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Short Post on Hard Costs

by Jeff Steele

Just to set the record straight from previous comments about one of the main reasons entertainment banks ignore film budgets under 10m.

The traditional finance model (via senior banks and mezz lenders) does not willingly service films with budgets under $10m because there are numerous hard costs that (as a percentage of budget) cannot be reasonably sustained by low budgets.

It’s important to remember that each of the financing parties in a film are going to require the production to cover their legal expenses as well as a deposit before they even start the closing, in case you don’t close.

This being the case, expecting a production to pay $125k in legal fees for the pre-sale and gap loan is not unthinkable, which is in addition to:

  • $80k for the equity deal
  • $20k for the tax credit loan
  • $25k – $50k to represent the producer for all of these deals

(side note: make sure you tell your attorney to make that a package deal which includes production legal if your attorney is competent in both or at a firm that handles each, production and finance).

That’s $275k in sunk costs, all billed to the production, and you haven’t even shot a frame of film.  That’s 3% of a $10m budget, which isn’t great, but it’s bearable.  But, when your legal costs reach parity with your 10% contingency (on any budget under 3m), that’s a problem — and that’s a big chunk of your budget that never makes it to the screen.

The exception to the $10m rule for banks is if they’re servicing an important relationship (like a producer of larger budget movies who decides to do a documentary.)

The current budgeting software that I know of won’t tell you the mistakes you’ve made and it certainly won’t remind the producer of the hard costs possibly over-looked, which in turn causes your budget to lose credibility with financiers and the bond company.

7 Responses leave one →
  1. April 14, 2010

    Well, that’s my really-useful-information for this week. Thanks a million. Love the clarity.

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  2. April 14, 2010

    Jeff,

    Had you said this 7 years ago I would have disagreed. A $2 million film could easily be financed using bank/gap lending. The main reason is that their were enough unsold territories with estimates three times the outstanding loan balance to justify the expenditure despite the disproportionate costs.

    Today, the biggest difference is not tight credit or a reduced appetite from banks to loan money (although these play a huge part), it is reduced revenue potential.

    This particularly affects producers of smaller budget films for which the international marketplace is shrinking. Otherwise, one would simply do a volume of small budget films and spread the costs across multiple pictures and thereby keep the costs-as-a-percentage-of-budget ratio down.

    Unlike a good wine or (at least until recently) a piece of real estate, films do not get better with age. Once a film has been through 2 market cycles it becomes package fodder. Producers who want to succeed with small budget films – despite the disproportionate costs – have to be quick to market and flexible on pricing within a declining market.

    While this is not impossible to do with bank financing it is not for the “auteur” producer. It takes someone who can grind a budget down, shoot on a contracted schedule, use technology to help reduce cost and reacts rationally when the sales team tells them that Germany is no longer worth what was discussed during pre-production. And to make those costs look better the producer must be willing to do this over and over again.

    No wonder most bankers and their counterparts on the sales and marketing side prefer larger budgets.

    I hope I did not go off topic here but it would be great, Jeff, if you would do a series on costs that do not make it on the screen and how to reduce their impact.

    Thanks, Phil

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    • April 16, 2010

      @Phil

      Thanks for the post suggestion. I will think about that and most likely include your idea on what costs do not make it on the screen and how to reduce that impact.

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  3. Scott Hillman permalink
    April 14, 2010

    my comment is that this seems like the preverable Red M&M in the jar at the concert. If you find something like this(or the equivlents of this) i would go through the budget AGIAN to see what else was left out.

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  4. April 16, 2010

    This explains a lot, betraying a short post.

    My research has shown a 3-5% legal budget, or what ever term you’d like, should be used in your budget. By budget, I mean the total amount of crawfish you’re going to have to haul in to get your project produced. I use 5% because I’m very fiscally conservative, though I admit I’m lately leaning towards moving this number to 4%.

    While some may argue ‘legal costs’ don’t make it up on the screen – if it ain’t on the page, it ain’t on the screen – I would argue they most certainly do. For without legal guidance, your project wouldn’t be up on the screen anyways.

    And I’m aware lower budget producers are probably screaming, “My entire budget was $275k!” Fair enough.

    I’ve produced two features with this target in mind. The EPs only had this amount to spend and it was my job to get the project made. I accomplished producing both projects. Fortunately for my professional embarrassment’s sake, these films will never see the light of day as the EPs did not do their homework, as Jeff ‘so’ encourages here to do, and they now have projects which have taken ‘poison pills.’

    Whew. I dodged two bullets yet, I’m disappointed I won’t see these distributed.

    I would like to see more detail on what the following entails:

    * $80k for the equity deal
    * $20k for the tax credit loan

    You rock Jeff!

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    • April 19, 2010

      When people say the money does not appear on the screen it does not mean that they are not necessary costs.

      The term is used in conjunction with containing costs. It is used in conjunction with the term “production value” which in and of itself is subjective.

      While most producers want to have the best looking finished product they can afford, some seek to pull as much money out of the projects in fees and to deliver the least acceptable production value. The latter would indicate that not all the money for the production is going on the screen.

      Similarly you can review any and all expenditures with the same attitude and determine whether the money is making it onto the screen.

      For example, when you consider two offers to finance a film from two different banks, you can determine which will cost you more in terms of costs, fees and interest and pick the one that puts the most money on the screen (i.e., is the least expensive).

      Clearly you need a lawyer throughout the process, yet you may be better off hiring one that gives you a package price as opposed to hiring the most expensive attorney in terms of hourly billing at a top firm because this might take money off the screen.

      This analysis can be used when discussing actors perks, crew size, catering etc.

      The caveat (sp?) is that you don’t want to have blinders on. If you have the choice between two DP’s and one is more expensive than the other but can save you money due to certain expertise (say with digital workflow or VFX planning and execution) then you would not categorize that expense as taking money off the screen.

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  5. Richard permalink
    April 19, 2010

    @Stan, thanks for sharing, could you clarify what you mean by the EPs not doing their homework and poison pills? I know poison pills from a hostile takeover perspective, but not in the movie business. Thanks!!

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