Roundtable: Film financing

The independent film sector might be flush with cash, but making and releasing projects outside the studio system is still fraught with challenges, experts say

With newfound wealth pouring into the independent film sector courtesy of hedge funds and private investors, securing financial backing for projects has never been easier. But when it comes to finding distribution for such movies, well, things become more complicated. In a recent discussion moderated by Stephen Galloway for The Hollywood Reporter, leading figures from the indie world kept returning to that point when talking about challenges facing their business. Participants included William Morris Independent co-head Cassian Elwes; Nu Image/Millennium Films co-chairman and CEO Avi Lerner; Lionsgate president of theatrical films Tom Ortenberg; Jean Prewitt, president and CEO of the Independent Film & Television Alliance, which organizes the American Film Market; and ICM head of international and independent film Hal Sadoff.

The Hollywood Reporter: Let's start with what matters most: money. How available is it?
Cassian Elwes: I don't feel there's ever been a time when there's been more money available for independent films. We are in the middle of a boom period. I am not sure why, other than that there (are) a lot of groups out of Wall Street that are eyeing our business and saying, "There can be a formula for making independent films. They can be made for a certain amount of money, they can be sold for a certain amount of money, and there are experts who know how to do that, and maybe we should back those films because we can see a real rate of return on them." On top of that, you have a lot of individuals who have made enormous amounts of money through the Internet bubble who are flocking to Hollywood because it's glamorous and their advisers are telling them there's a way to make money in it, too.
Hal Sadoff: I agree. There's never been more money in this industry before in terms of independent films, and it's a function of various things. The studios are financing less and less movies ? they are focusing on their tentpole films and those big-ticket items. So, they are looking to outside producers to finance movies and bring them back to the studios for distribution. That's opened up a whole area for investors ? both private and institutional ? to come in and negotiate better deals and have a more realistic recoupment position in these films.

THR: Is the money here to stay?
Sadoff: We hope it will be long-term, but in the past, a lot of investors have come into Hollywood and been burned. But in this new environment, everyone realizes ? from the studios to the agents to the actors ? that you want to keep these people involved in the business on a longer-term basis. The deals are more realistic, and as long as we protect these people as much as possible ? it is not a risk-free business, people can still lose money ? they will stay in the business.
Tom Ortenberg: My guess is this new money is attracted as much by the perceived sexiness of the movie industry as by the potential rate of return. But there is the potential for great return with money smartly invested. I am not sure that I agree that in the past, some of these out-of-towners have been burned so much. When you come to Hollywood waving wads of cash, you kind of deserve what you get! (Laughs)

THR: Usually, it's the foreign companies that are getting burned.
Ortenberg: Foreign companies and what people like to call "high-net-worth individuals," particularly the newly rich. And I do believe there is potential for great return, but people coming into town waving those wads of cash had better do it with their eyes open.

THR: How great are the risks for investors?
Ortenberg: We've seen some pictures recently where you can lose everything. It's not unlike playing the stock market.
Avi Lerner: But money was never an issue in Hollywood. Because of the kind of business we are ? so sexy, so attractive ? people see the big numbers on the boxoffice and the video, and they don't see how low the profit is. From the first day I (was) in this business, which is over 30 years, I always find a different kind of money coming in ? insurance money, tax money, German money, and today, all these funds. But it is always short-term. They come, they lose the money, and then they go.

THR: How can investors protect themselves?
Lerner: By understanding the business, (knowing) that it is not a business where you can just spend money to make a movie and then sell it. The sale always has limits. You have to know (in advance) how much you are going to sell it for. And from this, you start to see how you are going to make the movie. And the only protection is, you can always walk away from a script ? if you can't make it for the right price, you tell them no. That is the advice I would give anyone that comes to invest money in this business: Look at the business side.
Jean Prewitt: One of the things the independents are good at is risk-sharing, and one of the ways you protect people is by limiting the amount of risk they are assuming. As the deals get more complex, you are seeing a completely different equation in terms of how the risk is shared between a wide variety of people, and that creates some protection.
THR: But that means spreading the risk among more investors. And to do that, you have to find the investors. Where are they?
Prewitt: There is a lot of money from Asia that wasn't there before. You are beginning to see institutional investment happening there ? you are beginning to see a lot more equity investment. And again, it is a risk-sharing equation. They are looking carefully at co-productions, where both sides have to think (about) what's going to make that production attractive in their environment.

