SAFE FILM FINANCING STRUCTURE – THE 20/30/50 RULE
For the average Joe, solving a complex Calculus equation feels like an impossibly hard challenge. This is especially true after you exit your four years of film school and go out into the world of debt and disappointment. Trying to figure out how to properly finance your film can feel just as hard, but there are some tools that can change your efforts from “hard” to “manageable.” So, fear not, for those of you primarily concerned with making sure that your first forays into filmmaking are financially successful, our 20/30/50 rule is here to help.
Please know that the ideas discussed herein are primarily realistic only for the most commercial genres such as Action, Thriller, and Horror.
The “20” stands for 20%. This is the percentage of your film budget that you’ll need to be able to count on coming from tax incentives. While we certainly understand that your screenplay may suggest a specific city or location, and in some cases demand it, it’s your duty as the producer or filmmaker to fit your story to locations that bring more value than just a pretty setting. Luckily for us, nowadays there are so many tax incentivized locations to choose from that unless you’re dealing with a rare-case scenario, there’s little excuse for staging your production in un-incentivized locations.
There are many different flavors of tax incentives that are available in both the United States and abroad, each with its own unique considerations, however, regardless of what type of incentive program you adopt, selecting your target destination should be the very first step you take on your road to funding. The location you ultimately select will not only have tax-related implications but will also impact other expenses that must be addressed in a final, defendable budget.
These film tax incentives can be financed upfront, prior to production, or you may elect to keep them available as an extra point of security for investors and lenders.
The “30” stands for 30%. This is the percentage of your budget that should be recoupable on a North American presale or minimum guarantee (MG). For the sake of this article, we will assume that you already have a somewhat experienced Director attached, as well as an experienced unit production manager (UPM). With the right key crew onboard your production, bankable distributors such as Lionsgate and MGM will have faith that the final delivered product will be up to par in terms of production value. So, quality concerns aside and provided the distributor has approved of the screenplay, it’s time to discuss names of talent that will justify your film at its current purposed budget.
During the course of discussing approved names, it may become apparent that your budget is too large or too small in scope. So, during this phase of the “30,” it’s your job as the producer to make adjustments to the budget that allow you to satisfy the distributor’s requisites without placing undue financial strain on the production.
The “50” stands for 50%. This is the percentage of your budget that should be covered by international sales. There are some sales companies that will finance this portion of your budget upfront in exchange for all foreign sales rights; IFT, and Red Granite are good examples. If you can manage to gain the interest of one of these types of companies, open discussions between your domestic distributor and your foreign sales company should be initiated so is to identify a mutually agreed-upon approved talent list. With an approved list you will now be able to make offers to talent, knowing that any such attachment will trigger both your 30% and your 50% portions. Knowing that you can cashflow your 20% through financial institutions and lending companies, you will have now completed your budget and are ready to go into production.
On the other hand, if you’re unable to secure financing upfront from a foreign sales company, getting a letter of intent (LOI) from a reputable sales company is your next best option. Do not make the mistake of signing the foreign sales rights of your picture over to any sales company without quid pro quo. In other words, having that LOI may help you in securing a private equity investor to fund the remainder of your production. That investor may require you to sign your rights over to the sales company, however that investor might also only be willing to invest provided you sign the rights over to a different sales company of his/her preference. Regardless you should only sign rights over to other individuals or entities when you’re getting something in return; an LOI is more than adequate to provide proof to potential investors of your close proximity to a reputable sales agency.