Pre-Selling Coproductions With A Twist

Periodical: The Business Of Film

Date: May 1996

The latest twist which I have seen in "preselling" coproductions for a group of films, identified or not, and joining this arrangement with a U.S. theatrical commitment and a gap financing credit facility.

O.K., that was a mouth full. So what does it all mean?

We all know that the 1990's saw a tremendous change in the revenue streams for independently produced motion pictures. In order to finance films, independent producers turned almost exclusively to the international community for presales and other financing. In fact, over the last couple of years, the U.S. and Canadian marketplace has become so unfavorable for independent production that in many cases independent producers are not preselling to the domestic marketplace either because they can't or because they hope for a better deal once the film is complete. Fortunately, the international marketplace  has expanded at a rate that has provided additional opportunities and, therefore, the financial wherewithal to allow independent films to still be made.

Throughout the 1990's, prolific independent production companies, particularly those with foreign sales arms, developed strong relationships with distributors in most of the key territories. Frankly, it has gotten to the point with some producers that it seems as if every one of their films is handled by the same distributor time after time. In fact, many of these indies have developed such a track record and strong relationship with particular distributors that they can simply pick up the phone, call "their distributor" in a particular country, and arrange a presale over the phone.

Recently, several domestic production companies established output arrangements with distributors in several countries. By lining up key territories in advance, the indie assures itself of a stream of production financing for a series of films over two or three years. The distributor assures itself of a proven product. Further, both the producer and the distributor benefit by assigning a fixed formula to calculate the minimum guarantee. For example, a Japanese distributor might be required to put up a minimum guarantee equal to 11% of the budget, a little too high on some films, and a little too low on others. However, each party believes that, on average, the percentage is fair.

The trick in arranging these international output arrangements is to try to setup deals with a sufficient number of territorial distributors in order to provide at least 75% of the financing necessary to make the series of films. Accordingly, the process of making territorial output arrangements must involve lining up key distributors at percentages of the budgets equal to or greater then industry averages. Examples might include Germany for 12%, Japan 11%, UK 9%, etc.

When you add up the potential percentages for the potential territories of Japan, Germany, South Korea, UK, France, Italy, Benelux, Scandinavia and Brazil, most producers, who have done their job right in terms of packaging the right talent, cast and budget, will find that they have accumulated enough financing to cover between 70 - 85% of their budgets.

Unlike domestic output deals, in order to entice the international distributor with such an output arrangement, the indie usually must offer the key distributor a profit participation in the film equivalent to their financial contribution (e.g. 10% of the budget buys 10% of the film's worldwide profits) in addition to the normal territorial distribution rights.

A typical output arrangement for foreign distribution of independently produced American films might be something like following:

Over the next three years, the distributor agrees to finance a specified percentage of the budgets [for example, 10% for Japan] for a slate of up to five films a year, with an annual commitment of no more than $5 million dollars and no more than $1.5 million for any given film. The distributor's contribution would be by way of a bankable minimum guarantee.  A definition of what items may or may not be included in the budget of the film would be established. In addition to the distribution rights obtained in the particular territory, the distributor would also receive an equivalent [10% in this case] percentage of the film's worldwide profits.

The producer would be obligated to present to the distributor all films that it intends to produce over the term of the agreement. The distributor would be obligated to take all films presented by the producer that meet certain criteria. This criteria might include approval rights over the lead actors, requirements that the film be theatrically released in the United States on a minimum number of screens or that all films be of a particular genre or certain budget. Basically, the established criteria would allow the distributor to gain more certainty that the films it will be getting, and be required to take, will be of the commercial stature, and fall within the paradigm. However, the criteria should not be so limiting that the producer can't meet the required criteria. Finally, the criteria should be tailored for the particular type of trims and budgets expected to be presented. Criteria appropriate for films in the $1.5 to $3.5 million budget range might be completely inappropriate for films in the $10 to $15 million range.

For a film with a budget in excess of $2.0 million, many distributors might require a United States theatrical release. Moreover, as discussed below, such arrangements might be required in order gap finance the U.S. estimates. While it would be helpful to have a respectable theatrical release commitment, for most international output arrangements, a relatively modest theatrical commitment should be all that is necessary. This might mean a release in ten of the top forty markets or that the film is simply released in at least Los Angeles, New York and Toronto. In either case, the fact that the United States distributor is not required to make an investment in the negative cost, and is only required to make a moderate financial commitment for theatrical distribution, should make the likelihood of such an arrangement feasible. (The foregoing must be weighed against the concerns of the bank providing gap financing as described below).

The final piece to the puzzle is to add a credit facility that includes a gap feature. Obtaining financing against the presale output contracts is no different than that required for single picture. It is just a little more complicated.

Since the indie has negotiated a multiple picture license, it can, essentially, negotiate a multiple picture credit facility based on the motion picture output "presale" arrangements. Such arrangements with Imperial Bank, Newmarket Capital and similar institutional lenders should be almost perfunctory. The only twist is to finance the remaining 15 - 30% gap.

Given that such major territories as the U.S., Canada, Australia, Taiwan, Latin America and Spain are still open, there should be more than sufficient estimates to justify this gap. If the U.S. is presold and other key territories remain unsold, the process is even easier. The main difficulty will be justifying the U.S. estimates.

Morgan Rector, head of Imperial Bank's entertainment lending division, one of the leading providers of gap financing, tells me that the decision to finance the domestic gap, as opposed to a gap in key international markets, is something that can only be done on a case by case basis. According to Morgan, "gap financing a domestic shortfall of $300,000 to $400,000 of a $2 million dollar budgeted film really depends on the talent attached." Obviously, certain talent would enhance the ability to obtain a domestic video and cable deal while other talent might not reasonably justify such numbers.

Morgan goes on to say that "it's actually easier to judge the value of the domestic gap on a $10 to $15 million dollar film with a more or less guaranteed theatrical release commitment than it might be on a film say with a budget of $8 million dollars with a $1.5 to $2 million dollar domestic gap. There, without a guaranteed theatrical release, you are sort of in no-man's land."

This is not to say that a gap financing credit facility is impossible, only that the nature of the gap would have to be evaluated on a case by case basis. Further, as part of the facility, a value could be placed on the open international territories. This plus output arrangements that are in place makes the process of filing the gap, either through justifying the estimates or making a U.S. sale, the only finance problem the producer will face.

In summary, the track record that the producer has developed, together with multiple international output arrangements and a gap financing credit facility, will result in the indie producer having facilitated and streamlined the process of financing a slate of films over two or three years. Although the end results may put the producer in a position different than it would otherwise have been in (considering the profit participation that has been granted to the key distributors), most indies would agree that the elimination of anxiety of financing each film, having arrangements in place that can speed the process of "closing" and permitting the production and distribution of more films over the same period, makes this process more than worthwhile.

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