In March 2023, the North Carolina Film Office reported that 2022 spending from film production had topped over $258 million, and 2023 was off to a strong start. Governor Roy Cooper lauded the industry for creating over 16,000 job opportunities in the state, including over 70 films, television, and streaming projects in 2022 alone.

With ever-increasing film production in North Carolina, it is timely to review the basics with respect to advising clients considering an investment in film. This blog post shares top legal and non-legal considerations when advising a first-time (or relatively unsophisticated) film investor. There is a long list of potential bad outcomes for a film investor — from the producer running out of money, the film being unable to obtain distribution, a lender taking over the project due to non-payment of a loan, or even the failure to distribute profits. Set forth below are key questions to ask about the proposed project to assist you in understanding the project and advising your client regarding strategies to minimize risk.

15 Questions to Consider

1. Who will be the accountant for the production?

An experienced motion picture accounting team is crucial for the production’s success. Moreover, the production in most cases needs an accountant who is licensed in the state of production. The accountant needs to be conversant in the state specific procedures to apply for the incentive, all qualification requirements, as well as obtaining and maintaining other documentation in order to be in compliance with the projected tax incentives offered by the state, and/or locally. The types of expenses that are qualifying expenses in order to benefit from an incentive will vary greatly from state to state — for example, North Carolina has a very specific definition of the types of “goods and services” that are subject to the incentive, as well as a list of items which are excluded from the incentive — i.e., in some states like North Carolina, there may be an exclusion of certain otherwise qualifying expenses for “highly compensated individuals.”

In short, in order to insure the project will benefit financially from the incentive in the manner in which has been projected, the accounting firm must be familiar with the ins and outs of the incentive program. This is particularly important wherein debt financing has been or is being obtained against the projected tax incentive. In terms of collecting revenue, the client is looking at a different set of financial professionals. Specifically, the client should consider requiring a collection agency to manage collecting worldwide revenue, recoupment of lender and investor financing, and profit disbursement. Similarly, attorneys should insist on a Collection Account Management Agreement (CAMA) managed by one of the industry-wide recognized collection account managers, such as Freeway Entertainment or Fintage House, as it is sometimes difficult to protect an investor without a collection agent.

2. What is the budget for the production?

Look at the line items in the budget. There may be valid reasons for deviation from these ranges in a specific project, but clients should review the budget to determine if percentages are roughly in line with some of the following rough rules of thumb. Note that when calculating these fees, the definition of the “budget” may customarily have certain negotiated exclusions (for example for purposes of obtaining a completion bond) such as the contingency, completion bond fees, financing costs and interest expenses, overhead, if any, and sometimes “above the line costs” such as actor, writer, director, and producer fees. It is worthy of note to flag that clearance and music licensing is often an underbudgeted line item. Rates should be negotiated in advance of completing the budget to allow for creative decisions to be made if the license to a specific song is in excess of that which is expected. Popular and well-known songs can command licenses in the six-to-seven figure range.

Examples of Types of Fees AcquisitionRights/Writers (aggregated)	Percent of Budget 1 – 5%
Producers Fees	5 – 10%
Directors Fees	2 – 5%
Cast	10 – 35%
Legal and Finance	1 – 5%
Completion Bond Fees Guild Bonds	1.5 – 2.5% (if and as agreed)
Post-Production Contingency	Varies based on music and visual effects costs. 5 – 10% (as agreed with bond company)

3. Who are the key production personnel in the roles of producer, director, and key department heads (Director of Photography, Production Designer, Editor, Costume Designer, etc.), and what is their respective past production experience?

How have their past projects performed? Do the producer, director, and key department heads seemingly have a good working relationship?

4. Is there a principal lender lending against collateral, and if so, what is the collateral?

What are the deal terms of the loan? What security interests and recoupment provisions will apply?

Typically, collateral for lenders includes the copyright and distribution rights of the film, pre-sale contracts for the territories around the world, plus subsidies, tax credits, and incentives available for the production. For pre-sales in various territories, banks will cashflow a higher percentage of the contractual minimum guarantee for Tier 1 rather than Tier 2 Territories. Tier 1 territories typically include the following countries (which are subject to change depending on the country’s economy): Germany, Italy, Spain, the United Kingdom, France, Japan, Australia/ New Zealand, Canada, Korea, Scandinavia, and Benelux. Tier 2 territories are generally the rest of the world.

In their simplest form, negative pick-up arrangements can be one of the most straightforward discountable agreements- in essence, this is a deal between the distributor (or a studio/network/streaming service) and the producer. Upon delivery of the film, the distributor agrees to pay the full amount of the contractual distribution minimum guarantee, which hopefully will cover the loaned funds for the production costs, lender fees and interest, and legal fees. .

5. Are there other investors involved in the production?

If so, how much are the others investing relative to your client, and the overall budget? Will there be different recoupment priorities for the various investors? An example is a “mezzanine investment” that may have a higher recoupment priority than other investors.

6. Where will the production be shot and post-produced?

What tax incentives, subsidies, and incentives, rebates are available for the client to use? Are non-recoupable incentives (“free money”) available to fund production? Is IRS Section 181 available for investors in the production, which allows for the rapid write-off of the investment against applicable passive income?

