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My Film Finance Theory: As Goes Real Estate, So Goes Film

by Jeff Steele

I have this theory that film financing follows real estate: as goes real estate, so goes film. Not necessarily the home buying market,  but real estate development investing. This is nothing I can quantify with statistics; it’s a gut feeling, solidified over time, observational, not empirical.

One factor that piqued my renewed interest in this theory are the numerous “good news, bad news reports” – yesterday afternoon on Marketplace, yesterday morning on Good Morning America, for example – about how the European debt crisis has resulted in increased investment in U.S. Treasury bonds.

For background, you can read reporter Neelabh Chaturverdi’s report in the Wall Street Journal Online. Libor (London inter-bank offered rate) has hit a 10-month high, meaning that the overnight rate banks charge each other to borrow money has, in Chaturvedi’s words, “been creeping higher.” William L. Watts, in his column yesterday about Libor for MarketWatch, writes that this is a sign of “growing unease over the possibility that Europe’s crisis in sovereign debt could turn into a banking crisis.”

This is definitely bad news, and as I’ve written before, the European debt crisis is relevant for independent producers when it comes to pre-sales, equity financing, and international distribution.

Like every other important industry of our time, production is a global enterprise. Problems abroad are problems at home.

But there may be an unintentional upside for Treasuries.

Marketplace
‘s Alisa Roth, reporting a conversation she had with senior economist Beth Bovino from Standard & Poors, said the bump in Treasury bonds is “important because a lot of mortgage rates are based on Treasuries.” Thirty-year fixed mortgages are at historic low rates, and that’s good news for the real estate market.

So the domino chain goes something like this:

  • Sovereign funds are rushing to buy US Treasuries (which drives down treasury rates);
  • Mortgage rates are tied to Treasuries (which brings down mortgage interest rates);
  • Lower mortgage rates (coupled with lower home prices) incentivize people to buy houses;
  • Home purchases increase real estate developers’ cash liquidity;
  • Increased developer liquidity facilitates further real estate development and (by extension) overall film investment, because… as goes real estate, so goes film.

It looks like real estate investing could be picking up, and if my theory holds weight, that means greater liquidity in film financing.

A few weeks ago, when U.K. academic and critic Kingsley Marshall interviewed me about film financing, I said I was starting to see this new equity coming back to the market, but that the new financiers were more sophisticated and informed than their predecessors. Solid financials are crucial for every deal, meaning good business plans, in addition to solid scripts, proven producers, experienced directors, and cast attachments that work for the project.

This is similar to the more stringent requirements for real estate investing: no one is giving away money for nothing, not anymore.

What do you think? Poke holes in the theory – add your own perspective. What else should I be looking at that I’m not?

Related posts:

Portugal: The Straw That Breaks the Back of Independent Film Financing
Earlier observations about how both the European debt crisis, and attempts by the EU and the IMF to solve it, could affect independent film financing.

UK Film Finance Mag Interview
A conversation with Kingsley Marshall about the current state of film finance investing.

Top Independent Producers, Take Finance Plans Seriously
Covers basic components of the film finance plan, and why it’s crucial to have a good one.

Star Power is Anything But
About the importance of script, producer, director, and cast – in that order.

Nicolas Chartier and the Hidden Hands Who Financed The Hurt Locker
In case you missed it, one of my early posts about Nic Chartier’s journey to make the film that ultimately won the Academy Award – that he wasn’t allowed to accept in person. It serves as a case study of the path many independent producers take in their search for equity investors and foreign pre-sales.

19 Responses leave one →
  1. Milan permalink
    May 26, 2010

    Let me start by saying I agree with most of the things you say and really enjoy your take on film and film finance. On this matter, while I think your logic is sound, I actually believe the inverse and I’m going to lump in the flailing stock market. Three years ago when we approached private equity, we’d often get this ridiculous look of “why should I invest in film, when their is free money to be made in real estate and the stock market. Guaranteed returns vs a highly speculative film investment”. Now with the struggles of real estate and the stock market and the loss of some consumer trust in both, especially with the recent Goldman manipulation, alternative investments such as film don’t seem quite so crazy. At least in the end there is an asset, unlike what the stock market has become. So, hopefully there’s some truth to that and regardless, it’s my spin.

    Thanks again for this educational blog. It’s good to see someone opening dialogue on the “boring” parts of filmmaking when in fact it’s the engine, well I guess the fuel, of this industry. I’ll be at the film finance event you’re moderating tonight.

