests you, you might want to take the time to watch the following 41 minute preview video.  In it, Jeffrey gives us small taste of his upcoming workshop.

Random Thoughts on Financing and Distribution

I just got back from a lecture on independent filmmaking this evening.  The speakers were a husband and wife.  She runs a local film festival and he runs a local film production studio and is the son of a very famous football coach.  It was really interesting to hear about their jobs, how they got into the film industry, how they met, and the projects they have worked on.

One interesting story he told was of a film that he had invested in.  It had been a real attention getter at Sundance and had been nominated for two Academy Awards.  You would think that with credentials like that they would make a real nice profit on this film, but the highest price a distributor was willing to pay was only a third of the film’s budget.  Needless to say, he and all the other investors lost money on that film.

This is the kind of story I’ve heard over and over again.  Most people think that producers who get their films picked up by major distributors make a lot of money, right?  Wrong.  In most cases it’s the distributors who make the money.  And who ends up getting screwed?  The investors.  So why would anyone want to sell their film to a major distributor?  Well, because the opportunity to get the kind of exposure that comes with a wide release is very tempting to a producer.  It means that they will become known and that could give them more clout in future negotiations which lead to greater profits for subsequent films.

There’s only one problem with that:  you’ve screwed your investors.  Why in the world would anyone want to invest in a film where they knew they would lose money?  Now some investors love film or believe in a specific project and just want to be a part of it so they’re willing to take the risk.  But most are in it to make money.  It’s an investment and they want to see a return on their money.  I can’t blame them for that. 

Some producers justify accepting these distributor deals by saying that their investors are rich and can afford to lose the money.  Yes, they do have to have a certain amount of wealth to qualify as an accredited investor.  But does that justify taking their money knowing full well they will never see a return on it?  My view on this is no.  I find it unconscionable that producers would screw the very people that helped to make their film possible.  I may get labeled idealistic or naive for this viewpoint.  Fine.  But I won’t compromise my integrity for anything or anyone. 

I strongly believe that producers have a fiduciary responsibility to their investors.  It’s not only the job of the producer to make a quality film that is appealing to the audience, but it is also the producer’s job to try to the best of their ability to make a profit on the film and, at the very least, pay back the investors’ money.

Getting a distribution deal with a major distributor is every producer’s dream and I’m by no means against it if they are willing to offer a fair deal.  But the more I hear about how tough it is to get a fair deal, the more I have begun to explore other options.  I’ve heard that sometimes a smaller distributor will offer a more equitable deal and it’s something I want to look into further.

A question I asked the producer tonight was whether he thought that self distribution was the way to go.  He said yes, but he said to be sure to team up with someone who has done it.  Self distribution is something I definitely want to explore.  From everything I’ve heard it’s a huge amount of work.  But if you are going to spend huge amounts of time and effort to get your film made, why woudn’t you spend the effort to make sure your film gets distributed and makes money?  It’s what any business in any other industry would do. 

In every other industry out there businesses make sure that they have a plan and work that plan for getting their products distributed.  But in the film industry I’ve seen filmmakers shrug in defeat when they say they couldn’t get their film picked up by a distributor.  Seriously?  My jaw drops whenever I hear this.  This is a business!  Treat it like a business! 

The film industry is the only business I’ve seen where many people give all their attention to making the product and no thought to distributing and marketing it.  Granted, if you’ve got a bad product, you’re just not going to find many customers who will want to buy it.  But that’s no excuse for not trying. 

I do want to qualify what I just said and emphasize that not all filmmakers drop the ball when it comes to distribution.  There are many savvy producers out there who do know how to maximize profits on their films.  Unfortunately, there also seem to be a lot who don’t.

 

Writing and Financing Updates

Sorry for being so quiet lately.  When I got back from Comic-Con I was really looking forward to getting caught up with blogging, among other stuff.  Instead, a nasty virus caught up with me and had me down for the better part of a week.  This put me so far behind with everything else that I’ve been scrambling to catch up ever since.

So let’s talk about the film project, shall we?  I’m way overdue on giving you all an update.

Back in January I mentioned that two treatments were being worked on.  One by the writer I’m working with and one by me.  So how are they coming along?  Well, slowly.  The writer has the first revision of her treatment finished and ready to send to me.  I just haven’t seen it yet because we are busy negotiating a producer/writer agreement right now.  It’s a bit of a time consuming process and, ideally, it’s something that should have been done right at the outset of our working relationship.  But once we get the agreement hammered out and fully executed, she’ll be sending me the next revision.  I’m looking forward to seeing what she has done with it.

