40 Production Finance Terms Every Filmmaker Should Know
“On your way to crafty, can you have the AD grab a stinger?” If you understood that request, you’re probably pretty well-versed in general on-set lingo. But would you pass a quiz on production finance terms?
While this question may sound intimidating, you don't need to panic. In this post, we'll review some of the common terms and phrases you will hear, and need to understand, as you begin your project's financing journey:
Production Finance Professionals
First thing's first: you need to know who you'll be working with as you take your project to market.
1. Sales Agent: Helps a producer gauge the value of a project and make calculated decisions on the most profitable way to sell said project. Domestic sales agents negotiate deals with US distributors, and international sales agents coordinate deals with foreign distributors.
2. Distributor: The party responsible for marketing and distributing a film in the territory or territories in which they hold the distribution rights. Distributors control details like release date, marketing and publicity materials, and when a film goes to DVD or Blue Ray. Films can have distribution deals in multiple territories with multiple distributors.
3. Producer’s Representative: Also known as a producer’s rep, this person serves as a liaison who speaks on behalf of a producer and helps them negotiate and sell films directly to studios and networks, typically in the domestic market.
Types of Funding
There are many ways to access funds to help you bring your project to life. Here are some of the most common production financing options:
4. Soft Money: An umbrella term encompassing a variety of different funding options, including tax incentives or rebates, as well as grants and other government funds. Soft money is also known as "free money" because it doesn't have to be paid back.
5. Rebates: Funds returned to production companies by the state in which a project has paid for qualifying expenses. Usually calculated as a percentage of the production’s qualified expenses.
6. Grants: Tax-free payments issued to production companies by film funds; paid by government entities, companies, nonprofits, film institutes, or other organizations. Grants may have very specific qualification requirements, and grant providers often require some level of reporting and recognition in film credits and media releases.
7. Equity Financing: A way to raise capital that consists of offering a piece of ownership of the rights to a project in exchange for funding. Due to the complexity of ownership, it’s important to identify proper investors and to hire a lawyer to advise on all aspects of any equity investment.
8. Tax Incentives: Benefits offered by cities, states, provinces, and countries designed to entice productions to film in a particular location. These incentives help mitigate the end cost of production while mutually benefiting the incentivized area by creating jobs and boosting the local economy. Also known as "production incentives" or "film incentives."
9. Tax Credits: Claimed by a production when it files a tax return, these credits are applied to the business's tax liability – much like an individual state or federal tax credit. Film tax credits can be 1) refundable, 2) transferable, or 3) non-refundable and non-transferrable.
10. Hybrid Film Financing: A funding option that allows productions to combine for-profit funds (e.g., equity) with not-for-profit funds.
11. Crowdfunding: Utilizing a platform like Kickstarter or Indiegogo to source funds from like-minded people who support your vision. Crowdfunding offers a way to raise funds for a project that takes traditional investors out of the picture.
12. Mezzanine Loan: A debt and equity financing hybrid that gives lenders the right to convert debt into an equity interest in the event of a default. These loans may seem attractive at a surface level, but they tend to be high risk, often have higher interest rates, and are generally not a good first choice for funding.
Basic Film Financing Terminology
Now that you're familiar with the types of funding available, let's take a look at some key terminology you'll need to know before entering into any financing or service agreements.
13. Production-Financing-Distribution Agreement (PFD): An agreement between a studio and a production company that documents the studio's intent to finance a production. Typically, the studio acquires distribution rights and substantial equity in exchange for financing.
14. Production Service Agreement (PSA): An agreement between the producer/financier and the production service company (PSC) that will be hiring and paying for all things on the ground in the jurisdiction where the production activity will take place. Under the PSA, the PSC will own none of the assets nor the rights with the exception of a One Picture License.
15. One Picture License (OPL): A short form agreement between the commissioning producer/financier and the PSC which gives the PSC a license to make and deliver the film back up to the commissioning producer/financier. No other rights are conveyed in this license.
16. Exit Strategy: A contingency plan executed by an investor or business owner to liquidate a position in a financial asset once predetermined criteria are met or exceeded. In the case of a production LLC, an exit strategy comes into play after a project earns enough net profits to meet an investor's recoupment requirement (e.g., 130%). Once met, rights can be assigned from the investor to managing members of the LLC (typically producers), and the LLC can be dissolved.
17. Ask and Take: Columns on a sales estimate used during pre-sale negotiations with distributors that provide guidelines on what deals a sales agent can approve based on their producer’s ideal “ask” price and their bottom line “take” price. If a distributor offers a figure within the range, the sales agent has the authority to approve the deal. If an offer falls outside the range, the sales agent must get approval from the producer.
18. Minimum Guarantee (MG): A flat fee that a distributor agrees to pay a producer for the exclusive rights to distribute a completed film for a set term in a defined territory.
19. Overages: Amount of revenue received by a producer above and beyond the MG that has already been paid.
20. Compliance Expenses: All production costs incurred related to adhering to industry and governmental regulations. These include compliance worker salaries, COVID risk mitigation costs, OSHA safety compliance-related expenses, taxes, and so on.
21. Copyrights: Rights producers buy to utilize and legally produce any existing intellectual property as new content. These apply to scripts, books, treatments, magazine articles, short stories, music, and other forms of intellectual property.
22. Co-production: A type of collaborative joint venture that brings two or more production companies together for the purpose of producing a project. Co-productions can be very beneficial because they allow a project to take advantage of more diverse resources, funding and incentive opportunities, marketing avenues, and so on.
