The blood that flows through the veins of financing films is the loan, which is by far the primary source of financing. Some films are completely funded by Ipass loans, while one film doesn’t have a loan within sight. So, anyone who is interested in the business of the film to understand the basics of this crucial source of financing for films.
Before we go any further, we need to establish some borrowing terms. In the definitions, any capitalized terms are defined separately.
Gap Financing: An individual film loan in a sum that is greater than the pre-sales currently in place. “Gap” is the term used to describe a loan that exceeds pre- “gap” is the amount of the film’s budget is higher than pre-sales in place.
Line of Credit: It is a revolving credit (i.e. the borrower is able to pay back and borrow in the same amount at any date). The loan is never recourse and generally secured by all of the assets of the borrower.
Nonrecourse: A non-recourse loan is one that does not need a repayment. The lender is not allowed to pursue all of the borrower’s assets in the case of failure. The lender is only allowed to take action against the collateral on the loan. Nonrecourse loans, as a result, are always guaranteed by collateral. Because the borrower is a Single-Purpose Entity with only one film, most film loans appear to be Recourse but are actually Nonrecourse. The lender may be allowed to pursue all of the borrower’s assets because the borrower’s only asset is one film, resulting in a non-recourse debt secured by one film.
Perfected: To give the world constructive notice of a security interest, usually by registering it with the proper governing body.
Recourse: A loan that allows the lender to grab the borrower on its lapels and take over every asset that the borrower owns or has to pay the loan.
Secured: It refers to loans when the lender acquires a security interest in the borrower’s property as collateral. The lender has the option of foreclosing on the property in whole or in part if the borrower defaults on the loan. More crucially, if the security interest is fully perfected, any future assignments or security interests cannot trump the lender’s claim to the property. A security interest permits the lender to keep its claim on the asset even if the borrower defaults.
Unsecured: The term “unsecured loan” refers to a loan that is not secured. Otherwise, the lender would have no recourse if the borrower defaulted on an unsecured loan.
Single-Purpose Enterprise: A corporation formed only for the purpose of producing a single film. In order to keep affiliates out of bankruptcy, lenders frequently need a Single-Purpose business to be the borrower.
Borrowers and Lenders
From small-budget, one-off films to huge studios supporting a whole calendar of films, lenders range from single-purpose firms to large studios. Individual private lenders (a rare occurrence) to commercial banks that grant big film companies, including studios, lines of credit ranging from hundreds of millions of dollars.
The procedure of acquiring loans for large film firms is not complicated; they may either arrange vast lines of credit or use negative pickups. In this second alternative, the bank loan is transformed into a separate legal business with the only aim of producing the film, and the film production firm promises to pay for the picture when it is delivered while repaying the bank.
Amount due at time of delivery following that, a loan secured by the film and pre-sales is required. After that, there will be gap funding to cover the remaining costs of making the film. Gap financing is the riskiest part of the loan. It’s a highly specialized market since it’s a high-risk endeavor that needs a thorough grasp of sales agents, distributors, and manufacturers. There are only a few lenders that can issue a large gap loan at any one moment, and the roadways are littered with dead bodies.
Costs, Interest, and Fees
Interest can be found in many kinds. There is no longer a time of fixed interest that was an agreed rate for the duration of a loan. Nearly always it is defined by a percentage over a variable floating rate, like London Inter-Bank Offering Rate or prime. Furthermore, in the case of loan-to-pay, the financier typically gets a certain type of contingent portion of the revenue of the movie, like the proportion of the gross or net revenue.
Along with interest and fees, lenders usually pay an upfront fee that is usually expressed in terms of an amount (“points”) on the value of the loan. For instance, a two-point commitment fee is two percent of the sum of the loan.
They also seek to cover the legal fees used in obtaining the loan. If the legal costs are established at a reasonable level, this might be rather unjust. In the absence of this, the lender’s attorneys would want to blast into the sky on every issue, and the borrower will be forced to pay for the arduous procedure. In addition to the pleasure, under the terms of the majority of commitment letters, if the lender’s attorneys succeed in dissolving the loan, the borrower is often still accountable for legal expenses. In one situation I heard about, a lender was left with a bill for $400,000 to cover the lender’s legal fees on a loan that was not able to be paid back.
Letters of Intent
The term “commitmentletter” is inaccurate. Because all commitment papers have several qualifiers, exclusions, exceptions, and loopholes that allow the bank to escape, the bank is not obligated by anything. A letter’s only legal function is to demand the borrower to reimburse the bank’s legalfees even if the transaction is not completed.
If you’re borrowing, delay the letter of commitmentfor as long as you can, but don’t even ask for one.
Covenants, Positive and Negative
Every loan has a slew of covenants, both positive and negative. In most cases, these covenants are vast and intricate, and the borrower’s default is clear from the start, allowing the lender to accelerate the loan and foreclose on its security interests. In practice, lenders are more likely to disregard these covenants until the situation worsens and other problems surface, at which point all of these covenants, as well as those pertaining to kitchen appliances, may be shoved in the borrower’s face.
Argh! The need for legal advice on loan transactions makes me angry. It’s a standard process for banks to ask for an opinion on legality from the counsel for the borrower on a variety of issues. The two most offensive are opinions that say the following: (a) it is true that loan document is valid according to its terms as well as (b) it is the interest has been properly crafted. In the face of a lot of tooth-gnashing from lenders and counsel, I am often reluctant to provide such opinions for the benefit of the lender since (a) I didn’t write the documents for the loan and they’re extensive that certain portions could actually be ineffective and (b) I’m not the person who has perfected the security interest The bank’s lawyer is. I have instructed banks to seek the opinions of their lawyers, who ought to be the ones who are able to give these opinions. It may appear as a minor issue however, the lawyer who gives the opinions is actually guarantying the loan.
Payments are made in this order
In most cases, banks are not allowed to receive 100% of their earnings when a loan is repaid. To begin, many foreign nations levy withholding taxes, which must be withheld and paid to local authorities by overseas distributors. If the tax withholding rate is 10%, for example, the foreign distributor will remove 10% from any payment, lowering the total amount available to pay the bank. Many filmmakers use intermediaries based in countries with advantageous treaty networks to decrease or eliminate withholding taxes.
A percentage of the proceeds will be used to cover the costs of the sales agent and distribution. Banks frequently try to force sales agents to delay these payments until after the loan is repaid, although sales agents with clout can get around this, at least in terms of distribution expenses and a percentage of their income.
Additionally, it’s often required to reserve some of the loan payments for participants (contingent payment to talents) specifically gross participations to talent, and also to pay the residuals to guilds. One thing that isn’t allowed to be taken out prior to the loan being paid is the regular tax on income which could be detrimental to users. Even if all the money is used to pay to the lender, the borrower could still be taxable. This means that the borrower could have an income tax bill, but not enough cash to pay for it. The borrower will be in trouble in the event that they cannot convince the lender to accept an arrangement to pay tax on income.