My version of the treatment is coming along much more slowly.  Instead of writing, I got sidetracked with financial matters, namely, my own.  Now I’m not one to talk about my personal finances on a public blog, but in this case my own finances are very much a factor in this project because all of the money that is keeping this project moving forward right now is coming out of my own pocket.  I need to get this project to the point where it is packaged so that I can pitch it to investors and get presales.  If I get lucky, maybe I can find an angel investor who is willing to come aboard the project early and help out with seed money.  But, in the meantime, I’ve had to get creative and find ways to stretch my own money.  While I make an okay living, I’m not by any means a wealthy person, so this has been a challenge. 

A couple of years ago I had refinanced the second on my tiny condo.  Then, at the beginning of this year, as I watched real estate prices plummet and people lose their homes, it didn’t make sense to hang on to my riskier loans any longer so I decided to refinance both my first and second into one fixed-rate loan.  Fortunately for me, I was in a position to refinance.  There are a lot of unfortunate people in this country who got into risky loans and didn’t have a clue what they were getting into.  I really feel for them.  But having a little bit of a background in real estate, together with my propensity to do my homework and make sure I understand what I’m getting myself into, really gave me an advantage.  So I’m not in any danger of losing my condo even though it’s not worth much anymore and I have virtually no equity to speak of.  But I have a roof over my head and that’s the important thing!

Refinancing allowed me to get my monthly payments lowered a bit and pay off my car.  It’s not a huge amount, but it’s freed up enough money to allow me to keep the project moving forward.  For now.  Eventually, in the not too distant future, I’ll come to the point where I’ll need equity and/or debt money.  So even though the writing got put on the back burner for a while, I’ve been moving the project forward by taking care of some necessary financial matters.  And speaking of financing, I’ve met a few investors over the last few months who have shown some interest, so maybe something will come of that…we’ll see.

Getting back to the writing has been a challenge for me.  When developing a movie there always seems to be a ton of other things that need to get done and are demanding my time, so I found a way to basically force myself to focus on the writing:  I signed up for a screenwriting class.  The goal of this particular screenwriting class is to have an outline or beat sheet of one’s story finished by the end of the semester.  This is exactly what I needed because once the outline is done, writing a treatment from it should be a snap. 

Getting the feedback of my classmates and especially my teacher is a real help.  My teacher has worked in the industry for years as a writer, story analyst, studio executive, and executive producer; and has been involved in the making of such movies as Silence of the Lambs, Platoon, and Bull Durham.

Each week we are required to write a three-page scene.  Rather than try to come up with a random story idea each week, I decided to take the story I’m going to outline and use the characters and setting to fit the scene.  Most likely none of the scenes will actually be used in the story because I had to change some things to fit the homework requirements, but it does give me a chance to explore the characters and the story and really makes me think about where I want the story to go.

The first week’s scene assignment was to have one character follow another, so I had the protagonist follow the antogonist in an interesting setting.  My teacher liked it so much that he posted a note on the bulletin board and told the whole class to go read my “very instructive scene in the vein of I AM LEGEND.”  He also said I “include(d) so much action and suspense and communicate(d) the flow of action with some real clarity.”  I’ve never seen I Am Legend, but from the trailers I’ve seen of the movie, I can see where he would get that comparison even though that’s not really the tone I was shooting for.  Now, mind you, this scene was far from perfect.  The formatting was too “Old Hollywood,” but considering that we had just read an old Hitchcock script, that’s what I was using as a guide.  Also, the ending fell short.  Nevertheless, I’ll take the compliment, especially coming from someone with his experience in the industry, and considering that, so far, I’m the only one in class that has been singled out for praise.

Going on my trip and then getting sick afterward has really put me behind in this class, so if you’re wondering why I’ve been so quiet lately, it’s because I’m scrambling to get caught up on homework.  There are only about four weeks left before the semester ends and I’m determined to get the most out of this class, not just in terms of getting the outline finished but, also, in terms of learning as much as I can about screenwriting, which will make me a better producer.

