The unpredictable nature of the industry makes negotiating film finance a minefield. For independent producers working outside a studio system, the strategies and structures of financing arrangements are as numerous as the films that are made. International, bi-lateral and multilateral co-production treaties, pre-sales, bank loans, equity investment, tax funding, gap financing and public funding are just some of the ways of raising the necessary finance. For many producers, finding money to make their films can take years - countless meetings, attendance at film festivals, promises, broken promises, changes in tax legislation, actors dropping in, dropping out …
For a young, unknown producer to raise the necessary finance, he or she will need to be flexible with his / her production plans so as to optimise funding opportunities from all potential sources. These sources typically include:
- Public funding
- European film funding.
- Tax based incentives schemes.
- Pre-sales rights
- Co-production
- Sale and Leaseback
- Private equity/banks
PUBLIC FUNDING
Bord na Scannan / Irish Film Board (IFB)
The IFB plays a critical role in assisting new Irish film talent to bring their ideas to the screen providing both development and production funding for feature length projects.
Having identified a suitable script, a producer approaches the IFB seeking public funding for the initial development of the project (script development and planning).
In assessing projects, the IFB typically looks for imaginative, original and compelling concepts with the potential to attract an audience and involving the employment of indigenous directors and writers. If it approves funding, the IFB then negotiates a recoupment structure for its investment based on an assessment of the project's potential to make a financial return and the likely timescale of that return to the IFB.
The cumulative per project threshold on Development Loans has recently been increased to €80,000 from €75,000, with the base amount available to writers increased to €10,000 from €7,500 for any one project. These loans are repayable on the first day of principal photography. However, a producer will not even get to the stage of pre-production unless all the funding has been raised.
The IFB will also provide production loans,which are typically offered on the basis of repayable loan or equity participation based on a proportion of the film's total budget.
Regional support initiative
A producer may also be eligible to seek additional production funding from the IFB for filming in locations outside Ireland's capital city through the regional support initiative.
European film funding
As a member of the European Union, Ireland has been an active participant in MEDIA, a major support programme for the European film industry offering funding assistance for training, development and distribution.
EURIMAGES, a programme of the European Commission, provides production finance for European co-productions. It is complicated finance to access but can provide between 10 -12% of the production budget of qualifying films. Ireland has participated in EURIMAGES since 1992 and, to date, Irish projects have received approximately €2 million in production finance from the scheme.
TAX BASED INCENTIVE SCHEMES
Section 481 Film Relief
Section 481 Film Relief, (formerly Section 35) has become a popular way of part-financing projects. A producer can expect to raise approximately 10%-12% of their production budget via this tax incentive scheme. For established producers with a proven track record this is a vital form of funding and the recent extension and amendment to this scheme are welcome. However for young and unknown producers who are unlikely to raise a large proportion of their funding through distribution rights deals, this 10%-12% is only a tiny step in the right direction.
Summary of the Scheme
The scheme provides tax relief towards the cost of production of certain films. The maximum amounts which can be raised under the scheme are:-
- up to 66% of the total cost of a film with a budget of €5,080,000 or less;
- up to 55% of the total cost of a film with a budget of between €6,350,000 and €27,272,272, with a sliding scale for films with a budget between €5,080,000 and €6,350,000.
- up to €15,000,000 maximum for films with a budget over €27,272,272.
Tax relief on 80% of their investment is available to individual investors and to corporate investors.
Individual investors can invest up to €31,750 under the scheme in any year of assessment. An investor who cannot obtain relief on all his / her investment in a year of assessment, either because his / her investment exceeds the maximum of €31,750 or his / her income in that year is insufficient to absorb all of it, can carry forward the unrelieved amount to following years up to and including 2008, subject to the normal limit of €31,750 on the amount of investment that can be relieved in any one year.
A corporate investor and any connected companies can invest up to €10,160,000 in any 12 month period. The total amount which can be invested in any one film cannot exceed €3,810,000.
Investment may be made by an individual company or a corporate group. Where the total investment exceeds €3,810,000, the excess can only be invested in productions with a budget of €5,080,000 or less.
Outlined below is an example of how the funds benefit both the film production company and investors. For our example we have presumed a production budget of €5m.
For a production with a budget of €5m, Section 481 funds of 66% may be raised (i.e. €3.3m). Under these schemes investors usually subscribe for an agreed value of shares in the qualifying film production. Shares are held for a period of at least 12 -18 months. At the end of the period typically 70%-80% of the money invested by the investor is returned to him / her. This shortfall is then compensated for by the Section 481 relief on 80% of the amount invested, up to an investment maximum of €31,750 at the taxpayer's marginal rate. The taxpayer can claim relief once the principal photography on the film has commenced and the relevant certificates have been issued. It should be borne in mind that an element of risk is attached to this investment and should the film not be made for any reason or a film is not accepted by a distributor / broadcaster then the investor is at risk of losing his / her equity investment.
A pre-sale agreement or completion bond may however be put in place with a distributor / broadcaster for a percentage of the Section 481 funds raised. This amount is payable on delivery and acceptance of the film. The distributor / broadcaster may also fund the non-Section 481 element of the budget. In this example we have assumed that a pre-sales agreement is put in place for 82% of the Section 481 finance raised.
