Owing pains

Will the indie world ever shake the bitter legacy of foreign-funded high fliers such as Carolco, Orion, Hemdale, et al.?

Not if the guilds have anything to do with it.

As split-rights deals have become more prevalent and many producers are financing the their pic budgets through foreign pre-sales, the guilds have started to pay closer attention their portion of the ancillary pie.

“Over the last couple of years the guilds have become more aware that no one is paying residuals, particularly as it pertains to the independents,” says attorney Craig Emanuel, co-head of the entertainment department at Loeb & Loeb.

Movies with studio distribution worldwide are not the problem, it’s indie films that may or may not have domestic distribution in place and have sold off foreign rights to numerous overseas distribs, many of which are loathe to pay residuals to the guilds.

“You are not going to get residuals from international distributors — they are just not going to pay them, unless they are (U.S.) studios,” says veteran lender and AFMA vice chairman Lew Horwitz. “When a distributor licenses a film for Spain for $450,000, they pray to God they are going to get the $450,000 back and a producer prays to God he’s going to get some overages. But you aren’t going to get foreign residuals.”

One way the guilds are enforcing payment of foreign residuals, a percentage of overseas distribs’ grosses from TV and homevideo, is by requiring indie producers to set up reserve accounts with an amount that’s reflective of potential residuals before a film goes into production.

While the reserve amount will vary pic to pic, it’s usually calculated by taking a percentage of the combined pre-sales as a minimum floor. For a medium-budget pic a reserve can range from the low to high six digits.

Generally, the Screen Actors Guild and the Directors Guild of America require these residual reserves for certain films.

“It depends on the circumstances,” says Douglass Bergmann, SAG’s director of residuals administration. “It happens most often when there’s no (domestic) distributor in place or we have no track record with the production auspices.”

Guild reps insist that they resort to reserve requirements on a minimal amount of films and that normally an assumption agreement will do, but indie players say the residuals issue has become an increasing source of pain.

“In the indie world sometimes that extra $200,000 to $300,000 that the guild is requiring (up front) is the difference between making the movie or not,” says financier Michael Mendelsohn. “Producers are forced to sign assumption agreements but the reality is that they’re already working for a meager fee. … There were a couple of companies in the ’80s and early ’90s that took advantage of the guilds and now everybody is paying for it.”

One solution is to start including residuals as part of the cost of making a film.

Says Emanuel: “We’ve advised our clients making budgets that they better have an allowance in place for residuals because the guilds are going to ask for it.”

If residuals become part of the film budget, these cost eventually wind up with the distribs.

“Residuals are part of the negative cost of the motion picture,” agrees Lee Solomon, chief operating officer of film sales company Helkon Intl. Pictures, “and as such you have two options: one is to go out of pocket, which is not financially viable for a producer, the other is to lay it off on the distributor. You better sell your film for X-plus residuals or you are going to lose your asset.”

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