In the producer/writer agreement that I’m currently negotiating, we’re setting deadlines and right now we have asked for a completion date for the treatment of October 31.  However, since the negotiations are currently eating into our writing time, I’m pushing to move the date back to November 30.  This means that all treatments, both hers and mine, need to be in final form by that date.  In addition, I’ve been accepting story submissions from another writer and if I feel that one of them is worth developing, I’ll have my attorney draw up an agreement with that writer also with the same timeline.  The goal is to get all the treatments done at the same time so they can be submitted to the cast at the same time.  After that it will be the decision of the cast as to whether they like any of them.  If they do, then we’re looking at a six-month timeline to get the script completed.  If they don’t, I start all over again looking for more stories.

So that’s where we are right now.  If things go well, we are looking at having a finished script by next fall, hopefully sooner.  I know that seems like quite a ways off, but getting the script right is absolutely vital.  According to Dov S-S Simens, you don’t just need a good script, you need a great script.  Yes, the standards need to be that high because the competition is intense.  Nothing less than great will do.  Hollywood may be able to get away with mediocre scripts, but independent filmmakers can’t.      

An Evening With Lew Horwitz, Part 5

Can you believe that we’ve finally reached the end of this series?  Yep, this is the last installment.  If you’re a new filmmaker, perhaps you learned a thing or two?  If you’re a fan, you’re probably wondering when I’m going to write about something more exciting, such as the next cast appearance.  I don’t blame you.  While I find this all extremely interesting, I realize that it can be rather dry for anyone not interested in the subject of film financing.

So on to the dry stuff…

The Three Components of Film Financing

These are three components of film financing:

  1. Presales
  2. Gap Financing
  3. Equity Financing

We’ve already covered presales in a previous post, so I won’t go into that again.

Gap financing is a loan against your unsold rights.  If you haven’t sold all of your rights yet, the bank can loan you money against those unsold rights.  Now, of course, they have no way of knowing for sure exactly how much those unsold rights will sell for, so they estimate (in other words, guess).  But don’t count on getting the full value of those unsold rights.  Nope, banks will only lend you about half the value of those unsold rights and no more than 20% of the total budget of the film. 

Equity financing, which I briefly mentioned in a previous blog, can be expanded to include the following:

  1. Investors
  2. Production deals with foreign distributors
  3. Studio deals (split rights)
  4. Tax incentives from states and foreign countries
  5. European subsidies

Lew didn’t go into any detail about the above types of equity financing.  He only mentioned them so that we would be aware of them.  I guess it’s up to us filmmakers to do our homework and learn more about them.     

There is one other type of debt financing that Lew mentioned and that is bridge financing.  Bridge financing is very expensive.  You can expect to pay an interest rate of 25%.  Ouch.  But if you can’t get all your money together in time, a bridge loan can help.

The Real Budget

So you’ve got your budget done and you think you’ve got everything covered, right?  Wrong.  Lew explained to us why our budgets aren’t always sufficient.  See there are all these extra expenses that come up when you presale your film and sometimes they can be an unexpected surprise for an inexperienced filmmaker.  So what are some of these added expenses?

  1. Interest – Yep, you’ve got to pay interest on those loans you take out.
  2. Force Majeure – Insurance for events that are beyond the control of the producer or guarantor and that cause an interruption or suspension in the production or delivery of the film to distributors.
  3. Loan Fees
  4. Attorney Fees – The bank hires an attorney when you take out a loan with them and guess who pays for their attorney?  You do. 
  5. Post Delivery Interest
  6. Gap Fee

I was trying to scribble this down on my notepad as quickly as possible, but I’m sure I’m missing a few more expenses in there somewhere. 

Anyway, that pretty much wraps up most of Lew Horwitz’s workshop on debt financing for independent films with the exception of one last piece of advice:  Try to keep your Internet rights.  Don’t sell them off just yet.  While it is currently quite difficult to make a profit showing your film on the Internet, Lew predicts that eventually that will change and that the Internet will someday become a viable outlet for independent filmmakers.

So while this wraps up Lew’s workshop, it didn’t wrap up the evening.  After Lew was finished, a panel of investors took the stage.  I’ll talk about that in a future post.   

An Evening With Lew Horwitz, Part 4

Picking up from An Evening With Lew Horwitz, Part 3, let’s continue our discussion by talking about completion bonds and banks.

Completion Bonds

It’s easy to get bonds confused with insurance because sometimes there appears to be little difference between them, so here’s a quick explanation of what they do.  They both provide coverage for financial risk or loss, however, bonds usually cover the performance of a specific project, service, or act.  Whereas insurance usually covers financial risk to a tangible item such as a house, boat, or car.  There are exceptions to this rule of course, such as errors and omissions (E&O) insurance, which is more like a bond because it provides financial protection for acts performed or not performed.