THR: Specifically where in Asia?
Prewitt: Japan, Korea ? and not completely for their own movies. There are a number of co-productions going on, and there are a number of big funds being created.

THR: What about the U.S.-based hedge funds? Are they now coming into the independent business in addition to backing studio films?
Sadoff: We have seen hedge funds investing in individual independent films. That has happened. I don't know if it will continue happening, but they are looking at a few more to invest in. Also, they have invested in (prints and advertising costs) on individual films at studios ? independent films that the studio is distributing with independent P&A financing.
Ortenberg: From our perspective, there has been a lot more talk about hedge funds than hedge funds themselves. What's really been coming out of this is how key distribution is. I say that as a distributor, but it has been incredible ? the number of people coming to us, looking for some level of guaranteed distribution so they can run to the hedge funds and get financing. And there are only so many places to go in the independent film world.

THR: Hasn't that always been the case? Hasn't distribution always been the issue?
Elwes: For a long time, (the independent business) was driven by foreign sales, and foreign-sales estimates, and gap financing from banks, and "soft" money coming in from wherever you can get it and then small equity portions of financing, so that the equity investor essentially is leveraging his position, owning a majority of the movie. You hope that the foreign and the "soft" money equal the budget of the movie, so that an eventual American sale is the upside for the investor. That is how most films are being made still in the independent film sector. Then you have this new money that's arriving in Hollywood that is based on hedge fund money or Wall Street money, where they are saying to their various investors, "Here's a new formula for you: Get American distribution, maybe you put up your own P&A, you get a low (distribution) fee, and you own all the rights across the world. And the international rights are going to be far more valuable if you have American distribution in place. And maybe on paper before you even start the movie, you are ahead by 25%." The tricky part of that is, with the distributors, there (are) not enough slots for the amount of money that is arriving. So, the distributors are getting bombarded ? particularly MGM, who have put themselves out there as strictly a distribution entity that is available for the right price to be rented. You just see how many films are being thrown at MGM. If there was another distributor like MGM, there would be another 25 or 30 movies (distributed each year).

THR: Are we going to see hedge funds financing whole slates of independent films in the same way they now are financing studio slates?
Elwes: You already have. Ryan Kavanaugh (of Relativity Media) has made deals with Sony and Universal, and he has a hedge fund interested in doing independent films, albeit larger-scale independent films. Those are quasistudio films.

THR: So, the money is effectively for studio-style movies?
Prewitt: As you get more and more institutional investment, they want different types of (films). There are a lot of statements from institutional advisers saying technology is going to drive the content ? not the last time any of us checked, but if that is what makes you feel comfortable about locking in those deals, that's OK. One thing that is interesting is whether or not there is going to be the same level of public funding ? from the U.S. at the state level, and internationally at the governmental level. Because certainly a lot of the (smaller) product ? and certainly local product ? is being funded from other sources: subsidies, tax breaks, local investment. All that product comes into the marketplace, but the economics on local-language product is different (in that) they generally make back the production costs in their own country. If they make extra foreign sales, that is profit, but they are not coming into the market needing to make 30 presales.

THR: Are you worried that those foreign subsidies will dry up for American films?
Elwes: Well, the great irony now is that it is actually cheaper and easier to make your film in America than anywhere else ? certainly than in Europe. For American movies that were running to Europe to get the 20% sale-and-leaseback deals in the U.K. ? ones shot in Eastern Europe, where they'd do postproduction in the U.K. ? that is basically over. The U.K. government is not interested in subsidizing American pictures being shot in other places in Europe. At the same time, the dollar is weak, so it is cheaper to shoot a movie in America and take advantage of the (state) subsidies. And in fact, it is a better deal because unlike the German tax money, which was the deal that everyone was running to, now you can get 20% (of a film's budget) from a state and not have to pay it back.
Ortenberg: Then you get to work with American crews, and you can get talent more easily. It is much easier to get talent to go to New Mexico than Eastern Europe.
Sadoff: We are seeing more and more states enact these tax rebates and subsidies. We have Louisiana, South Carolina ? Connecticut just started one.
Ortenberg: Georgia just started one, too, in response to (filmmaker) Tyler Perry.
Prewitt: It's between 20 and 30 states that have (subsidy schemes) now.
Elwes: Governor Schwarzenegger, please do one in California!

