Why Films Under $2m Can’t Catch a Break
One of the things that bigger-budget producers unknowingly take for granted is the availability of different types of financing. Terms like gap and presales and tax credits and equity are freely bandied about as if they’d been around since day-one. Broad-stroke percentages outlining a film’s capital structure are exuberantly scribbled across the backs of napkins in bars around the world:
FINANCIER: So how much do you need?
MIDDLE MAN: (gesturing to his napkin) That’s the best part! See here, if you put 10% into escrow, I’ve got a guy who’ll match it, then just some soft-money-presales-n-gap and we’re there.
FINANCIER: (handing him two bags of cash) You’ve got yourself a deal, my friend.
But any ultra low budget producer (under $2m) can tell you with frustrating familiarity that the financing structure for their films fits on something much smaller than a napkin… a postage stamp: 90% equity + 10% tax credit. That’s pretty much it.
“My film’s only 500k and the potential upside is so huge and no investor, packaging agent or lender will even talk to me. Why?”
The truth is that
- lower budget films are just too combustible: 90% fall apart prior to completion,
- if they’re under $2m then they can’t get a completion bond (no bond = no lenders), see previous,
- they generally have lower budget lawyers (who aren’t adept at closings),
- their paperwork is usually in more disarray (I once spent 6 weeks cleaning up a film’s chain-of-title, just so I could proceed with the financing, which then took an additional 8 weeks), see previous,
- the cash-on-cash returns don’t justify the overhead/resource costs allocated to finance them (it requires the same level of commitment to close a low budget film as a higher budget film), see previous,
- unless they’re creature features, they generally don’t have marketable stars that sales agents can provide bankable estimates for (which is the foundation upon which more complex financings are predicated),
- did I mention they’re too combustible and end up costing time and money?
- contrary to popular opinion, they’re not going to perform like Paranormal Activity, Blair Witch, or Greek Wedding (note: never ever include those films in your prospectus, ever!) It’s comparable to using the Lottery as an example of how to get rich quick.
That being said, there is still a place and a market for low budget indies; it’s just a different type of lottery than higher budget indies: i.e. they have worse odds and lower returns (cash-on-cash).
Just to be clear, this is not about bashing low budget indies – I’m just frankly addressing the question that has been posed to me several times a day since starting FilmClosings.com: why won’t I consider them or why are they so hard to finance?
Despite the fact that I personally only consider projects over 3 million, producing low budget creature features for Sci Fi Channel was one of the best experiences of my life. Alas, that model just doesn’t work anymore.
There is some good news: budgetarily speaking, $250k is the new $2.5m. That’s right. Due to the down economy, and advances in cheapening technology, you can now create for $250k what was once the purview of $2.5m films. In addition, once your film is complete you don’t have to try very hard to sell $250k+ in foreign territories, so that makes for a pretty good return on a $250k film, even after you net-out the costs-of-sales. So there’s your light at the end of the tunnel.