Basics of Film Financing Agreements: Essential Terms and Top Practices

What is a Film Financing Agreement?

A film financing agreement (or "financing agreement") is a legal document entered into in connection with the financing of a film. It typically takes the form of a loan agreement or a promissory note (with or without a security agreement) between the borrower, which is generally either the production company or a financing company, and a lender whereby the lender extends an agreed amount of funds to the borrower in exchange for the commitment that the company or lender will receive the return of the loan plus an additional amount as repaid per the terms of the loan agreement or promissory note.
In certain cases the financing agreement may be entered into as part of a multi-document loan or credit facility, which may include a term loan agreement, pledge and security agreement, etc.
Further, in the context of the production, in some cases, the financing agreement may also be preceded by a production services agreement, in which the production company entering into the financing agreement agrees to pay the producer under a production services agreement a certain fee out of the proceeds from the loan extended under the financing agreement assuming the film is produced in accordance with the financing agreement and, in essence, "pays" the producer to arrange, manage and produce the film .
Typically the purpose of the financing agreement is to provide a specific amount of funds for a specific purpose related to the production of a film and may be used to cover a variety of costs associated with the pre-production, production, and/or post-production stages of the film. Although the purpose and amount of funds made available by the financing agreement is generally a matter of negotiation between the parties, generally the funds provided under the financing agreement would be used to cover costs such as:
-Pre-production costs, including: salaries, fees, and expenses for producers, executives, actors, actresses, directors, and consultants, above the line crew costs, below the line crew costs, and general and administrative expenses.
-Production costs, including: salaries, fees, and expenses for producers, executives, actors, actresses, directors, stunt coordinators, stunt people, cinematographers, costume designers, wardrobe, and general and administrative expenses.
-Post-production costs, including: salaries, fees, and expenses related to editing, visual effects, music, and general and administrative expenses.
The importance of the financing agreement in the context of the production of a film is in its ability to give the production company or financing company the funds needed to successfully start, complete, and/or distribute or exploit the film in accordance with its production schedule, including the ability to pay for necessary services and materials and produce and complete the film in accordance with the terms of the financing agreement.

Forms of Film Financing

Unlike the clear, hierarchical structure of studio system financing and distribution, the independent film market includes a patchwork of financing options. Equity financing is one of the most common forms of financing for indie films. In an equity financing structure, the producer offers a monetary interest in the proceeds from the film in exchange for investment in the film, often as a part of a private placement memorandum (PPM) or LLC equity structure. Notably, PPMs are not intended to be used in a public offering, but require fewer disclosures than full SEC registration in some circumstances.
The salient feature of debt financing is that the investor owns no interest in the film but receives back their principal and a return at a previously agreed upon rate of interest. Debt financing is common for both indie and studio films, where banks or other financial entities or individuals lend money in exchange for a promissory note. Debt financing is typically secured by contracts, bank accounts and other assets of the borrower, and grants the lender first priority over the assets of the borrower in case of bankruptcy. Hybrid financing combines elements of both equity and debt financing. Distinct from more traditional debt financing models, which foreclose the investor from participating in the profits of the picture, hybrid models allow investors to recoup their capital with interest, but also to receive a share of profits once the initial investment is recouped.

Key Provisions of Film Financing Agreements

Film financing agreements typically include several key clauses that are essential for delineating the financial arrangements between the filmmakers and financiers.
Funding Schedule: This clause will detail how and when the financier will provide funding to the production. For example, there may be a requirement for the financier to deposit funds into an escrow account at the signing of the agreement, with additional disbursements to be made at specific milestones during production. This helps to ensure that the filmmaker does not receive all of the financing up front and then potentially misallocate funds outside the scope of the budget.
Recoupment of Funds: The typical recoupment structure for the financiers, providing for the mechanics and method of repayment. For example, financiers may be entitled to an aggregate of producer fees and a preferential return of their investment out of profits, until they receive an agreed-upon multiple on their investment (such as a multiple of 1.5x). Thereafter, financiers would share in additional profits according to a waterfall distribution schedule. Often the financing entity will also take an equity ownership stake or gross revenue participation in the film that sits above its repayment of principal and interest, and it may receive a full producer credit in exchange for its investment.
Revenue Participation: This clause will set forth both the distribution windows and the specific share of revenues that the financier will receive during the various distribution windows both before and after the recoupment of financing. For example, the financier may receive a higher percentage of gross revenues from the exploitation of the film in ancillary media outside of the theatrical window, but only a low proportion of the gross revenues from the exploitation of the film in the domestic theatrical window.
Accounting and Reporting Requirements: This clause will detail both the reporting requirements and the timing of such reports. For example, the financier may require a quarterly accounting of revenues and expenses and appropriate back-up documentation. The timing of such reports may also call for quarterly reports by the filmmaker and annual audited financial statements by the production accountant, due by the end of the next quarterly quarter.