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  2. Bob permalink
    May 26, 2010

    The flight to U.S. treasuries is at best – a temporary parking spot for cash. What is happening in Europe is just a pre-cursor to the future of the U.S. – which debt wise – is in disastrous shape.
    Rising interest rates are a GIVEN for the future in the U.S. as the dollar eventually craters under the weight of the “unrepayable” debt load and foreigner reign in lending the U.S. any more money. With out the support of foreign lending – the U.S. would currently default on its debt load as domestic savings and output do not support it. S&P is already hinting at downgrading U.S. treasuries – which will guarantee rising rates.
    Real estate sales in the U.S. has only been supported by artificial Govt stimulus over the last year. Recent housing statistics are already showing dramatic cracks as the punch bowl is being taken away – and the shadow inventory of distressed homes hit the markets.
    No matter how you look at it – the story going forward is one of contraction. Sovereign countries cannot max out all their credit cards with falling income and expect the good times to continue. Somewhere along the line – you have to pay down your debts or declare bankruptcy. Some European countries will default – the U.S. may not be too far behind.

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  3. Andy Halmay permalink
    May 26, 2010

    In this case, Jeff, I would trust your intellect more than the gut. I, too, have no hard facts to substantiate the following but observation and assumption. I feel that the most typical film investor is a different animal from the real estate investor. Let me Stanislavsky myself into the character of each.

    As a real estate investor I deal with facts that I can trust. Granted, markets can go up and down and some of the most sophisticated developers have gone belly up by going overboard and guessing the market wrong. But if I don’t let my ego overtake my common sense, it is hard to lose money in real estate. Film? Why should I invest in film when there are so many far safer routes to take. I like bottom lines, a cottage by a lake, tranquil weekends.

    As a film investor, I want a little more out of life than just predictable R.O.I. I value dealing with more interesting people, I like to challenge my soothsaying talents by examining a creative work and deciding how well it might do. I seek the thrill the unknown and the reward for having been bright. Oh, sure, I put money into real estate. It’s the only field in which I’ve really made any meaningful money – but God, how boring it can get and how many boring people one must deal with. Deep down, I believe that one day I’ll back another “Jaws” or “Driving Miss Daisy.”

    To my way of thinking these represent the different types of investors in real estate and film and that is why I think there is no link between the two. One could probably research the history of the two markets and establish if, indeed, there has been a link. I would bet against the likelihood.

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    • Scott Hillman permalink
      May 27, 2010

      This is where i disagree with you Andy. Real estate as oposed to Tressury notes, bonds and mostly stocks, is at some level a creative investment. You are always investing in something specific- a real building, this particular peice of land, something tangible, which you have responsibility..

      In my time working in real estate investment i have seen more creative investment done in building then i have seen on a lot of movies. Scripts, Directors, Cast, Contractors, Architects, Plans, Tennants. A rommantic comedy or 10,000 feet Commerical?

      Sometimes in real estate there is no precived bad anwser. In fact usually there is the preception that it is a very safe money. When this is the case why not be smart with your money, an investment that requires a little bit of creative thought(as oposed to T.B).

      The diffrence between film and real estate here, is i think one of messures. We precive film as simultantiously a risker and more creative endevor-film investment is also a smaller field. This part of the reason why its a smaller field. However i am not sure they are that diffrent.

      If the chain of financial markets suggest that it is now safe to invest in such creative assets, i think film investment may be laggging investment, but i think it might pop up.

      In this scenario it depends a lot on whether tickets sales actually go down in europe over the long term, which i suspect probabbly isn’t going to be the case.

      Whether smarter or not whose to say? People(not Andy) make dumb real estate investments all the time. Yet in that field there is a preception that one needs to follow proven numbers while with film its a crapshoot. Really like you said they are the same-its a matter of cost not exceeding return.

      You need to look at everything with a business- a creative business, but all such business is creative.

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      • May 27, 2010

        Just a thought, from my personal observations: People who make dumb Real Estate investments do so fully convinced that there are no surprises in Real Estate. Those I’ve known who bombed in R.E. were shocked, shocked I tell you!, that they could lose. On the other hand, those who win in film investment are equally shocked–pleasantly, though–when they WIN.

        I used to build houses (there are a dozen in the La Habra Heights area of Los Angeles that I designed and supervised decades ago, among the old avocado groves) and love architecture, so I’ve always paid attention to real estate investors.

