HOLLYWOOD — The ad slump, the TV depression, the Neuer Markt tumble, Sept. 11, the Kirch crisis, the Canal Plus debacle — all reasons why filmmakers who depend on foreign coin are pulling their hair out at the moment.
The main issue is that the downturn in global advertising has affected TV acquisition budgets, in turn forcing foreign distribs — those that are still in business — to be much more careful about their film purchases.
“I’m hearing insane tales of woe about TV in every European country,” says attorney John Sloss, who puts together financing for specialty pics through his company Cinetic. “I don’t know how you get films financed overseas these days. If the U.S. becomes your most reliable market, you’re in trouble.”
The halcyon days of international sales seem to be over, and everyone’s scrambling to find alternative means of financing.
“Except for tentpole pictures, the level of minimum guarantees that distributors are willing to put up is coming down,” says sales veteran Mark Damon, chairman-CEO of MDP Worldwide. “In the good old days you used to be able to get 70% of your budget out of foreign. It’s more like 45%-50% these days — and that is if you sell every territory. Today it’s very difficult to sell Germany, France, Italy and Spain.”
“Studios are going to have to increase what they pay for domestic rights,” suggests Hal Sadoff, a partner at financing and sales outfit Cobalt Media Group. “The only way to make it up is through soft financing.”
Among the most popular soft options are the German tax funds, British sale-and-lease-back schemes and local subsidies.
Teutonic taxpayers are perhaps the biggest contributors to the film scene. An estimated $4 billion flows through these government-sanctioned tax structures annually, essentially giving high-income German citizens or groups a writeoff by investing in a slate of movies.
“I don’t think it will be another $4 billion this year, but the market will remain strong,” says Michael Ohoven, CEO of the Cinerenta fund and facilitating company Infinity, which take on about 10-12 pics a year.
Ohoven adds, however, that he thinks there will be a shakeout among the funds soon. “There were so many small funds coming up in the last two years; they will have a hard time raising the money they set out to raise. About 15 to 20 of these funds will probably remain.”
On top of the German setup, there are about a dozen or so countries that offer tax-based incentives. Canada, Ireland, the U.K. (and the Isle of Man), the Netherlands, Belgium, Luxembourg, Iceland, Austria, New Zealand and Oz all have programs that give producers a rebate on production spend. But the catch is that some have gotten tougher on the qualifying factors to access these rebates.
The U.K. sale-and-lease-back setup, which returns roughly 10% of the budget to producers of films that cost up to $22 million, is a frequently tapped option. But it’s a tough fit for U.S. producers, given that 70% of the production costs must be spent on U.K. soil and the film must qualify as British. That percentage drops to as low as 20% for European and treaty-country co-productions.
An additional snag is that the cash — the producer’s net benefit — doesn’t materialize until the film is finished, and it can be difficult to get banks to sign off on a loan when little of the budget is in place beyond the sale-and-lease-back.
U.K.-based financing company Future Film Group (FFG) came up with a solution for this dilemma with a program called Facilities for Finance. It allows pics such as Mike Barker’s $20 million “To Kill a King” (aka “Cromwell & Fairfax”) to cash flow the money into production by using FFG’s post services.
“We generate value up front by investing our post-production facilities,” says FFG’s chief exec Tim Levy. “We recover our cost when we close the sale-and-lease-back.”
While Levy anticipated closing the U.K. tax year with less volume, he says the opposite happened. “After Sept. 11, there was a real quiet period where very few investors were stepping forward with investment. We all reduced our (sale-and-lease-back) entry prices for investors. At the end of the day we had an oversubscription.”
But this year will be the toughest of all, predicts Levy.
“There will be a downturn, in fact,” adds FilmFour CEO Paul Webster. “The sale-and-lease-back (laws) run out in 2005. And there’s the knock-on effect of the fallout of Canal Plus. They are not as aggressively acquiring titles for French pay TV. Spain and Italy are also profoundly affected.”
For all the gloom and doom, though, execs are in agreement that the austerity will yield a superior crop of films.
“To put a project together today you need an exceptional commercial property,” says Levy. “It’s better; we’ll get better quality projects.”