Behind the Scenes w/ David Brown - Film Waterfalls Explained - Part 2
Decoding Film Financing: A Breakdown of Waterfalls and Debt Strategies
Ever wondered how movies actually get made? It's not just about having a great script and talented actors. Film financing is a complex world, and understanding it is key to getting your project off the ground. Let's break down the process, focusing on film waterfalls and debt strategies.
Understanding Film Revenue and the Waterfall System
So, your film grosses $10 million worldwide—amazing, right? But before you start planning your acceptance speech, let's talk about where that money actually goes. Often, the final profit for investors and filmmakers can be surprisingly low.
The Harsh Reality of Gross vs. Net
Think of it this way: a film's gross revenue is like the sticker price on a new car. It looks great, but there are a lot of fees and expenses that come off the top. For example, let's say that $10 million gross turns into much less for the people who put in the work.
Distribution Fees: The First Cut
First in line is the distributor. They typically take a percentage of the gross revenue as a distribution fee. This fee covers their work in getting the film seen. A standard distribution fee might be 30%, which is taken "off the top." So, on that $10 million gross, $3 million immediately goes to the distributor.
Recoupment and Premiums: Digging Deeper
Next, the distributor gets to recoup their initial investment. This is often referred to as the Minimum Guarantee (MG), plus a premium. On top of that, they deduct any money spent on marketing, making copies, distributing the film, and other release-related expenses. And guess what? Each of those deductions often comes with its own premium, making it even harder for investors to see a return.
Revenue Sharing: Splitting the Remaining Pie
Once all those expenses are deducted, what's left is split between the distributor and the investors or filmmakers. This split is pre-negotiated. It could be 60/40, 50/50, or another arrangement. For example, if you're left with $4 million after all the deductions, a 50/50 split leaves $2 million for the investors and filmmakers. Negotiation is key here!
The Waterfall: Where the Money Flows (and Dries Up)
That remaining revenue then goes through a "waterfall." It's a prioritized list of payments. It dictates who gets paid and in what order. Here's an example:
1% to the camera operator.
Up to 7% for residual reserves.
20% to the sales agency (off the initial gross).
Unfortunately, equity investors are often last in line, receiving little to nothing.
The Sales Agency Fee: A Significant Deduction
Sales agencies also charge a fee. This could be around 20% of the film's gross revenue. This fee is deducted in addition to any upfront MG they secured. Negotiating these terms is vital, but sales agencies often have the upper hand. For more information on how sales agencies get paid, do some more research.
Equity vs. Debt Financing: Is There a Better Approach?
Given the complexities of the film waterfall, you may be wondering if there’s a smarter way to finance your film.
The Peril of Equity Financing
Raising money from friends and family through equity can be risky. Why? Because they're the least likely to see a return. They're at the bottom of the waterfall. Using equity from loved ones isn't often advised.
Debt Financing: An Alternative Strategy
Debt financing can be a more attractive option. The debt is tied to the film's LLC, not to you as the producer.
Setting Up the Debt Structure
Here’s how to set up the debt structure:
Create an LLC: Form a limited liability company (LLC) specifically for the film. For example, "Generic Movie LLC."
Budgeting: Create a detailed film budget. Let's say it's $2 million.
Writer Agreement: Make sure the writer agreement is with the film's LLC. This establishes the chain of title.
Leveraging Tax Credits for Initial Funding
Consider shooting in a state with film tax credits. Georgia, for example, offers 30%. A $2 million film in Georgia could qualify for a $600,000 tax credit. Keep in mind that tax credit brokers will typically buy it for around 80-85 cents on the dollar. That $600,000 tax credit translates to about $500,000 cash.
Securing Distribution Deals (MGs)
Next, secure a distribution deal with a studio or distributor for North America. This deal includes a Minimum Guarantee (MG). A distributor might offer a $1 million MG for the film. That MG serves as collateral for securing debt financing.
International Pre-Sales: Tapping Global Markets
You can also sell the film to international distributors in different territories. There are over 44 markets to consider. Attend film markets like Cannes, Berlin, and AFM to secure pre-sale deals. For example, you might get $200,000 from a German distributor and $200,000 from a Russian distributor. Compile all these contracts to meet your funding threshold.
Collateralizing Contracts for a Loan
Now, approach film financing companies. Some examples are filmmoney.com, Bonded, Shoreborn, or SS Film Capital. Present your US distribution contract, international pre-sales agreements, and tax credit as collateral. The financing company provides a loan to the film's LLC based on the value of that collateral.
Repaying the Loan
The film financing company is repaid from the film's revenue. This can happen in a couple of ways:
Through a Collection Account Management Agreement (CAMA).
Directly from the distributor via a direction to pay.
Debt Lenders Prioritization in the Waterfall
Debt lenders take a senior position in the waterfall. They dictate the payment schedule. They also make sure their principal is recouped before other parties. Typically, debt lenders sit behind only the 1% CAM fee and the 7% residual reserve.
Residual Deposits vs. Residual Reserves
SAG-AFTRA often requires a residual deposit upfront, especially if you don't have a CAMA in place. However, with a CAMA, you can often negotiate this away. A residual deposit isn't in the waterfall because it's on file. But a residual reserve is.
Additional Considerations and Next Steps
There's even more to learn about film financing.
Completion Bonds
Another helpful resource is to learn about completion bonds and how they work.
International Marketplace
It can also be useful to explore the international marketplace in more detail.
Conclusion
Navigating the world of film finance can feel overwhelming, but understanding the film waterfall and exploring debt financing options can empower you to make informed decisions. Armed with this knowledge, you can protect your investors, maintain creative control, and bring your cinematic vision to life. Remember, securing the right financing structure is not just about the money, it's about building a sustainable and successful filmmaking career.