7. Is there an international sales agent involved with the project?

If so, what is their experience level? To research sales agents in person, consider attending the American Film Market (“AFM”) held in November in Santa Monica, California, the European Film Market (“EFM”) held in February in Berlin, Germany, the Cannes Film Festival and Market held in May in Cannes, France or the Toronto International Film Festival (“TIFF”) held in September in Toronto, Canada. If you or your client are not researching the sales agents in person, look at their libraries, check them out on IMDB pro, or subscribe to Cinando, which lists most of the sales agents and their personnel and product. Buyers and bankers know sales agents well. So, look for sales agents who reliably deliver on project sales estimates and pre-sales, can ensure that the applicable minimum guarantees for sales contracts are actually paid so as to ensure that the final edited picture will be properly delivered to the applicable territorial distributors and ensure that the production loan will be timely paid back and stop the interest charges against the production.

8. Who will be the film’s domestic agent/representation?

Have they worked on projects with comparable budgets? Will the agent be assisting with the United States and Canadian sales or licenses of the production? What is the marketing and distribution plan the sales agent is mapping out? Have they projected certain buyers and how will they be approached? Will there be a market screening or festival screening, or will the film be sent around directly to each studio, streamer, independent distributor, or pay tv network?

9. Is it desirable or possible to be a lender rather than an investor on the deal?

The rule of thumb for lenders is to recoup their loans in first position with a premium at prime plus 2-3 points, and then for equity investors to recoup their investment plus a premium of 10-20% in the last position after the loan, residuals and deferments are paid. Then, the equity investor will receive a back-end profit participation, typically splitting 50% of the profits pro rata and pari passu with all other equity investors. The balance of 50% of the profits then goes to the producer and the other creative participants. Of course, this is all after sales/distribution fees and expenses, and any applicable collection costs.

10. Can any of the investment be cash-flowed rather than escrowed?

Clearly this is a push-and-tug situation as the investor always wants to hold on to their funds as long as possible, and the producer needs certainty that all of the funds are actually committed and available.

11. Who will be responsible if the project exceeds the budget? Is there a completion bond?

If the budget can accommodate a completion bond, counsel must insist on it to protect the investors. Completion bonds are like an insurance policy that guarantees the completion and delivery of the film — which provides comfort to investors and lenders that all of the contractual pre-sale obligations by the various territorial distributors will be honored since the film will be delivered, and that, accordingly, the proceeds from the project should be available to repay lenders and investors, or if somehow the film is not completed and delivered, then the completion guarantor will either be responsible to complete and deliver the film or ultimately have to repay the investors their investment and the lenders their loans.

12. What remedies will be available to the investor, and in what jurisdiction?

Consider the pros and cons of an Independent Film and Television Alliance (IFTA) or another arbitration tribunal such as Judicial Arbitration and Mediation Services (JAMS) or the American Arbitration Association (AAA). Arbitration may offer advantages over courts in that the resolution of the dispute can typically be achieved much quicker than in traditional court litigation.

13. Is Errors and Omissions Insurance (E&O) insurance available to the investors?

Savvy counsel will insist that not only E&O Insurance but General Liability Insurance also cover the investors as “additional insureds” and insist on a certificate of insurance be provided to the investors.

14. What credits will be given for the investment? How important is credit to your client?

Investors usually like to see their names somewhere on the screen (preferably in the main titles rather than the credit crawl at the end of the film). Depending on the level of investment, some investors can also insist on credit in the paid ads, posters, billboards, one sheet, packaging, and “billing block” for the film. Further, investors may insist on including a “favored nations” provision such that if the producer or certain other personnel on the film get credit in some of the ancillary media, so will the investor. Recently, there has been a proliferation of “executive producer credits” for investors (we recently negotiated a series of deals for one film where there were at least 30 executive producer or producorial credits on a film), and the current tendency for production entities and studios is to try and limit the number of credits. As part of the negotiation and documentation of your client’s investment, you should determine from your client how far your client is willing to push for credits, as credit negotiations can become complex and sometimes protracted.

15. Has the producer considered the effect on the budget of the applicable guilds, such as the Screen Actors Guild, Writer’s Guild, Director’s Guild, IATSE, and Teamsters?

Moreover, prudent counsel must consider whether or not the guilds should even be applicable to the production. Certain states are clearly union states and others may not have a sophisticated entertainment labor force and certain unions may not be a necessity. While the most experienced crew are typically in a union, one has to factor in the extra costs involved as a result of “work rules,” overtime, portal-to-portal pay, pension, health and welfare, and residuals outlined in the Guild Collective Bargaining Agreement. If a union is involved, what tier, compensation level, or type of collective bargaining agreement may be applicable to the production, and what deposits or bonds, if applicable, will be required by the guilds?

Summary

With due diligence and information in hand, you can begin to strategize on how best to minimize your client’s risk and help to secure the return of your client’s investment. In reviewing the above factors, you may be able to identify a more secure recoupment position for your client to contribute the same level of funds as originally contemplated and have your client’s investment placed in the safest possible position to recoup that investment and hopefully achieve a profit.

About the Authors

Mary Craven Adams is a partner in the Winston-Salem office of Womble Bond Dickinson (U.S.) LLP, and a filmmaker who is expected to graduate from UNCSA with an M.F.A. in Filmmaking in May 2024. Mary has been practicing law for over 25 years.

Harris Tulchin is an entertainment lawyer, licensed in California, and a producer, who has been practicing for over 45 years and has sold, licensed and/or helped finance and produce hundreds of films. He is a co-author of all three editions of “The Independent Film Producer’s Survival Guide.”

March 11, 2024/by SportsandEntertainment