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Financing the Film Industry

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Ways and means to finance your film: 'Investing in a motion picture is risky business. ... Investor Financing. Partnership: joint venture ... – PowerPoint PPT presentation

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Title: Financing the Film Industry


1
Financing the Film Industry
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  • Karen Niwinski
  • April 5, 2002

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2
Ways and means to finance your film
  • Investing in a motion picture is risky business.
    Unless a film was fortunate enough to garner
    sufficient advance sales, to cover at least the
    movies production cost, there is no guarantee
    and little promise that the investors will recoup
    their investment or earn a small profit.
  • Film is probably the worst investment anyone
    could make. One might as well go to Las Vegas and
    throw the dice- in fact, those odds are probably
    better!

3
Ways and means to finance your film
  • Investor Financing
  • Partnerships
  • joint venture
  • limited partnership
  • Corporation
  • Industry Financing
  • Studio Development Production
  • Foreign Financing
  • Lender Financing
  • bank financing
  • presales financing

4
Investor FinancingPartnership joint venture
  • Any partner may pool their monetary, creative,
    and business resources
  • all partners, or a combination of partners are
    considered active
  • every one of partners has agency power- one
    partner can bind all members in a joint venture-
    if one partner incurs debts related to the
    project the partnership is involved with, all
    partners are liable.

5
Investor FinancingPartnerships joint venture
  • Each partner individually can perform any service
    necessary to conduct business
  • Each partner is personally liable for the debts
    and taxes of the partnership if the partnership
    assets are insufficient to pay any creditors
    and/or IRS claims, each partners personal assets
    are subject to attachment.

6
Investor FinancingPartnerships joint venture
  • Unless partners agree to share profits and losses
    equally, they have to agree on a sharing ratio.
  • Partners cannot compete amongst each other in the
    business.

7
Investor FinancingPartnerships limited
  • Limited partnership is composed of a group of
    limited partners (the investors) and one or more
    general partners (the producer, or producers).
  • Risk only the capital the invested.
  • Never pay if picture goes over budget

8
Investor FinancingPartnerships limited
  • invest because of tax benefits
  • interest payments are deductible
  • expenses are passive
  • if capital gain, gains will be taxed as regular
    income.
  • equivalent to having a share

9
Investor FinancingAdvantages and disadvantages
of partnerships
  • Advantages
  • limited partners do not necessarily have to put
    up funds, but guarantee the bank loan by issuing
    letters of credit
  • partners are more easily set up than a
    corporation
  • partnerships can be set up from film to film
  • among reliable partners, all working for the same
    goal, a venture makes a great production team
  • Disadvantages
  • the general partner (producer) is liable for a
    films over budget and other debts
  • limited partners lose then their limited
    partnership status if they become actively
    engaged in the limited partnerships business
  • In a joint venture, partners are agents for each
    other and liable for each others debts incurred
    in the management of the business
  • limited partner shares cannot be solicited
    publicaly

10
Investor FinancingCorporation
  • Right to issue stocks
  • corporation v. partnerships
  • ownership in corporation is evidenced by stock
    certificates, but ownership of stock certificates
    does not give a stockholder the right to
    participate in the corporations management.

11
Investor FinancingCorporation advantages v.
disadvantages
  • Advantages
  • corporation rather than directors are responsible
    for debts
  • corporate shares may be more readily transferable
    than interest in partnerships if there is a
    market for them
  • shares can be sold publically.
  • Disadvantages
  • costly to set up
  • have to adhere to stringent rules and regulations
    (i.e. stockholder meetings, directors)

12
Industry FinancingStudio Development Production
  • Development Deal Memo
  • Step Deal
  • i.e. Warner Brothers, Disney, Sony, Universal,
    Paramount, 20th Century Fox

13
Industry FinancingStudio Development Production
  • Advantages
  • use studios money and studios development
    companies
  • studios can provide for bigger pictures because
    they have a higher production budget.
  • Collaborative process
  • Disadvantages
  • odds are not good
  • Hollywood System
  • theft
  • lose material to studio if project is delayed
  • can be laid off at any time

14
Foreign Financing
  • All countries insist on the following
  • picture must be a major production
  • U.S producer may bring in an American director
    and two American stars, all others must be hired
    within the country
  • all key personnel must be hired within country
  • must have national content
  • certain percent of revenues from the film must
    remain in that country

15
Lender FinancingProduction Loans
  • Lender financing is process of obtaining a loan
    from a lending agency to finance the development,
    production, and/or distribution of your film.
  • Bank Loans
  • banks can only lend money based on measurable
    risk, and only credit they can take is collateral
    or assets being offered to secure the loan
  • resource loan loan made only if an endorser
    (producer) is made personally liable for payment
    in the even the borrower (production company)
    defaults
  • debt or equity transaction important to make
    clear how intended loan is to be characterized.
  • Equity investment- the lender becomes an investor
    whose investment is at risk.

16
Lender FinancingProduction Loans
  • Cost of loan is tied to the prime rate, which is
    the rate of interest the bank pays to borrow from
    the Federal Reserve
  • floating number that fluctuates
  • in commercial lending, loans to low-risk firms
    (major studios) are 1/2 to 1 above the prime
    rate
  • small production companies pay 3 above the prime
    rate
  • EX.
  • Say the bank charges 2 percentage points above
    the prime rate and the prime rate is at 9.
    Total the rate is 11. On a 1 million loan, the
    bank removes 110,000 (1 million 0.11)
  • To hedge risk the bank retains another 1-2
    incase prime goes up
  • if the bank charges 1 , another 10,000 is added
    to their retained amount, now down to 880,000.

17
Lender FinancingProduction Loans
  • Advantages
  • lender does not share in the net profits
  • lender does not have any creative control
  • option of a non-collateralized loan, which is not
    supported by collateral and therefore may be
    suitable for development money or for financing a
    low budget picture
  • Disadvantages
  • have to be paid back
  • may lose collateral and non-collaterized loans
    are limited
  • loans have a specific term, where they are
    repayable on or before a specific date,
    regardless of whether the film made it

18
Lender Financingpresale financing deals
  • Presales- funding of a films production costs
    through the granting of a license for the films
    rights by a producer to a distributor in a
    particular media or territory before the
    completion of a film.
  • Take forms of
  • funds
  • guarantees
  • commitments
  • EX if you have a contract for the presale of
    your film to a distributor, then you may be able
    to present the contractual commitments to a bank
    or lender and walk away with cash

19
Lender Financingpresale financing deals
  • Revenue cap
  • a certain amount of money in sales, up to which
    the buyer gets to keep all the money.
  • Buyers try to estimate the highest amount that
    the movie will make and then try to make that
    amount the cap
  • after the revenue cap is reached, the seller may
    start receiving a percent of the revenue or may
    renegotiate the deal

20
Lender Financingpresale financing deals
  • Advantages
  • Can provide for a big portion of financing.
  • Less creative intervention.
  • If you arent confident in the economic upside
    potential of your picture, then a presale
    arrangement is a viable option.
  • Disadvantages.
  • Difficult to collect the money from the lenders.
  • Increase the number of films produced a year, and
    the demand for and cost of various film elements
    that are limited in supply.

21
Recap
  • Four basic ways to finance a film
  • Investor Financing
  • Partnerships
  • Corporation
  • Industry Financing
  • studio-based Independent Production Company
  • Foreign Financing
  • Lender Financing
  • bank financing
  • presales financing

22
Financing the Film Industry
  • THE END
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