Saturday, February 19, 2011

The New Model Of Indie Film Finance, v2011.1 Domestic Value & Funding

Here we go again. From Ted Hope's blog. If he keeps posting good stuff, I'll keep re-posting...

The New Model Of Indie Film Finance, v2011.1 Domestic Value & Funding

by Ted Hope

This was once going to be a single post. Today is part three. There will be at least two more to come. Yesterday we tried to determine the factors for accessing foreign value. Today, let’s look stateside.

Until the double whammy of Toronto 2010 & Sundance 2011, it looked like the US acquistion market for feature content had fully collapsed. No reasonable P&L would have shown more than a modest six figures for US acquisitions. Hybrid & DIY models have not been developed yet to consistently deliver returns in excess of this amount (or even at these figures). Perhaps this is now changing, but it would still be foolish for any filmmaker or investor to expect this and we can’t budget for such expectation.

How many of the 7500 films produce in the US annually return 20% of their negative cost from US licenses? Although it puts emerging filmmakers at a great disadvantage, I think the surest determining factor for predicting US acquisition potential is the filmmakers’ track record. If you have found buyers previously, you are well suited to find them again — and even still exceeding that 20% is the exception and not the rule.

When the US market was depressed, I often had sales agents & finance experts challenge me with the claim that the market wasn’t down; it was just that there were no good films. People like to think that good films sell for good prices. If 7000 American films can raise money to fund their works and no films are selling, what are those investors thinking when they fork over their cash? They can’t be thinking that are actually helping their children or nephews and nieces when they give them money only to recognize their failure? They must be thinking that they are making good films, and all 7000 can not be 100% wrong.

Clearly we are at a point in US film culture where the infrastructure is not serving either the investors, the creators, or the audiences. Good films are getting made but not being delivered to their audience. Last year I went to a film investor conference. Several other producers were invited and we all asked to pitch projects. None of us left with funding, but the investors said to me that I was the only one that addressed how we would deal with the reality of not just getting our film to market, but bringing it to the ultimate end-users — the audience. As artists build communities around their projects in advance of actual production, they are developing a plan to give domestic value to their films. It is hard to imagine that any artist will be able to do enough pre-orders to predict 20% of negative costs from the USA — unless they are working on microbudgets — but taking a step forward is still a better plan than surrender to the unknown.

So where are we now in the process of getting your films funded? If you’ve gotten your foreign sales estimates, and you can somehow reasonably anticipate a 20% of Negative Cost US Acquisition License, you are in great shape. That is, you are in great shape if you have foolish investors. The wise ones will still be wondering about how they cover sales fees, sales expenses, and the opportunity costs on the money. Those numbers are still routinely ignored in many business plans for indie film I find. If you are working with semi-literate investors, you will still be scrambling to find another 25% or so of your negative costs.

How will you fund your film if you can not predict full recoupment from the combined US & foreign licenses? Fortunately, if your film is set in America, you can pull in some tax credit relief. Otherwise, I hope you carry a foreign passport, and qualify for foreign subsidies. If you plan on cash flowing any of this soft money, don’t forget to discount them and budget for the additional legal expense. From personal experience, I find it hard to justify the costs of cash flowing soft money on the type of budgets we are talking about – but that’s good news. In the NMOIFFv2011.1 you are wise to treat this soft money as revenue towards the project so that such aforementioned costs will be covered.

If you are fortunate enough to have all of these rare qualities (foreign value, US acquisition potential, strong team with a track record, soft money qualifications, and cash flow partners) inherent to your project, you probably are still wondering where’s the upside. How do we get to profit?

I think we now have a subject for tomorrow’s post. Stay tuned.

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