        Oddly, I was recently lamenting in this blog space how I wish investors would think as critically of film investment as they do of real estate investment (which is to say, they rarely think so critically of real estate investment).

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    • May 27, 2010

      Andy,

      I got a chuckle out of your characterizations.

      Although, I would say there are more similarities between real estate developers and film investors. It takes a gamblers heart to build a spec property, particularly the bigger ones, ditto film. Many successful real estate developers enter film (think Samuels in Boston, Davis in LA).

      Having been involved in both and been through ups and downs in both, I can only say that a loss is a loss and a win is a win.

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  4. May 26, 2010

    Jeff,

    Interesting theory and I will certainly follow it now that you bring it up.

    However, I tend to think that an illiquid (no more CMBS) real estate market with tight credit coupled with high unemployment and cap rates hammered by the overall economy tends to benefit film investment as opposed to a strong real estate market. Most big time developers or real estate investors that read the market right stopped buying/building properties before the crash and have been sitting on the sidelines with lots of cash and no traditional investments to put them in. This is where I would say there could be more of an inverse relationship.

    If treasuries are low this could bring life back into the real estate market from traditional players and take money out of more risky investments like film.

    It would be great if your theory proves right. I love real estate and I love film! I just need treasuries to stay low for a few months longer while I refi a couple properties ;D

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  5. BenL permalink
    May 26, 2010

    Jeff, great post. I really appreciate the issues involved. Economic indicators are valuable to all industries. Trend spotters are worth their weight in gold (John Paulson).

    If i understand correctly, your theory regarding a good real estate market has the same positive effect on the film industry. I don’t think i see the direct connection. You indicate that cash liquidity with real estate developers is connected to increased equity investment in film. Is that right? Would it be feasible then for you (or someone) to follow the the money trail to developers (via production companies, etc)? It would be a small cast of reasonably big players, right?

    Perhaps the speculative real estate market was more in line with film investment. There was a lot of property “flipping” going on by the average guy before the crash ie. every other cable show in years prior. May have pushed traditional investors to other asset classes. So refining the definition of real estate investment may provide further insight into the relationship with real estate and film.

    On the other hand, you mention LIBOR creeping and the resulting effect of the banking industry. OK, so lending is tightening and film is considered an alternative investment (ie risky) so then a rising LiBOR or anything that causes banks to reign in lending is bad for film. That looks like a more direct indicator to me.

    We could also take a multivariate approach and examine consumer confidence, box office ratios, and risk appetite in the market place (via asset class – Junk Bonds). They may help to add indicators that context to an environment that was flush with cash, had a low cost of capital, and embraced risk. All together, real estate and film could be experiencing similar fates as they represent a similar investment character.

    In any circumstance there is a small fraction of investors that will ever want to or be able to invest in film. How are they connected to the factors that affect the real…

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    • BenL permalink
      May 26, 2010

      …real estate market?

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  6. David permalink
    May 26, 2010

    A really smart investor is not someone who invests in either real estate or film, but one who invests in both, and many other sectors, to maximize returns on his portfolio. A diversified portfolio calls for both risky and less risky investments because the “failures” of risky investments will, over time to at least some extent, be countered by the “successes” of these same kinds of risky investments. This means you might someday guess right on a Paranormal Activity but more importantly it means that your weighted portfolio must have riskier investments, like film projects, to beat the market. (If you don’t want to beat the market, just buy a Vanguard market fund.) This is what many people don’t get. They talk about investing in film because the projects are more interesting than an apartment complex in Downey. Maybe yes, maybe no. The point is that financial theory dictates risky investments in the right proportion serve to maximize returns in a way real estate investments alone, risky or not, can not. Don’t go to rich people asking for money because you think they like you. Go to them with a project that’s “reasonable” for a film investment but still risky compared to stocks. Ask them to make your project part of their risky holdings. They will understand portfolio theory — though if they do give you money, it’ll be because they like you.

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  7. Andy Halmay permalink
    May 27, 2010

    You have valid points, Phil & Scott, but I still think real estate and film investors are two different guys. That doesn’t mean they can’t inhabit the same body. Most of us are made up of different parts. We approach a classic statue with awe and reverence, practically wearing a Roman collar. An hour later we might help a sweet little old lady across the street and we have become a boy scout. And that evening we might take in a musical and sit up straight as our heart rate and blood pressure rises when the lead dancer, half-naked, flings her rear from side to side as we thought no human ever could.