23. Fiscal Sponsor: A nonprofit that agrees to act on behalf of a production as a gateway for receiving funding. Utilizing a fiscal sponsor allows productions to reach a broader donor base because contributions to the project can be written off as tax-deductible donations.
24. Loan Out Corporation: A personal service company that “loans” out the services of actors and crew members - typically utilized by highly compensated individuals.
25. Minimum Spend: Amount of money a production must spend in a particular jurisdiction to qualify for a film incentive. Varies by state, region, territory, and country.
26. Gap Financing: The difference between a film’s total budget and the amount of money that has already been raised. To give context, a producer typically receives 10% of the agreed-upon funds from a distributor upon signature and the remaining 90% upon delivery. Since the 90% won’t be received until the film is completed, and providing the distributor is “bankable”, a lender would consider lending against the receivable (the “gap”) providing the lender’s requirements were met. This type of loan is considered senior debt (i.e., in first position to be paid back from receivables).
Legal and Investment Terms
27. Completion Bond: A guarantee that serves as an insurance policy between producers and financiers, lenders, or distributors, stating that the film will be delivered on time and within budget. If agreed-upon conditions are unmet, beneficiaries of the bond may file a claim to get their money back.
28. Prospectus: A document that a producer creates which includes all the pertinent information about the project for which they are seeking funding. This document is helpful in generating interest from potential investors. This checklist, which sums up details of the project, is what the prospectus should include.
29. Pro Rata Pari Passu: Typically, 50% of a production's LLC is owned by the producer who is the Managing Member, and the other 50% is owned by investors on a Pro Rata Pari Passu basis. Meaning, on an equal basis that's dependent on each individual's level of investment.
30. Managing Member: The film’s producers are the Managing Members of the LLC. The managers of the LLC have complete discretion over the production, editing, distribution, and exhibition of the film. The managers have complete control over all business decisions with respect to the film, including the sale or other disposition of the film, marketing, distribution, and exhibition arrangements.
31. Offering Memorandum: Also known as a private placement memorandum, this legal document states the objectives, risks, and terms of an investment involved with a private placement. It includes a company's financial projections, management biographies, a detailed description of the business operations, the production plan, and more.
32. Program Related Investment (PRI): Investments made in the form of loans, equity investments, bank deposits, and guarantees which are used to support projects that fulfill an IRS-recognized charitable purpose. Typically repaid along with modest interest or other types of financial returns, PRIs are most commonly provided by nonprofits that are strategically invested in making the project a success because the film’s messaging is consistent with the mission of the nonprofit.
33. Non-recourse Loan: A loan that stipulates a lender can seize loan collateral in the event of a default but cannot go after the borrower's other assets – even if the market value of the collateral is less than the outstanding debt.
34. Option: A right that is exercisable during a certain period of time for a specific amount of money to acquire specific permissions related to a production. For example, paying the agreed-upon sum within a specified time frame to gain rights to produce a film based on a specific book.
35. General Partnership: A partnership made up of two or more equal partners who can contractually bind the partnership with third parties. The partnership is liable for any acts taken by any partners, and each partner is personally liable for all the debts of the partnership. It's uncommon to intentionally form a general partnership production entity – but it can happen unintentionally if a transaction is legally structured as a "joint venture" or "co-production."
36. Limited Partnership: A partnership with two classes of partners: general partners and limited partners. General partners have the right to manage and control the affairs of the partnership and are liable for all debts. In contrast, limited partners don't have the right to manage or control the affairs of the partnership and are not liable for any of the debts of the partnership. Sometimes, though rarely, used by independent filmmakers, and especially first-time filmmakers who raise funds by soliciting contributions from friends, family, and people within their personal network.
37. 501(c)3: Commonly referred to as "charitable organizations", 501(c)3 entities are eligible to receive tax-deductible contributions in accordance with IRS Code section 170. Some producers opt to set up a nonprofit legal entity to raise funds for a film, which provides the benefit of tax-deductible contributions. Legally, a nonprofit film project must not be operated for private benefit or gain. Rather, it must achieve a public or artistic purpose. If you’d like to explore this option, consult an attorney to learn about the pros and cons.
38. C-Corp: A business entity formed by filing articles of incorporation with the Secretary of State. C-corporations are owned by shareholders, whose degree of ownership is evidenced by the number of shares they hold. The corporation itself is taxed on any earned income and shareholders are taxed again when income is distributed to them. C-corps tend to be ideal as production entities, especially in jurisdictions with refundable tax credits because the refund will go directly back to the production entity.
39. S-Corp: S-corporations can be beneficial in a loan-out situation. A person (writer, actor, etc.) can become an S-corp in order to obtain various tax benefits, including the ability to deduct expenses that are not ordinarily deductible for employees of a film company, resulting in significantly lower taxes.
40. LLC (limited liability company): Allows a production to be treated as a separate legal entity from its owner(s), thereby separating the liabilities and debts of the business from the business owner. Forming an LLC has multiple benefits for producers, as it 1) protects your personal assets if the business experiences litigation, 2) defines governance, and 3) gives owners the opportunity to take advantage of many tax incentives and other funding opportunities. An LLC is a passthrough for tax purposes, which means any gain or loss in tax liability inures to the benefit of each member of the LLC.
Have questions about any of these terms or about anything else related to production financing? Contact our expert team for answers. We’re always happy to help!
This article contains general definitions which may differ with respect to your particular situation or transaction. We recommend that you consult with your outside advisors before applying any of these terms to your specific situations.