This example assumes a pre-sale agreement has been put in place for 82% of the Section 481 raised finance. A young producer, with a limited track record, is likely to find obtaining this level of pre-sale agreement difficult so other means of finance have to be tapped into.
10% TAX RATE
The 10% tax rate in Ireland applies to manufacturing companies (including film production companies), companies based in the International Financial Services Centre at the Custom House Dock in Dublin and those based in the Shannon Free Zone around Shannon Airport.
PRE-SALES
A producer with a good reputation and a strong project with elements such as a lead cast and a director can sometimes “pre-sell” distribution rights to distributors and / or broadcasters before production commences. Most of the value of the sale is payable on delivery, so a producer requiring funds must finance the value of the sale until delivery, usually through a loan from a specialist media lender secured against the benefit of the distribution contract.
CO-PRODUCTIONS
Irish co-production agreements
The Government of Ireland has signed co-production agreements with both the Government of Canada (1989) and the Government of Australia (1998). These co-productions are treated as national productions by each country. Both parties use their best efforts to ensure that the co-producers enjoy, insofar as it is possible, whatever benefits result from the legislation and regulations concerning the film and video industries which are in force or from those which may be decreed in each country.
The aim of these Agreements is to ensure an overall balance in:
- the contribution of the nationals of each Party to the production costs of all films;
- the usage of studios and laboratories of the two Parties;
- the employment of nationals of the two Parties as creative, craft an technical personnel, measured on a straight head count basis; and
- the participation of nationals of the two Parties in each of the major creative, craft and technical categories and, in particular, that of the writer, director and lead cast.
UNITED KINGDOM
Sales and Leaseback
Since 1997, the UK has had legislation permitting 100% tax relief on the cost of acquisition of qualifying films. This has resulted in the increased use of sale and leaseback transactions. In these transactions, the producer sells the film to a purchaser with taxable profits sufficient to utilise the tax relief (typically a film partnership of individuals with higher rate tax liability) and leases the film back over 15 years. Most of the sale price is placed on deposit to secure the repayment instalments, with the remainder the producer's net benefit. Copyright and exploitation rights return to the producer. Certain conditions must be met for the purchaser to be able to claim the tax relief, including qualification of the film as British by the producer. This can be circumvented by an Irish producer entering into a co-production arrangement with a British based producer.
While the producer is free to use the net benefit as they wish such as repayment of any outstanding production costs, as film income or to fund distribution plans, the benefit is of little use to a producer who is unable to start production due to insufficient funds. Some sale and leaseback organisations now advance funding to producers before production starts if they have certain guarantees that the required conditions will eventually be met.
PRIVATE EQUITY / BANKS
Finally, and not until all of the above means of financing a film budget have been exhausted, a producer may approach private investors and banks for any gap financing required. Banks will only be prepared to lend strictly on the basis that it expects to be fully repaid, without facing any unreasonable risk and, in doing so, to receive a small return on its cost of capital. The banks will depend heavily on the completion guarantee and distribution agreements. Practically, this often results in the bank being the last to put in its funding and the first to be repaid.
Once the producer approaches a bank the value of the distribution contract will be discounted to allow for costs such as interest charges, legal and financing fees and taxes. Depending on the reputation of the distributor the distribution contract may also be discounted for the risk of non-payment, something that can be mitigated by getting a letter of credit from the distributor. Piecing together several pre-sales can make a substantial contribution to the financing of a film.
An important element of financing the presale will be a completion bond. As the bank depends on complete delivery of the film to trigger full payment by the distributor the producer is required to arrange for a special form of insurance which guarantees completion. Such a bond would cover additional costs where a film goes over budget or schedule or in the case of abandonment repay the outstanding loan to the bank.
A sales agent often takes a leading role in gaining pre-sales and concluding the many agreements and notices required before a bank loan can be drawn down. With a good reputation, the sales agent's estimates of future sales for unsold countries can often be borrowed against in a similar manner to discounted distribution contracts, although the estimates are likely to be heavily discounted.
In addition to the difficulty of pre-selling low budget films, the legal, financing and completion bond costs associated with setting up bank finance at this level may reduce the effectiveness of the pre-sale. A low budget production with a relatively small pre-sale may however be able to use the principle behind discounted pre-sales to attract finance from other sources instead of a media bank such as sourcing funds from an investor who will get the eventual proceeds of the pre-sale. Alternative sources of loans may also apply such as the Loan Guarantee Scheme or use of small business development funds. Low budget productions are more likely to get a pre-sale during post-production with at least a rough edit of the film available, and a distributor may be willing to pay an advance up front to cover completion costs.
CONCLUSION
Raising finance for movie projects is not for the faint hearted. For every success story there are many failures. That said, readers will recall many instances of Irish success in the industry recent years and there are few more rewarding challenges than to act in an advisory capacity to such projects.
Peter Squires, ACA is a partner of Squires & Co. Email:
www.squires.ie
Peter,
Very nice article made easy to understand. Perhaps you can tell me how you work, fees etc.
Im a film producer with a history www.whenthegoddessruledtheearth and an about to be released documentary "Zeus Almighty" about to be released. My new project is requiring a 12 million euro investment.
John McCluskey
Producer
Arden Films