    Rajaratnam, who will be tried soon on something akin to insider trading, invested in a film or two at one time. He had a brother in production or some such connection. I doubt that he would ever have become a film investor if not for some family connection because hedge fund investing and film investing are world’s apart – and even when he did invest in film, psychologically, he would have used another part of his psyche.

    Of course, my argument could be extended much further. There are probably divisions between film investors in comedies and dramas and action films and musicals. There are real estate investors who despise the word “creative.” They develop simple formulas which they follow successfully be it land for development or condo high rise or rentals, etc.

    I’m in neither field now but every time I pass a magnificent office building at 111 St. Clair Ave. W., in Toronto, the wannabe developer in me scratches his head for ideas because it’s such a shame to see a building like this one sit empty for years. It was headquarters for Imperial Oil for some 20 years but they moved to Calgary about 7 years ago. The tax on the building would doubtlessly choke an elephant. It’s up for sale but no takers and they doubtlessly use it as a tax write-off but someone should do something bright with it……..

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    • May 27, 2010

      I like the cut of your jib, Andy! ;-}

      I, too, will suddenly see a building and gasp at its awe and beauty. It becomes a flag, a testament, that somebody had a vision and a style and the balls to make it happen even though everyone around him/her was fighting to reduce that vision to a cheaper, less dramatic, easier-to-swallow box.

      The world is full of people who fear the expression and beauty of the human spirit, which can be expressed in a building, a sculpture, a film, a garden…

      Other people (and God how I wish I could find them!) are going to invest because they need the passion of a film that will move people’s souls.

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  8. May 28, 2010

    Interesting take on film financing (related to real estate developer liquidity). I’m reminded of a banker’s quip one evening over drinks shortly after the real estate development bubble-burst: He said, ‘…Real estate developers are like drug addicts they don’t stop til it’s gone…’ I do like the optimism of ‘as goes real estate, so goes film’; it adds another arrow to our quiver in determining/betting on what lies ahead (nobody has a crystal ball when it comes to real estate trends–but we can look to the past for clues). I hope one day we can look back and recognize your theory as a ‘leading film finance indicator’. Meanwhile lets keep real estate developers drug-free.

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  9. Andy Halmay permalink
    May 29, 2010

    I have a confession to make. Reading what I’ve written I realize I’m good at slicing baloney. I’d let my imagination roam. I think not as an investor but as a producer trying to second guess investors. Real estate is different. I worked with a developer and I invested in residential rental property, little Mickey Mouse deals at the right time in and the right time out which took no genius. I developed the original concept for the vacation time-share and persuaded Fidinam, SA out of Lugano, Switzerland to back me in developing a 1,500 acre island, which never came through because of a new governor in the islands whose soul doubtlessly is now burning in hell. Thus speaking realistically from the investment needer as opposed to the investor, I find it child’s play to approach investors with a real estate proposition because here one can make a rational proposal with credible projections. How do you grab a film investor? The contemporary nonsense is a “business plan.” If I were investing in film, I would read only the screenplay and take a look at the films that the attached director has made. Looking back through experience for some clue, I recall sitting with a low key English engineer, telling him the story of the proposed film. For some reason, without having planned to expose him to anything else, I reached for a recorder and told him, “Here is a demo of one of the songs we’ll have in the film.” It was a good demo and it excited the man. His eyes widened. “You wrote this?” he asked. “Yup,” I said, and he pulled out a checkbook from his breast pocket and wrote a check. From that experience alone, I conclude that in film one needs a prospective investor who responds emotionally. This, of course, neither disproves or proves your contention, Jeff, about the link between the two fields of investment. Scratch your head and see if you can find more stuff to back this interesting assumption.

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  10. May 30, 2010

    Jeff, I have to admit this is the most hair-brained, convoluted and comical idea you’ve posted to date.

    I completely buy it.

    With the European debt crisis teetering on the brink everyday we wake up, I can certainly see contractions taking place in the foreign sales arena, causing angina with regards to independent producers. Major/mini studios would seem they’ll get all the attention, just not most.

    I can certainly see the arguments above between real estate investors and film investors. My vote would probably come out even in these debates. Meaning? I just don’t know.

    As for, “Increased developer liquidity facilitates further real estate development and (by extension) overall film investment, because… as goes real estate, so goes film,” I’m missing the leap of faith here.

    Either way, I still think it’s a hard road for indie production in today’s economic climate.

    When are you going to start hosting monthly mixers? (Just a thought.)

