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PFENNIGS FROM HEAVEN? Will the German money that currently funds Hollywood movies continue to dry up — and if so, will anything replace it?

I get asked this question a lot, so when Daily Variety invited me to try to respond, I couldn’t resist the chance to read the tea leaves. Along with a number of Jonathan Dolgen’s very gifted execs, I helped launch Paramount’s German film financing program in the late 1990s and now do it on my own.

When I closed my first deal for Paramount, virtually no other studio could be distracted from the scramble to sell pay TV rights to Leo Kirch in order to figure out what “GmbH” stood for (it’s the German equivalent of “Ltd.”)

Today, German film fund investment in major U.S. movies exceeds $2 billion a year. And there simply is no studio or mini-major that does not rely on German money to offset, share or diversify the risk of its production slate.

Here’s my take on the big questions for this year:

1. Does the crash of Germany’s Neuer Markt spell the end of the German film funds?

No. With the exception of individuals who only chose to invest in film funds because they were able to redeploy gains from the Neuer Markt, there is no direct link between these two very different instruments. As a result, the bankruptcy of Kinowelt and EM.TV should have as little impact on film funds as the Enron debacle will have on the price of light bulbs.

2. It seemed everybody and their Vater launched a German film fund last year. Where did the market end up?

Based on the last five years of results, it was a very strong year. Based on expectations, it was a disaster. Had every deal that was announced fully sold its inventory last year, the public market for film funds would have nearly doubled — an ambitious goal for a market that had just doubled in the previous 12 months.

Screen Capital Intl. — my company — estimates that an overheated marketplace of sellers led to an overall contraction in the public funds market volume.

Expect the final tally for 2001 to be 8%-10% off its prior mark of DM4.1 billion ($1.85 billion) in 2000.

3. Why did investors seemingly react so poorly this year?

They didn’t. It’s just that many big-ticket investors migrated out of public funds and into private market transactions (one of the areas I specialize in). The remaining public market was addled by increased competition among sellers and confusion on the part of buyers: Changes to the rules, an explosion in offerings and bad (and inaccurate) press all conspired to slow investors’ step.

4. Will the rules change again?

It took 17 German states nearly 30 months to agree on a working set of guidelines for film funds — and those rules were just passed last May. There is currently no agenda — and certainly no desire among the government officials I know — to toss that hard-won consensus out the window. On the other hand, tax laws undergo perpetual review, the EU is pushing to harmonize tax policy within the Eurozone … so anything’s possible.

5. Won’t they institute a rule requiring films funded with German money to shoot in Germany?

Only if they want to kill the business. Without resorting to quid pro quos (which never work), the German authorities have succeeded in doing more to promote Germany as a production location with this tool than with any other initiative in postwar history.

Mandalay shot “Enemy at the Gates” almost entirely in Germany; Sony and Franchise’s Steven Seagal starrer “Half Past Dead” will film entirely there. These are not one-offs but part of a steady flow of projects, including Richard Donner’s actioner “Timeline” and Spike Lee’s boxing epic “Save Us, Joe Louis.”

Factor in the small-screen work drifting over the Rhine from top producers (Hallmark, Brad Krevoy, etc.), and you realize why European neighbors are green with envy. Anyone who is still skeptical hasn’t walked through the soundstages at Bavaria Studios, Babelsberg or Adlershof recently. Believe me, these are not your father’s klieg lights.

6. What can we expect to see in upcoming deals?

Brutal competition — particularly now that every Hollywood studio is in the game. Beyond that, a few clear trends:

  • With a number of sellers still smarting from last year, underwriting confidence will be eroded. “Guaranteed” offerings will be tougher to come by.

  • A necessary shift in the economics of the deals –more favorable to investors on the upside, but riskier on the downside. These deals will be somewhat less favorable (but still attractive) to studios and producers than they were, but that is to be expected as the marketplace matures.

  • Bad deals will come home to roost, so expect some thinning out of dubious promoters and fraudulent offerings — to be succeeded by a fresh crop to take their place.
David Molner is managing director of Screen Capital Intl., which facilitates off-balance sheet financing structures for film producers.