Film production completion bonds guarantee delivery of the completed film.  They guarantee that the film will be in a technically perfect condition, on budget, and on time.  Banks always require that independently financed films have a completion bond.  This protects their interests because it guarantees that in the end there will be a product to distribute.

Lew gave us the names of three film completion bond companies:

  1. Film Finances
  2. International Film Guarantors
  3. CineFinance

Lew insists that you should never produce a film without a bond.  He says that bonds not only protect the bank, but they also protect you.  However, if you’re a first-time producer, you’ll need to convince the bonding company that you know what you’re doing.

Bonds usually run about 3% of the budget, but might be more for a first-time producer.

Banks

So where do you find banks that will loan you money against distribution contracts?  Well, Lew recommended the International Film and Television Alliance.  Their membership includes bankers as well as sales agents.  You’ll want to ask for a membership booklet from them.

It’s a good idea to get to know bankers ahead of time.  Here are some tips from Lew for getting aquainted with a banker:

  • Be sure to approach the banker professionally.
  • Talk about your project.
  • Never predict what your film is going to make.
  • Ask what he or she needs.
  • Which sales agents do they like?
  • What type of films do they like?

When you’re ready to ask for a loan from your banker, don’t approach them without a sales agent.  Be sure you have all your details together such as start date, bond, and chain of title.  Also, be sure to give them enough time.  Deals can take anywhere from two to three months, even up to six months.  So don’t go to the bank and tell them your shooting in two weeks and will need the money by then.  You won’t get it.

Keep in mind that bankers will not take all contracts.  Who you sell to is very important.  Only reputable distributors will be accepted by the bank.

This is turning into quite a lengthy series of blogs, but I should have the series wrapped in one or two more blog posts.  Next, I’ll talk about the three components of film financing and the real budget.

An Evening With Lew Horwitz, Part 3

Continuing the discussion from An Evening With Lew Horwitz, Part 2, let’s talk about sales agents.

Lew advises that you need to get a sales agent.  Don’t sell your film yourself! 

Wait just a minute.  Isn’t that opposite of the advice that Sandra Schulberg gave a couple of months ago in a class that I took?  Yes it is.

I have a rule when it comes to getting advice or learning something new and it’s this:  Get several opinions.  Don’t just accept the opinion of the first person to come along, because, as noted above, even the experts don’t always agree.  This rule applies to more than just the film industry.  It can be applied to just about everything in life.  And when you come across a different opinion, dig deeper, get more information, and then make up your own mind.  You’ll find that you’ll make better and more informed decisions.

So why does Lew think a sales agent is so vital? 

  • According to him, without an agent, nobody will talk to you.  By nobody, I’m assuming he means banks and distributors.
  • A sales agent will give you an estimate of every territory’s value for your film.  That’s important to know because, according to him, you need to keep the budget of your film to the value of the estimates.  Don’t bluff yourself, he warns.  Be realistic with your budget.

As much as Lew recommends that you hire a sales agent, he also warns not to trust them.  “Love them, but don’t trust them,” he says.  So how can you protect yourself from your own sales agent?

  • Don’t let your film get packaged with other films.  You don’t want cross-collateralization because if the other films don’t make any money and your film does, you’ll be sharing your profits with the filmmakers whose films weren’t profitable.  Not a good thing.
  • Give your sales agent some leeway to make deals without having to get your approval every time, but be sure to state in the contract with your agent that they cannot license your film for less than X % of his estimate without your express permission.
  • Make sure you see the quarterly reports.
  • Make sure the bank knows about your deal with your sales agent.  You can do this by sending the bank a letter detailing the agreement conditions and asking them to uphold those conditions.  Your sales agent might not be scared of you, but he/she won’t mess with the bank.
  • Hire the best attorneys.  Make sure they have a lot of experience with independent films.

The jury is still out for me as to whether getting a sales agent is the best route to go.  Lew insists that it is, but, obviously, Sandra Schulberg has been able to sell her films without one.  I’m definitely going to have to look into this further before deciding which route is the best one for me to take.

Coming in part four I’ll talk about what Lew has to say about bonds and banks. 

An Evening With Lew Horwitz, Part 2

Okay, picking up from last Saturday’s post, An Evening With Lew Horwitz, Part 1, let’s continue the discussion about financing films using debt financing.