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  11. Green Miller permalink
    June 6, 2010

    I fear I shall have to agree w/ Stan Gill w/r/t this post, Jeff…

    In that a huge leap of faith is required to get from increased RE Development to increased film investment. For even if we accept your theory that increased RE Dev. is positively correlated w/ overall film investment — being too lazy to research this for ourselves — it’s pretty glaring that you still really didn’t provide any causal link between the two, which automatically makes any theory less plausible. What’s more, without causation, we cannot know whether this theoretical correlation is a temporary one or a more permanent one.

    I considered for but a brief moment how greater RE Dev might yield greater overall film investment and I couldn’t come up w/ anything very direct, only perhaps a more ephemeral and indirect relationship in the form of correlation due to broader economic performance. E.g. Increased home purchases as a lagging indicator of improving U.S. economic performance >>> Improving U.S. economy should suggest Americans have/will have more money to spend on discretionaries/entertainment >>> etc. etc.

    Question: What other blogs are considering the macro implications of any of the various economic indicators on broader film finance?
    Answer: If there are any, I surely don’t know ’em.

    Kudos.

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  12. June 7, 2010

    I think Jeff’s right and have always believed this myself — because of tax considerations.

    RE investors seek tax-offsets to their passive income, and when times are good, plan for offsets to projected passive income. And the film/TV industry is always there as a tempting bride-to-be. It pushes all the buttons for an RE mogul — cash flow, taxes, brand promotion and personal sense of ego/identity (though, not necessarily in that order).

    If this is the true correlation (tax offsets for passive income), then it follows that film/tv growth generally begins in earnest some time *after* the renewed interest in RE. 3 months, 6 months, 2 years? I’d be interested to hear from someone knowledgeable in this area. Jeff?

    On a side note, I think one could also make the observation that this is actually a virtuous circle (i.e. media earners looking to offset their passive income turn to real estate in a high-proportion than other investments). When times are good, it’s a virtuous circle; when bad, a vicious circle. If so, what we’re really seeing is RE-FilmTV are symbiotic sectors, but because RE is so much larger (in $), it feels — to a $ man like Jeff — that “as goes real estate, so goes film.”

    (Off-topic but…. I wonder if the inverse is also true — i.e., because film is so much larger (in press), whether it might feel (to a publicist or an advertiser) that “as goes film/tv (marketing), so goes real estate (marketing)”??)

    Regards to all,

    Zack

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    • Green Miller permalink
      June 9, 2010

      1) Firstly, under the Bush tax cuts, passive income is taxed at 15%, which is histoically low. Looking back further, passive income is/has always been taxed much lower rate than earned income.

      2) Your comment is pretty nebulous, but it appears that you’re suggesting that investment in Film/TV could shelter taxable income from other non-related investments. If so please explain how this would work.

      3) What makes you think that a real estate investor would invest in a business as risky and taste-dependent as Film/TV instead of re-investment in RE, which would seem to be their area of expertise?

      4) Film/TV pushes the following buttons… cash flow, taxes, brand promo??!! What does this even mean? If a Film/TV project bombs there is/can be NO cash flow. Also, where are the synergies between promoting an entertainment brand and a RE brand?

      Moreover, as someone who worked in Real Estate private equity on Wall Street for several years and coming across dozens of RE investors throughout the country, I have absolutely never seen a single RE investor placing money in an industry about which they have no comparative advantage for the purposes of ego. That actually doesn’t really make sense either.

      Further, and most importantly, if even a few people tried this scheme of yours: investing passive RE income in Film/TV, it would still not be substantial enough to explain a correlation between the broader film and RE market cycles. There is no reason to assume that any RE investor flush w/ cash would invest in Film/TV. And certainly not for cash flow purposes or whatever you mean by taxes.

      Not to be a dick, but your comment reads like something you pulled out of thin air.

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  13. July 13, 2010

    Jeff, I agree for a different reason. see my article here, relevant excerpt:

    For example, real estate has lead the way in securitization. In the beginning, only Class-A commercial property was securitized. As technology and data progressed, more and more esoteric real estate properties, such as residential, and specialized property such as movie-theaters, were bundled together, or cross-collateralized. These assets were then split up into different risk classes. The film business has followed the same route. In the beginning, studio films were securitized. Now, with better data, any type of intellectual property can be securitized, including smaller and more risky assets.

    more: http://hollywoodandwall.com/colony-capitals-founder-art-has-zero-downside/

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