Legal and Financial Risks

To adequately protect the parties’ interests and ensure that the financing is structured in a manner that minimizes risks, it is of utmost importance to carefully examine the film financing agreement and consider all of its legal and financial aspects. In this regard, there are certain key concepts that must be taken into account for a thorough and comprehensive analysis of the parties’ rights and obligations arising under the agreement.
First, the financing structure of the project is hugely significant. Often, independent film productions will seek out multiple sources of funding for their films. These sources can include completion bonds, tax incentives, cash investments, and awards from grants and funds, amongst others. As such, determining the interplay between all of these different financing sources and determining which source will back which portion of the production is crucial at the outset of the production. Once all sources for financing have been identified, then it is necessary to determine how all of these sources will be put together into a cohesive financing package. If not evaluated correctly, the financing package may be flawed and thus render the production vulnerable.
Once the mechanics of the financing structure have been established, it is then important to consider the use of the funds in terms of an accounting policy, cash flow and production budget. This is to ensure that the investor’s funds are not over or misused. Within this process, it is also important to confirm that the funds will appropriately be used for the payment of wages to the production personnel, and that residuals for the proper administration of royalties is adequately factored into the budget. Essentially, this is to make sure that the funds can be accounted for in a proper manner in terms of both use and distribution.
Next, it is also important to consider the nature of the underlying rights in the property. For example, is the property protected under copyright, trademark, or something else? If the property rights are merely secured by way of a license, then the scope of the license and the legal enforceability of that license must also be considered. In the case of an option, it is also essential to evaluate the contingent rights that may ultimately vest in the production company as a result of exercise of the license.
A further aspect of the legal considerations that merits evaluation is the timing of the payments for the various amounts to become due under the financing agreement. Specifically, to ensure that the funds will be sufficient to finance the production, it is important to consider the timing of the disbarment of the funds to the production and the timing of the corresponding capital coming into the production. Thus, for example, it should be considered whether the start of the production is feasible given the current state of funding for the project. Similarly, it must also be considered whether the corresponding expenses for the production will coincide with the inflow of capital for the project.
Finally, a crucial consideration is that of compliance issues. More specifically, this entails assessing whether there are any relevant laws that would govern the use of the funds under the agreement or the rights granted under the agreement. This would include, but not be limited to, analyzing whether the production requires any special permits or licenses for the location of filming, whether all of the industry requirements and practices are satisfied, and whether the production has complied with any governing provisions. Additionally, it must be ensured that there are no private placement issues for investors.

