Co-productions save millions with complex international rules


THE TRICK TO TREATIES: International co-productions are saving millions
DIALOGUE: Co-production expert David Zitzerman
CONNECT FOUR: Projects made possible by complex treaties

When producer Ehud Bleiberg set about raising the money for his comedy "The Band's Visit" (Sony Pictures Classics), it seemed like a slam dunk.

The movie was a $1 million-budgeted charmer about an Egyptian police band that gets lost in the middle of Israel and has to find its way back.

But raising that money in Israel was no easy task, especially when a substantial part of the cast was not Israeli. Even with a hefty contribution from the Israeli Film Fund, along with sales to satellite and free television, Bleiberg didn't quite have the capital he needed.

That the film got made owes a great deal to an obscure trade agreement between Israel and France that allows a film shot in the former country to qualify as "French" and benefit from French subsidies.

"If you have a number of points (that meet certain key criteria), you are entitled to get subsidies from the ticket sales in France," Bleiberg explains, "even if you didn't shoot your film there."

Bleiberg is one of hundreds of producers who have benefited from a web of international co-production treaties that have transformed the independent business in recent years.

Films as varied as 2004's "Hotel Rwanda," "Starship Troopers: Marauder" and Steven Soderbergh's upcoming biographies of Che Guevara, "Guerrilla" and "The Argentine," have all accessed local subsidies through various co-production treaties that link countries as disparate as China and Australia, Canada and South Africa, and Spain and Puerto Rico. Often, producers are able to shave 25% or more from film budgets by complying with the strenuous requirements of the treaties.

The way treaty co-productions work is relatively simple: As long as a movie production spends a certain amount of its budget in each country -- usually at least 20% -- and complies with minimum thresholds for cast and crew, it may call itself French or Italian (or whatever nationality it happens to be) and qualify for that country's financial aid.

Because Bleiberg did postproduction work on "Band" in France, the film obtained a subsidy from the French government based on ticket sales. Bleiberg couldn't use the money directly to fund production, but it was a major incentive for French investors to help finance the film.

Similarly, Myriad Pictures' "Death Defying Acts" (the Weinstein Co.), with Catherine Zeta-Jones and Guy Pearce, could access both British and Australian subsidies, even though it was filmed entirely in England, because of a treaty signed between those two countries. In this instance, postproduction was done in Sydney, according to Myriad CEO Kirk D'Amico.

Most of the leading Western filmmaking nations have signed multiple treaties. European countries together have entered into more than 50 such pacts, and insiders estimate that Canada alone has 54 of them -- more than any other nation.

Each treaty has different requirements, and over the past year, several countries have scrambled to change those requirements to make the deals more equitable.

Great Britain, in particular, has tightened the rules governing what qualifies as a treaty co-production after seeing a huge outflow of money go to movies that were only nominally British. Whereas it previously mandated that only 20% of a movie's budget had to be spent in the U.K., that figure has now doubled.

Understanding the mechanics of the various treaties -- not to mention keeping up with their changes -- can challenge all but the bravest lawyers, especially when a deal involves more than two countries, as was the case with "Hotel Rwanda."

"'Hotel Rwanda' was done as a U.K.-Italian-South African co-production," says Hal Sadoff, who heads ICM's independent division and helped put the film together. "The reason we went through Italy was because the U.K. did not have a co-production treaty with South Africa at the time, while Italy did. We realized we could make it work if we structured it as a three-country deal."

It made sense because, under European Community rules, Britain essentially had to honor Italy's obligations, meaning that an Italy-South Africa co-production could effectively count as a U.K.-South Africa co-production.

"We were able to get the South African government's Industrial Development Corp. to invest in the film because it qualified as a South African film," Sadoff notes. "And through Italy, we were able to access the U.K. subsidy deal and also get money from Ingenious, a fund that was doing U.K.-qualifying films."

Most independent producers operating outside the U.S. have become experts at navigating treaty requirements and say that the treaties have become a pivotal part of their dealmaking.

"The last film I did, 'Adam Resurrected,' was a German-Israeli co-production," Bleiberg says, referring to the upcoming Paul Schrader drama starring Jeff Goldblum and Willem Dafoe. "Through the co-production, we are entitled to get public funds from the (German) federal government. My co-producer is from Northern Westphalia, the German state, where they also have a very big fund for supporting films. And we are doing all our postproduction in Germany."

Meeting the minimum threshold of each country's requirements not only means carefully splitting the production spend between the countries concerned -- it also means balancing an international cast and crew, as Bleiberg did. "We have Derek Jacobi, who is an English actor, and German and Israeli actors, and we have a European DP," he says.

Juggling such complex elements has become a way of life for many independent producers in Europe, where it is not unusual to see a film made with a dozen or more different financing sources and several countries involved.

"In the world of independent financing, (treaties) are absolutely crucial and part of a financing arsenal," D'Amico says. "We have figured out that on average on our productions, we are looking for about 20% in 'soft' money, which can be comprised of tax credits or rebates and government funding, and that is a huge number when you are looking at a $10 million budget and doing six to eight films a year, as we are."

