Been working for several years to raise the budget for an indie feature I plan to direct. At one point had full budget raised through private investors but it fell through. Now we’ve got about 20% committed but no other investors lined up. Two questions: 1) How can we find financing for the remainder and 2) Can we lock in the Section 181 deduction even if the investors only come up with partial financing?

Answer by Brandon Blake, Entertainment Lawyer:

One of the big changes to effect film and television finance since 2008 is that now days it is rare for any one form of financing to make up 100% of the budget of the project. From studio features and network television to SAG Ultra Low Budget projects, producers need to turn to hybrid financing to get the project made.  Most investors and financiers are looking to spread risk and minimize losses, while still being exposed to the potential high returns of a blockbuster feature film or television series.

Private equity financing for feature films is picking up, and there is quite a bit of investor interest being stirred up by the renewal of the American Jobs Creation Act, (AJCA) Section 181 tax deduction. The magic figure for investor or private equity financing is about 20% of the total budget. If a producer can raise 20% of the budget of the film, our firm can generally help find industry financing to fill in the “gap” left over. While 80% seems like a large gap to fill, between State and International tax incentives, debt financing and collateralization, co-production partners, and foreign pre-sales that 80% can often be covered.

Looking in more detail at the hybrid funding options, the first step of course will be State and International tax incentives. Certain countries around the world are still offering tax incentives and credits as high as 50% of the budget of the film, if produced entirely with local talent, while states like Louisiana have added new tax incentives that can add up to 40% of the budget of a film shot with all-Louisiana crews. Even California introduced a 25% tax credit for relocating a television series to California. Moreover, there are more opportunities than ever today to monetize state tax credits and incentives, so that those funds can be spent as part of the budget, or even for pre-production costs.

Debt financing has become increasingly important to financing feature films and television series, and collateralization has replaced the old negative pick up deal. What does that mean? By shopping a feature film or television series to studios and networks, producers can convert the interest of distributors and networks in the project into cash for the production budget. With more banks then ever willing to lend against films and television series collateralized with Network deals and distribution guarantees, it is possible to raise a substantial portion of the budget through debt financing. Additionally, collateralization need not be exclusively provided by the distributor of the projects, and many creative deals are possible through other forms of collateralization.

Additionally, foreign co-production partners can provide either financing or in-kind service to projects, eliminating much of the below-the-line cost of producing a film. Large studio productions have used foreign co-production partners for years, and the trend is only increasing as many Asian markets become primary markets for film and television projects.

Finally, foreign pre-sales can still be a valuable source of finishing funds, with perhaps 10% to 20% of the budget available through foreign pre-sales. While lenders now typically discount the pre-sales agreements, there are still many funding opportunities available through pre-sales arranged at major film and television markets.

Regarding the second question about the American Jobs Creation Act Section 181 tax deduction, there is no requirement that equity financing make up 100% of the budget of the film. Provided that at least one day of principal photography starts in 2016, Section 181 tax deductions can be locked in for subsequent years of production. However, the project must qualify for Section 181 and the offering must be organized in such a way that the investors can take the deduction against their taxes.

As with any entertainment matter, please do not make a decision about complex matters without consulting an experienced entertainment lawyer first. I have been representing feature film projects, television series, and recording artists for more than 16 years. Please feel free to contact my office about a quote.

- By Brandon Blake, Entertainment Lawyer