In the classic film Singing in the Rain, a Hollywood studio responds to the invention of “talkies” by scrapping an expensive costume film, retraining its stars to “speak” and adding a music score and sound equipment. But no one asks, “How much is this going to cost?” or “How do we pay for this?”
After all, that’s the world of movies — not real life. Still, even in real life, the major studios — Disney, MGM and Dreamworks, to name a few — have deep pockets and the ability to turn out a stream of high budget projects like Star Wars and The Hunger Games despite the inevitable clunker — did anyone actually pay to see Jem and the Holograms?
Though “Hollywood” is synonymous with movie magic, many films are not produced by the big name studios. For decades film makers have struggled to create films outside of the studio system. Probably the most famous example is the great actor/producer Orson Wells. Unhappy with the way RKO changed the ending of The Magnificent Ambersons, Wells tried to self-finance productions like Don Quixote and The Chimes Ring at Midnight. Don Quixote dragged on for 10 years because every time Wells ran out of money, he took an acting job elsewhere to keep the film afloat. Along with about 20 other films, it was unfinished when Wells died.
In 1973, a more business-like way to finance films was developed. Lew Horwitz, who was already one of a small circle of bankers lending to the music industry, broke new ground by financing Sissy Spacek’s first feature film, Ginger in the Morning, to the tune of $250,000, upon the request of an admirer of the actress.
The admirer put up a letter of credit as collateral. According to Horwitz’s memoirs, Memories are for Tomorrow, the film was too wholesome for the major studios, who were only interested in “R” rated films at the time. The elderly backer died before the film was completed, and none of the studios were interested in distributing it. (It is available for viewing on Amazon.) But Horwitz’s loan was covered by the letter of credit.
Horwitz went on to become a producer, director and occasional actor, as well as the premier independent film financier in the U.S. until his retirement in 2004. Adrian Ward, a senior vice president at Pacific Mercantile Bank and division manager of the Entertainment Industry Division, started working with Horwitz 25 years ago. During his years in the industry, Ward has helped finance 700 independent productions, including some that went on to fame and fortune like My Big Fat Greek Wedding. Ward joined Pacific Mercantile in 2013. Most recently, Pacific Mercantile financed the 2016 courtroom drama, Misconduct, starring Al Pacino and Anthony Hopkins, and television productions, such as the Hallmark Channel series When Calls the Heart.
So what is the difference between the types of films that Ward helps to finance and the blockbusters?
“Those are usually big budgets. We’re talking about budgets that are under $30 million the majority of the time. The independent producer wants creative control. They want to control the process of the filming and the future assets of the film. So they take this hard road,” says Ward.
How do these deals get done if the star doesn’t have an admirer with a letter of credit?
“It’s actually pretty straightforward,” Ward says. “It’s pretty much like a construction loan. A producer comes to us with different pieces of collateral. Some of these pieces are pre-sales, certain territorial rights. They will hire a sales company to go out to different territories and film festivals and sell those rights.”
If you picture a movie financier reading scripts all day, you would be wrong.
“We’re not asked to read a script. We rely on the sales agents,” Ward says. These sales agents sell film distribution rights before shooting begins.
Selling Distribution Rights
Film rights enable distributors in countries such as Italy and Japan to show the films produced in the U.S., so the sales agents do have to know what the movie is about and who is going to star so they can sell the rights before the picture is made. It is essential for the success of the film that the sales people are persuasive and know the markets. These film rights are the first piece of collateral bankers like Ward look for before financing a film.
The second piece, Ward says, is a type of gap funding, which usually amounts to 20% of the film’s budget. Gap funding is a short-term financing piece based on future intended sales of yet unsold rights. So maybe the sales people know audiences will love this movie in Turkey, but haven’t sold the rights yet. The producers can still get a short-term loan.
Finally, the bank will lend against tax incentives offered by many cities or states in the U.S. and by foreign countries to entice producers to film there. To obtain the tax incentive, producers are required to film a certain percentage of the movie in that particular location. Toronto, for example, is often a stand-in for Philadelphia or Chicago because it has the big-city look certain films require, and Canada offers lucrative terms to producers.
The heavy lifting, says Ward, is done upfront in film finance. In fact, by the time an independent producer comes seeking a loan, between 50% and 80% of the financing is already in place and the budget is set. Producers still need to raise the bulk of the funds the old-fashioned way from investors, who may get a thrill backing a movie, or from hedge funds. Today, independent filmmakers can turn to crowdfunding sites like Kickstarter, though Ward admits that is a risky way to raise sufficient capital. The outcome is uncertain, and many crowdfunding sites have limits on funds raised that are much less than a producer requires.
The bank is “the last money in and the first money out,” he explains. So even if the picture is a flop and the investors lose their shirts, the banks get their money back.
Protecting With a Completion Bond
Ward acknowledges that there are many things that can go wrong when making a movie, and that’s why the bank and the producer often take out a completion bond, which insures that once the money is in play, the movie, based on the agreed script and cast, will be delivered to the distributor. Ward reports that over the course of his career, only three or four films he financed have gone south.
The classic example of a deal gone bad — not one of Ward’s films — was The Thief and the Cobbler, an animated feature with some famous names — Sean Connery, Tommy Lee Jones and Kevin Spacey — involved at different points in its record 31-year production history. The film began as an independent and was later acquired by Warner Brothers Studio, which took out a completion bond. When Warner Brothers pulled out, the bond company was left with the film. It hired a director to edit the film, and distributed it in Australia as The Princess and the Cobbler.
The most exciting change in the industry, according to Ward, has been the advent of former distribution companies like Netflix, Amazon and Hulu creating original movies and TV productions for streaming.
“They have given people the ability to binge watch,” Ward says. “People can watch on their own terms. A lot of energy in financing is going into television, and we can finance independent productions as well as independent fill.” The latter is the final piece of finance needed to complete a project.
Netflix, Amazon Changing the Industry
“Financing these is essentially the same model,” says Ward, although the length of the loans will be 18 to 24 months for a television series, as opposed to 12 to 15 months for a film. Also there are larger amounts involved, since a television series can cost from $2 million to $4 million an episode, depending on the talent involved. The cost depends on the commitment for the number of episodes.
“Both Netflix and Amazon have the capabilities to selffinance,” Ward says, although Pacific Mercantile has backed certain Netflix productions.
Although many of Ward’s clients are established filmmakers who prefer to be independent, how does a young producer with a story and a camera know how to budget and get financing? Do they offer a class in financing at film school?
No, says Ward. But he tries to spread the word by speaking at film festivals and other events frequented by independent film makers. And Lew Horwitz himself offers popular seminars on film finance.
Sometimes you only need to go the hard way once. My Big Fat Greek Wedding was an independent production financed by Tom Hanks, his wife Rita Wilson and the bank where Ward worked at the time. Wilson was a fan of writer/actress Nia Vardolas’ stand-up comedy act, and the couple took a chance on the movie. The 2002 film grossed $368 million, the highest gross of any independent film ever released. Last month, Vardolos returned with My Big Fat Greek Wedding 2. This time around, she didn’t need to arrange her own financing. Universal Films released the film with a big budget and studio distribution. So even in Hollywood, movie-like dreams can come true. But not without the financing.