Participants to Film Financing Agreements

Parties to a film financing agreement may include the following:
The Producer
Producers are the principal decision-makers on a given project, and are responsible for setting the overall vision and tone. Producers may be the instigator of the project, or may come on board after some or all of the financing and development is already in place. Major studios usually have a cadre of producers to man multiple projects at once. Even if not a disinterested financier, a producer generally will not help finance a picture unless it is strongly committed to that picture.
Financier
The financier is the entity or individual putting up the money. If a financier is disinterested in being an active participant in the production, the financier may only want observer and other limitations on its rights, so as to allow it to track the project’s progress, without playing a role in the creative or financial decisions.
Studio
A studio may be the producer, or the financier. Because of their clout and stature, studios often have their own internal sources of financing, either in the form of production funds, revolving loans from banks, or the ability to borrow against the film rights of a property. The key is to define the extent to which any studio involvement in the project may entitle it to participate in creative decisions, such as casting.
There are also a number of other parties , with various degrees of involvement, including:
Production companies
Production companies are entities who hire the talent and personnel to complete the movie, and may include holding companies and individuals. Production companies may also be in charge of running day-to-day operations in the interim between financing the project and starting principle photography.
Banks
Banks intimately familiar with the industry may provide financing to an entity with a pending green light, so as to fund preproduction costs.
Talent
The talent of a project includes all of those individuals and studios responsible for creating the work. For example, the director, screenwriter, cinematographer and editor are all talent involved. The term can also be used broadly to mean other ancillary workers involved in the project, such as correctionists, costumers and set designers. Often, the term is used to refer specifically to actors, but "talent" may also refer to someone who has a significant role in the film’s production, such as a screenwriter, director, and even a producer.
Talent agencies
Talent agencies are the gatekeepers to many actors, directors, editors and screenwriters. Theoretically, the identification and hiring of the primary talent is a collaborative effort between the producer and the financier, and may be subject to certain creative and financial limitations.

Negotiation of a Film Financing Agreement

Seeking to achieve the best deal for clients is the raison d’être of every lawyer, and film lawyers are no exception to that rule. However, obtaining the best terms for a film financing agreement that will provide the necessary certainty for a producer while at the same time garnering the greatest possible return for financiers is an extremely tricky proposition. Whether you are negotiating the terms of an agreement on behalf of a producer or a financier, the following strategies could make a significant difference to the bottom line.

• Seek to simultaneously negotiate as many film marketing and distribution arrangements as possible. Having multiple offers from various marketing and distribution entities, at any stage of the negotiations, is crucial. Having multiple options creates value to obtain the maximum amount of financing to complete the production of your film. Financial offers presented by marketing and/or distribution entities generally expire conditionally, so capturing those conditional offers as offers are received, whether directly or through production companies or distribution companies, can make the difference between going into production or simply staying in development mode.
• Focus on cash up front, not back-end percentages. This is an ongoing theme in the film entertainment industry from front to back. From the front end, it is much more difficult to collect on back-end percentages because it is difficult to locate the requisite parties once a film has been released, let alone collect. From a back-end perspective, cash up front is like a bird in hand as opposed to back-end percentages being like a bird in bush. While this should not be the only factor in considering the terms of the film financing agreement, there are a variety of other factors to consider such as tax benefits, etc. in addition to cash flow considerations.
• Consider future ramifications when analyzing the various terms of a film financing agreement. In every negotiation, the producer is looking at today in order to get the best terms so he or she can go forward with his or her project. However, whereas the producer views a given agreement in terms of the project only, the financier is looking at a given agreement in terms of the project, and also in terms of it being a precedent to other future investment. The long-term implications of every agreement must be analyzed thoroughly to ensure any bad terms are not repeated in the future vis-a-vis future financing. Such factors could include consulting fees, interests, production receipts and the way they are repaid, seniorities, taxes and many more.
• Take advantage of the exchange of information period. Often producers invest quite a bit of time into sending out a complete package of information on a given project to multiple financier/distribution entities. In order to maximize the chances a producer has of receiving competitive financing/distribution offers, it is critical to handle the complete package of information, which is sometimes referred to as the "information exchange period," as carefully as possible. This is because the competing offers coming back from financers/distributors tend to reflect the deal-maker mentality of that financier/distributor – their goal is to make the deal happen. In order to obtain the best deal for a producer, you must therefore treat the exchange of information period seriously.
• Consider the age and the future of film and television ‘technology’ in both the production agreement and the employment agreements as it relates to the delivery systems. The delivery system for film and television has changed considerably since the inception of the motion picture industry, and there is no reason to believe that such evolution will stop any time soon. The principal historic delivery systems of film and television have been 35mm projection for the theatre and magnetic recording for home television. Both of these technologies are now being rapidly overtaken by digital delivery systems and new media delivery systems such as Apple iTunes. Such fundamental shifts have tremendous implications, not only for the production itself, but also for cast and crew compensation, residuals, rights of renewal and royalties, and the like. Casting producers, cast, crew and investors, must therefore seek to embrace new delivery systems in the production agreement and all related employment agreements if they want to avoid being trapped in the past.
• Evaluate the financial strength of the parties involved. While it is true that the film entertainment industry is largely driven by creativity and full of uncertainties, a perennial issue in negotiating many agreements in the film entertainment industry is the financial strength of the parties involved. Investors need to know that the producer has cash flow to cover costs in the short and medium term, and producers need to know that investors are financially strong enough to hold on firmly to their investment, regardless of the outcome of the project.

