Over the past ten years most producers and financiers have been deriding the escalating cost of film production.
Indie producers have been on a relentless quest to find the elusive "final 20%" of their budgets. They've raised the equity, made the presales, maxed the gap, and still they come up 20% short. This shortfall is often due to the bank's discounting of presale contracts, which wouldn't be a problem if producers stopped trying to finance with gross numbers (see my rant on this.)
Meanwhile, over the same past ten years, producers and financiers have heralded film tax credits for saving the independent film industry in its darkest hour (where escalating budgets have collided with deminished access to capital.) South Africa and Puerto Rico were amoung the first to offer 10% to 15% tax credits for shooting in their respective countries.
Producers flew in from all over the world to cash on this windfall. Since then, incentives have shot-up from 15% to over 40% of local production spending. It stands to reason that the proverbial 20% shortfall matched-up against a whopping 40% cash rebate should be a slamdunk for financing -- these films should be financing themselves.
So why then are producers still stumbling around trying to fill that final 20% of their budgets?! In short, its because producers can't get out of their own way. Rather than using the tax credits to plug a financing shortfall, they instead use the tax credits to subsidize bigger budgets. The 2008 credit crunch, the dimise of over two-thirds of the entertainment lenders, the scarcity of equity, the exodus of hedge funds, and the increasingly conservative lending practices of the remaining banks have lead to a healthy contraction in film production.
Not only are fewer films being made, but they're being made for less. Many talent agents had a hard time coming to terms with this and as a result their clients didn't work. After two years of this, they've finally gotten the message. Studio stars are now having to forage for work in the indie meadow and for once they're being cooperative. With studios and indies making fewer films: gone are the days of fat upfront star salaries and gone are the mandatory rewriting fees for that script you just optioned. Writers and actors are finally playing ball.
Post production houses and other vendors are so desperate for clients that they're becoming investors just to get the business. Producers haven't had this much levererage since the 1930's. But yet, they still can't find that final 20%. Producers are sabotaging themselves by using the tax credits (and vendor investments) as layers in a film's capital structure. In other words, they make their movies by adding up all the money they have:
$3m in equity
+ $3m presales
+ $1m gap/mezz
+ $2m tax credits
+ $500k vendor investment
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$9.5m
