The Hollywood Economist

TheHow To Finance An Indie Movie?

     by Edward Jay Epstein


Movie Stars come in Two Flavors: $20 Million and Free

The crucial difference between independently-produced and studio-produced movies is the timing of their distribution deal.  Unlike their Hollywood counterparts, indies rarely have American distribution deal when they are green-lit for production. Indeed, it often takes many months, if not years. of screenings and treks to film festival, before an indie gets distribution. This reality makes raising money for them a truly daunting obstacle.

One ingenious way some in die producers get around it is to recruit Hollywood stars who will work for them on the cheap.  They then use their names to pre-sell the movie abroad. The same actors and actresses who quote Hollywood studios $20 million per movie will work on in die films for a small fraction of that fee. Often they accept “scale,” as the Screen Actors Guild’s minimum wage of $788 a day is called, or “near scale” of about $10,000 a week plus overtime. Instead of requiring private jets, luxury suites, and multimillion dollar perk packages as they do in studio films, the stars will fly on commercial flights, stay in inexpensive condos, and get the same per diem as the rest of the cast. Instead of receiving a sizable chunk of the gross receipts as they are accustomed to on studio films, for in die films stars will accept “net points” (even though they—or their agents—are no doubt familiar with David Mamet’s famous observation that in Hollywood, “There is no Net.”) “The total cost of a star can be less than that of running the office Xerox,” explained one knowledgeable producer. The willingness of top stars—including Keanu Reeves, Mel Gibson, Jim Carrey, Will Ferrell, Drew Barrymore, Al Pacino, Angelina Jolie, Pierce Brosnan, Leonardo DiCaprio, Charlize Theron, Tobey Maguire, Demi Moore, Sean Penn, and Julia Roberts—to work for near scale in the parallel universe of in die films allows in die producers to take advantage of a star’s cache to finance the movies.

Ironically, in the era of the moguls, the Hollywood studios gained a similar advantage over stars by locking all their actors and actresses into long term contracts in which they were paid a specified weekly salary regardless of the success of their movies. Since the stars could not work for any other studio, the studios who employed them could create PR images and reap all the benefits of a star’s cache for themselves. After the studio system collapsed in the late 1940s, the stars, represented by powerful talent agencies, quickly turned the tables on the studios. Now, no longer under studio contract, the stars auctioned off their services to the highest bidder from film to film. The studios still paid for their films’ publicity, but the stars now reaped the benefits of their cache via product endorsement, licensing their images for games and toys, and a raft of other celebritized enterprises. So, for example, while Warner Bros, Sony, Fox, and Universal collectively invested over a half billion dollars to hammer the super-hero image of Arnold Schwarzenegger into the public’s mind in a dozen different action movies, Schwarzenegger himself got the rewards of his cache, which included a record-breaking $29.25 million fee for Terminator 3, a personal licensing empire, and the Governorship of California.

Despite the lure of enormous compensation from studios—which now include perk packages and cuts of the gross receipts that can easily exceed $30 million a film –stars find occasional satisfaction in working for coolie wages in in die productions, making a distinction between, as one top CAA agent put it, “commerce and art.” Some stars may find that roles in studio comic-book movies (that they share with live stuntmen and digital doubles) do not provide the acting opportunities, award possibilities, prestige, camaraderie, or even aura of coolness of in die productions. Others may want to work with a particular director, such as Woody Allen, or burnish their fading image as an actor. They might also need to fill a hole in their schedule—since, PR hype aside, there is not an endless cornucopia of $20 million parts in Hollywood. Also, when stars do “artistic” films practically pro bono they do not lower their $20 million quote.

Whatever the star’s motives, the in die producers get, if not a free ride, a means of financing their movies through a 3-step process called “pre-sales.” Here is how it works:

Step One. The in die producers makes a “pre-sale”contract with a distributor overseas. In such an arrangement, he usually turn over all rights to exhibit the movie—including selling DVDs and TV licenses—in a particular country in return for a minimum guarantee of money once the film is completed and delivered. The catch-22 here is that a foreign distributor often will not commit to a pre-sale contract if there is no American distributor or unless the film has a recognizable star (with a star he has at least a chance of selling the DVD and TV rights). So in die producers must persuade or seduce a star into joining the movie—and here is where the genius comes in—for practically no money. With a star in tow, he can often make enough pre-sales to cover most, if not all, of the budget.

Step 2. Since pre-sales are no more than promissory notes, the in die producer must borrow against them from banks to pay for the movie. Before he can do that, he needs to guarantee the banks that the movie, once begun, will get finished and delivered to foreign distributors. So he needs a completion bond, which guarantees the banks that it will pay all cost overruns necessary to finish the movie and if the production is abandoned, it will pay all the money lost on the venture, which means that one way or another the bank will get back its money. Two companies, Film Finance, Inc and International Film Guarantors, provide almost all the completion bonds for independent productions. (Studios that internally finance their own movies do not need completion bonds.) Before either company will sell a producer a completion bond, he has to meet its requisites, which include buying full insurance for the star (so if he is injured or quits the completion bond coverer gets all the money back from the insurer) and turning over to the completion bond company the ultimate control of the budget (including the right, if anything goes wrong, to take over the production and bring in its own director to complete it.) He also has to pay the company about 2 percent of the budget.

Step 3. With the completion bond in hand, and the pre-sales contracts as collateral, the producer then borrows the money from a bank or other financier. Since the completion bond companies are themselves backed by giant insurers, such as Lloyds of London and Fireman’s Fund, the banks take only a very limited risk in making such loans. John W. Miller, the head of J.P. Morgan Securities’ movie financing unit, which last year had $7.5 billion in movie loans outstanding, told me that he does not even “reads the scripts” of the in die films he finances. “My bet is on the solvency of the distributors.” When these pre-sales contracts are with established international distributors, such as Sony Pictures, Canal Plus, ToHo Films, or Buena Vista International, that risk is, he said “negligible.”
Even after scaling all these hurdles, securing the money and making the movie, the in die producer faces one further challenge: getting the movie into American multiplexes. Even with a completed movie and star, finding a distributor requires going from film festival to film festival, an odyssey that often proves unfruitful. (ore than 2,000 in die films were submitted to the Sundance Film Festival in 2007 , for example, of which about one percent were accepted.) However, the presence of a star greatly improve its chances, especially in those festivals, such as Cannes, Berlin, Venice, and Toronto, that depend on stars for publicity and photo-op. As one highly-successful in die producer explains, “it gives the acquisition executives there more of an incentive to give the film a chance with distribution, because they figure that even if the film is a hard sell, they can always promote the star. Selling the film ultimately is what it’s all about.” So the Hollywood star as homo ludens, or at least seeking some kind of non-monetary gratification, winds up as the crucial element in a business model that in recent years has sustained a large part of independent films—and, for that, we can all be grateful.

    But, alas,  by 2008, this business model became a victim of its own success.  The result of more and more In die producers adopting it, seducing  more and more second string stars into signing on, was that the competition so intensified that they can today longer rely on pre-sales to finance their projects. 

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