Obstacles to Film Financing

Financing a film can be a complicated and often risky endeavor. In addition to the traditional challenges of securing funding and managing budgets, producers must also navigate an unpredictable market and shifting consumer tastes.
Funding Gaps:
The film industry is known for its high rate of funding failures. It is not uncommon for productions to struggle to meet their financing goals or to face unexpected funding shortfalls that can threaten the entire project. The reasons for these gaps can range from a lack of investor interest to a change in tax incentive programs.
Budget Overruns:
A budget overrun occurs when actual production costs exceed the budgeted amounts. Budget overrun is a risk in any industry, but in the film industry it can be particularly challenging given the large number of moving parts involved in a typical film production. A minor miscalculation or change in plans can have costly implications.
Market Volatility:
Perhaps one of the biggest challenges facing producers today is the rapidly changing film industry landscape. From the rise of streaming services to the increasing importance of international box office, the industry is becoming increasingly difficult to predict. As a result, producers must be prepared to adapt to changing market conditions and audience preferences.
Mitigating the Risks:
Despite these challenges, there are several steps that producers can take to mitigate their risks. These include developing a comprehensive financing plan, securing contingency financing, and conducting thorough market research to ensure that they are making informed decisions.

Case Studies of Film Financing

Paying close attention to legal details and structuring is critical in getting financing in place, and not just from the perspective of the attorney whose name goes in the documents. Often, film finance professionals will tell you that the paperwork we do is often much less important to them than the money or even the relationships we negotiate. However, if you reverse those priorities in terms of importance, legal and procedural issues become highly important. Many of the problems we see today occur because of a fundamental lack of legal understanding on the part of many others in the industry, which creates break downs down the road. Understanding that, we turn to a couple of deals I have worked on over the years – not with a view to publicizing them or bragging, but in the hopes that we can learn from both small and large deals.
Although I’ve worked on a variety of studio movies, rising independent films, and big budget low budget films ("indie-studios"), probably the most fascinating film financing deal we worked on in the past few years was the financing of We Are the Best! from director Lukas Moodysson (Together, Lilja-4-Ever). In that deal, we represented U.S. distributor The Samuel Goldwyn Company in bringing the film to the U.S., which was financed by a $1 million Canadian tax credit. In order to qualify for this tax credit, the advisor and the producer needed to submit a letter certifying that a portion of the production took place in Canada and that the production incurred qualifying expenditures. As the law is quite a bit stricter than the one in the United States, especially as it relates to appearance , Mr. Moodysson had to be sure that his film conformed to local laws if he wanted to benefit financially. I think it was the first time Moodysson had to address issues such as this in the financing of his projects, but it was an educational process that likely helped him obtain similar financing in future projects.
Another interesting independent financing deal was for Joseus, an independent film produced out of Los Angeles. Although the film never made it to theaters, the independent financing was structured in such a way that the investor could "cash out" of the project if things went wrong – essentially acting as a deferred finance agreement with the producer. What made the deal so interesting was in its practical application to a "protection" for the investor. For example, if the investor wanted out before financing was completed George, Inc. would buy out the investor’s share of the company at 80% of the value of his stake. Of course, in this case the investor did not want to exercise this option, but any investor looking to protect his or her investment could see the wisdom in this arrangement, and I expect we will see more such deals in the future.
This discussion of financial deals is by no means complete, nor should we consider these examples to be a standard. But what I hope to accomplish here is to associate some practical examples with the theoretical items I have discussed in my previous sections to help you understand the nuances of the process. The entertainment industry is unlike any other – people involved in it often speak a secret language, and before you start wading into financial arrangements, talk to a qualified attorney who has experience in this area.