Lew had an interesting comment about banks:  They don’t care if your film makes money.  That struck me as a rather odd statement, but it makes sense when you think about it.  Banks just care about getting their loan paid back with interest.  And getting their money back really has nothing to do with whether you make money or not on your film.  What they require is a guarantee that they will get their money back and that guarantee is in the form of collateral.  No, they don’t want your house or car.  Collateral in the film world is distribution contracts, also known as presales.  The term presale is a bit misleading because Lew emphasized that you must never, ever sell your film to a distributor.  You always want to retain ownership of your film in order to keep the profits.  Instead, you’ll want to license your film to distributors for a specified period.

The world is divided up into many territories, a domestic territory and many foreign ones.  Preselling your film to as many of these distributors as possible can give you the collateral you need to get a bank loan.  These distributors promise you a minimum guaranteed amount in the distribution contract and it is against those amounts that you can take out a loan with a bank. 

Before 1995, it used to be that presales could cover the entire cost of a film.  Not anymore.  After getting burned a few times, distributors became more cautious.  Now, you can expect, on average, around 30% to 40% of your film’s financing to come from presales…sometimes it’s more, sometimes it’s less. 

If you approach distributors after your film is finished, instead of before, you can usually negotiate a better deal.  But that means that you’ll need to get your funding from other sources and, if you’re like most, you’re cobbling together the financing for your film wherever you can get it. 

You really should try to get a U.S. theatrical release because it will help with getting foreign sales.  Also (and I’m going to interject something here that I learned from a Dov S-S Simens’ class I took a couple of years back), if you want to license your film to HBO, Showtime, and other pay cable networks, you need to get it out in theaters, even if it is only a limited release, because, according to Dov, the pay cable networks only air films that have had a theatrical release.  That said, Lew did mention that straight-to-video films can do very well.

Well, that’s all for tonight.  Part three of this series deals with getting a sales agent.  

An Evening With Lew Horwitz, Part 1

Lew Horwitz has been described as one of the true greats in independent film financing.  He has over 35 years of experience in the entertainment financing business and has funded hundreds of films during that time, including the very successful My Big Fat Greek Wedding.  So when I found out that IIFF was sponsoring a film financing workshop featuring Mr. Horwitz as the speaker, I knew I had to attend.

Wednesday night’s workshop was located at the Academy of Art University’s auditorium on New Montgomery street in San Francisco.  It’s not the usual location where IIFF workshops and meetings are held, so I made sure to leave early so that I would have plenty of time to find parking, which can often be a challenge in the City.  Fortunately, I got there in plenty of time and was able to chat with other attendees while we were waiting.  I, also, caught a glimpse of actress Diane Baker, who attended the workshop, and is currently a Co-Director at the University. 

Lew was very charming and entertaining.  Occasionally, he would take a break from speaking and entertain us with magic tricks, which were a lot of fun to watch.  He’s quite good. 

Some of the material he covered I already knew, some of it clarified things for me, and some of it was new.  Starting with the basics, there are three ways to finance a film:

  1. Studios
  2. Investors
  3. Borrowed Money

Studio financing is great if you can get it, and that’s the trick…if you can get it.  It’s rare for independent films to get studio financing, which is why independents usually fund their film by means of borrowed money (debt financing) and/or investors (equity financing).  This is a good time to define what debt and equity financing is for those of you who may be unfamiliar with those terms.

  • Debt financing is money that is borrowed from a bank and must be repaid with interest.  One of the advantages to debt financing is that the lender does not gain ownership interest in the film.  Once the debt is paid, your obligations to the bank are over and all profits from your film are yours to keep. 
  • Equity financing is money received from investors in exchange for interest in the film.  The advantages to this type of financing is that you don’t go into debt to obtain funds and the risks are distributed among the investors.  A disadvantage is that you don’t keep all of your film’s profit.  

Most films are financed using a combination of debt and equity financing.  That’s putting it very simply.  It actually gets far more complicated as you will see later on.  I already had an idea how complicated financing can get and I find the whole process very fascinating.  During the break, however, I overheard conversations from some in the audience who were hearing the information for the first time.  They were freaking out a bit when they found out what was involved to get their film funded.

Lew taught us about funding our films using the third option:  borrowed money (debt financing).  I’m going to stop here for the evening and pick it up again in part two.  There’s a lot of information to cover and I think it would be better to split it up into several posts.