THR: Presumably, the argument in favor of the states implementing these programs is that they ultimately get back six or seven times what they put out. Is that true?
Prewitt: Absolutely. We have spent a lot of time looking at this because as you go from state to state, you have to be able to substantiate the value. What's interesting is that, first, there is this huge short-term uplift from all the ancillary spending involved in making a film ? even if it's going to your local Nordstrom. But it is also creating an avenue of advancement and training within the state ? skills transfer ? and (leading to the creation of) very high-skilled jobs. You have trained people up in a high-tech environment. So, the benefits to the state are dramatic.
Sadoff: And that 10%-30% from each individual state is vital for individual films. Between foreign presales and gap financing and super gap financing and these incentives, you can get your films made.
Lerner: But what we are forgetting is the cost of the movie. Yes, you get 20% back, but you pay five or six times more for the crew.

THR: At least now there is more funding to pay those costs.
Elwes: There's a lot of money coming in, but what do you do with those films when they are made? The independent arms of the studios basically kill the independent distribution business by dominating it, and they have their own agenda. They'll make 10 films, but of those, only four will be picked up from outside. True art cinema is having a much harder time finding distribution, and you are seeing lot of deals that are just split-rights deals, where someone's buying video rights and someone else is doing theatrical distribution, and (because of that) a lot of films are getting no more than $1 million-$2 million of P&A. Breaking through (into theaters) is the No. 1 challenge, and the No. 2 challenge is getting the right movie stars. A lot of foreign companies have their criteria ? they want this actor or that actor ? but there's only a small pool of movie stars that make a difference to getting your movie financed. Independents are running around either trying to find some pet project from a big movie star or doing more of a quasistudio film, like Avi has been doing recently, where you pay the star close to what they are looking for on the open market.

THR: There was a period where there was a different pay scale depending on whether the star was doing a studio or independent film. Does that still exist?
Ortenberg: Talent is very willing to cut their quote for passion projects, but that doesn't necessarily mean independent films any more.
Lerner: The biggest problem we face is the fact that the studio is now actually competing with us. Every studio has got an independent (specialty) company. They are making independent movies, but for such a price that, for us, they are high-budget movies. At the end of the day, they are all going to lose money. Every single independent studio (specialty label) is going to lose money. And you think Universal cares that Focus (Features) is losing $10 million, $20 million?

THR: Should we really consider those specialty label productions independent films?
Sadoff: What is an independent film today, anyway?
Prewitt: Our view started out as any film that was majority-financed outside a major studio. But what that translated to was a film that did not go through the studio distribution system internationally. It might well have a U.S. distribution deal, but it wasn't being dropped into, say, the Fox deal with (BSkyB). And that still holds true.

THR: It's surprising that so much money has gone into production but not into new distribution companies.
Sadoff: Over the next year or two, we are going to see ? with all of this equity money and hedge fund money ? a few new distribution companies formed, and they will take up the slack from the studios. The independents will have a new avenue.

THR: How much does it cost to set up an effective distribution company?
Elwes: How long is a piece of string? You can either go in and be like a Strand (Releasing) or Roadside Attractions, where you raise $5 million-$10 million, and very cautiously acquire films for $250,000, and spend $500,000-$1 million to release a movie, and spend a couple of million in overhead a year and hope that your business grows into a $50 million company. I don't think that's what the hedge funds are interested in. They are interested in funding a $100 million company and hoping it grows into a $500 million company. You are then starting to compete in the bigger leagues, but it is very risky for a startup because the way all distribution companies have survived over the years is through their libraries. We have seen startup companies before, like Destination Films. That was a very short trip. They found their destination very quickly!
Lerner: In two years' time, no hedge fund will exist in this country. They are all going to lose money because they don't understand the business.