New order: shoot first, fund later

Eleventh-hour loan approvals put the cart before the horse

In the old days — a year ago — bank loans wrapped just before film production began. These days, with soft money from tax shelters and production incentives from various localities available upfront, bank loans increasingly close after principal photography wraps, according to indie film banking executives.

This new m.o. has numerous implications. Most significantly, film sales companies shoulder a more substantial financing burden, since the slug of bank funding for their films arrives later. And films are going into principal photography without full financing, risking a meltdown if all the funding doesn’t materialize as expected.

“It’s insane and forces film companies to scrape cash together before the bank money comes in,” says Rob Aft, co-founder of Los Angeles-based distribution adviser Compliance Consulting.

The traditional closing schedule — still used by fortunate films with substantial pre-sales — calls for production not to start until the bank loan is concluded, usually in a mad rush before the shoot. Such loans cover 100% of production because pre-sales are used as collateral.

With indie film prices falling because of economic recession and fewer buyers making commitments before actual production, producers have turned to tax shelters and subsidies to jump-start projects. Thus, bank loans are shrinking to a fraction of production costs. They are the last money to come in, since banks usually won’t cough up cash until full funding is in place.

Also suffering under the new regime are completion bond companies, which support bank loans by guaranteeing that films will be finished, thus paying for any overruns in production expenses. Instead of working on fully financed productions, bonding companies find themselves involved in partly-funded movies in production, expecting to officially bond them later.

“We find ourselves immersed in the financial transaction, helping the producers close financial details, and that never used to be the case,” says Fred Milstein, CEO and president of Century City-based CineFinance, which bonds 25 films year. “We used to be just focused on the physical production.”

Concluding film finance deals is increasingly tricky because more lawyers are in the mix. Previously, films required perhaps a half-dozen attorneys to represent producers, the foreign sales company and the domestic rights buyer. Now the table is crowded with additional reps from soft-money funders — tax shelters, production subsidies and the like — which provide capital but don’t take value in film rights.

Says Bennett Pozil, Los Angeles-based VP and group manager of entertainment at Natexis Banques Populaire: “Every day you think you’re done but then somebody finds something else that needs fixing. Transactions are just so over-negotiated.” The bank’s clients include indie film outfits Hyde Park and Senator Intl.

Looking back, the bank sector enjoyed a film funding boom in the late 1990s, spurred by silly money from foreign territories and short-lived financing schemes. Bank loans collateralized by new films peaked at an estimated $1 billion in 1998, though volume fell to perhaps half that level in 2003.

With banks becoming more picky in the aftermath, Morgan Rector, prexy of the entertainment division at Comerica Bank, says: “We’re in a period of relative sanity, though there’s no question we’re probably passing on some (proposed) loans that would probably work.”

Comerica’s clients include Franchise, Gold Circle Films and Myriad Pictures.

With the shrinkage of bank volumes and a tough indie film sales climate, European film banking retrenched last year. Belgium’s Dexia BIL Bank dropped film lending, and DZ Bank shuttered its London-based film finance arm. Partly filling the void, Bank of Ireland entered film lending, picking up executives from DZ Bank.

In Beverly Hills, Mercantile National Bank intends to increase entertainment lending.

“I’m hoping the market for independent films improves,” says Art Stribley, executive veep of Mercantile’s entertainment banking division, who took the post in December.

“Most of us are waiting for AFM and Cannes to see whether (film buyers) have finally worked through film inventories that built up, so they will have to start buying again.”

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