He adds, "Next year, we have $100 million in production, and those (rebates and subsidies) represent 20% of that, so they are absolutely crucial to us."

Satisfying the subsidy criteria often dictates vital creative decisions, such as where a movie is shot.

"We were looking at 'A Woman of No Importance,' with Bruce Beresford directing, and we originally set it up as a U.K. production," D'Amico notes. "And then we looked at it as a U.K.-Australia co-production, because the cost of shooting is drastically less in Australia than England, but that way we could still access U.K. (subsidies)."

In the end, Myriad decided to make "Woman" entirely as an Australian production because Australia recently raised its own rebate to some 40% of the amount spent on production there.

In addition, costs of shooting in England have soared dramatically with the dollar crumbling against the pound. Those costs have had a chilling effect on American producers, who, in the past, counted heavily on European tax breaks. Those breaks now don't compensate for the expense of shooting there.

"With the demise of (the British subsidy known as) sale and leaseback, you have to look at the incentives if you are a producer based in Los Angeles," says Steve Fayne, an attorney with the Akin Gump law firm who specializes in film finance. "Are you going to go to Europe and produce a film when the euro is a buck-47 and the pound is over $2, and you've got to fly people over and move them there? It's a cost-benefit analysis: What am I going to get out of it? From the point of view of an American producer, there may be less interest than before."

That is compounded by the complexity of making the treaty co-productions work.

"While they are great in theory, they are unbelievably complex, because you are in multiple jurisdictions and trying to meet multiple qualifications and you can spend more money lawyering it than you save," says attorney Schuyler Moore of Stroock & Stroock & Lavan. "You have to spend a certain amount in each country, and then you get into endless questions of what qualifies. How about the bond fee, the overhead, the development fees?"

He adds, "They (the treaties) used to be important because you would do a U.K.-pick-a-country co-production, and as long as it qualified as a treaty co-production, 100% of its cost qualified for the U.K. tax deduction, which added a huge benefit -- even if you only incurred part of your cost in the U.K. Back then, you could make an English-language film, shoot it in a cheap country like Bulgaria or Hungary, and maybe you'd do some postproduction in England, but 100% of the cost would qualify for U.K. sale-and-leaseback deals, which gave you approximately 10% of the budget as a benefit."

That changed last year, Moore says.

"Nowadays, it is only the U.K. spend that qualifies, and under their system, it's got to be a full-blown U.K. production" -- with a British cast and other key elements. "It is much harder to qualify, and given the currency rate, it makes no sense."

It makes even less sense when the subsidies themselves are slow in coming. Some countries can take a year or more to deliver monies owed, and few have the reputation for the speedy payment of, say, Puerto Rico, which has one of the most generous subsidies in the world: a 40% rebate on money spent there, with half of that coming as a cash advance.

When a subsidy is not immediately available, it can sometimes be discounted -- that is, sold in advance to a bank or other financier, usually at a reduced cost. But that becomes tricky when there is an issue about whether a movie actually qualifies as a treaty co-production.

"When we were typically approached to structure these deals," Fayne notes, "someone would come in and say, 'I've got this project, and it is going to be 79% in this country and 21% in that country,' which means that you qualified by the skin of your teeth. And if it changed, or something went wrong -- like you go slightly over budget in one country and then the ratio shifts -- you could not qualify anymore. A lot of these were cut pretty close to the bone. And there was the issue of 'How do you ensure that at the end of the day I am still going to qualify?'"

Problems like these have led some major independent companies to avoid treaty co-productions, by and large. "To qualify, you end up having the tail wag the dog," says Bob Hayward, COO of Summit Entertainment. "You end up making production decisions that are not really in the best interest of the picture."

Despite these drawbacks, international treaties have been a godsend for indie producers, especially considering the added benefits they gain from television sales.

"You have to understand the (European Community) directive for television," Moore explains. "The EC said, 'All you countries have to enact legislation saying that the broadcasters have to reserve a majority of their airtime for European works.' On top of that, each individual country is allowed to be even more restrictive. Here is where treaty co-productions are pivotal, wholly beyond that U.K. tax game: If you do a European co-production, it allows you to make it in the language of any European country, but it still qualifies as a local work. So if you do a U.K.-French-German co-production, you can shoot in any of those countries -- and in English -- and it still counts as a local work for those countries' broadcast requirements."

Hence an English-language project can meet a French broadcaster's definition of a French film but still be sold on the international market far easier than it might if it were shot in French.

Just as important, it can be sold for a premium rate to the local broadcaster, which has a greater need to buy local product. This is particularly relevant in countries like France and Canada, where there are strict laws about airing homegrown content.

"The law has changed the supply-and-demand equation by increasing demand (for local product)," Moore adds. "You can sell those films for at least 20% more and maybe even 50% more. It is an indirect subsidy, because it increases the amount television broadcasters will pay."

Until laws like this change, the treaties will continue to be a boon for the producers who are willing to do all the spadework and cobble together their pacts.

Bleiberg, for one, has already reaped the benefits. With "The Band's Visit" a worldwide hit, his French investors are earning dividends from their investment, just as France has benefited from the production work done there.

"They enjoy, and we enjoy," Bleiberg says. "It's a win-win situation."