We've Got Hollywood Covered

Portugal: Crushing Blow to Independent Film Financing?

Europe’s money troubles are going to have ripple effect as buyers close their euro-stuffed wallets

To most, Portugal is simply a southwestern European country located on the Iberian peninsula. Soon Portugal may be referred to as the country that brought the independent film world to its knees.

The runaway production problem is about to be replaced by an evaporating production crisis.

Last week, Portugal’s credit rating slipped from AA to AA-, the euro fell to its lowest point in nearly a year against the dollar ($1.33), and the euro-zone nations, led by Germany and France, along with the International Monetary Fund, approved a contingency plan (a no-bailout bailout) for debt-ridden Greece.

But before you scratch your head and say to yourself, "What’s this got to do with me and the movie I want to make right here in the U.S.?," let me assure you: It’s got everything to do with the state of filmmaking worldwide and no one is talking about it.

Independent producers, still reeling from dried-up senior and gap lenders, plus an equity exodus, have been scrambling to cobble together the financing for their films, which has put a greater emphasis on state tax credits and an even greater dependence on pre-selling foreign territories to cash-strapped and credit-crunched buyers.

Not all buyers are equal. Europe, as a whole, is the No. 1 international buyer of U.S. independent films and the United Kingdom, France and Germany reign supreme among them.

Germany alone is the fifth largest market in the world and, as such, has been placed in the driver’s seat for bailing out Greece, a fellow European Union member whose debt has been spiraling out of control.

While every country that uses the euro has pledged to help Greece, Germany and France — the most prosperous — will kick in the most.

This might have been OK, except now Portugal is teeing up to be the next bailout recipient.

EU members are justifiably balking at taking on that much more debt, and some have called for the IMF to step in. If the IMF does intervene, then the value of the euro likely will plummet to new lows, because the EU will basically be telling the world that it can’t take care of its own and that their currency is stable only during the good times.

So the tightening of credit and the reduction of capital will affect all the euro-zone countries and will have an impact on filmmaking here at home. European buyers will have much less buying power, which means much less buying of American films. They will be forced to look inward for more European films that they can purchase for euros instead of dollars.

The repercussions could begin almost immediately. Recently, I saw a contract provision from a European buyer that stipulated a euro exchange rate below which they reserved the right to reduce the value of their minimum guaranteed purchase price by $100,000.

It’s bad enough that fewer foreign sales (and pre-sales) are going to be made, but now the value of those sales (and overall value of Europe as a whole) is decreasing. It’s one thing to roll the dice on whether your film will be able to make its key sales, it’s another thing to watch the potential value of your film evaporate before your eyes.

Even if a producer does pre-sell enough territories to get their film made, what are the chances those European buyers will still have enough money (or credit) to pay a producer two years from now when the film is delivered? If the euro keeps dropping, then a film a buyer agreed this year to buy for $300,000 may end up costing $375,000 down the line.

So what happens next?

When producers can no longer secure financing through foreign sales, they’re forced to look elsewhere, and that means tax credits. According to the Economist, "All but seven American states and territories and 24 other countries now offer, or are preparing to offer, rebates, grants or tax credits that cut 20%, 30% or even 40% of the cost of shooting a movie."

California isn’t one of them, which is why, according to figures released by the state film commission, California’s share of studio films is about 30%.

By her own estimate, California Film Commission director Amy Lemisch terms the state’s incentives "modest," and she points out they’re due to expire in 2014.

One should assume that “modest” probably means cash-strapped California’s tax credits will come in the form of IOUs, since politicians hate to be seen “cutting checks to Hollywood.”

On a local level, a new nonprofit with an idealistic, slightly patriotic-sounding name, the Bring Hollywood Home Foundation", was announced earlier this month. It will advocate for additional government incentives and educate voters about the benefits of retaining L.A.-based production.

Does this mean no more "hush money" whenever a location manager hangs a "notice of filming" on your front door?

Former campaign consultant Sharon Jimenez is the organization’s executive director. Jack Kyser from L.A.’s Economic Development Corp. and City Council President Eric Garcetti also are onboard.

Kyser estimates a $32 million movie creates about 140 jobs and generates $4.1 million in sales taxes and income taxes. The Bring Hollywood Home press kit states that "If California had kept 30% of the production jobs lost in the last 14 years, we would have no budget deficit."

But the fact is, California does have a massive deficit, so who knows what kind of significant and lasting incentives Bring Hollywood Home and other advocates can wrest from Sacramento or other states.

In the meantime, Europe, the biggest buyer of U.S. films, is hunkering down for more serious retrenching. The impact on film finance is serious. And in the short term, if you want to get your movie made, be prepared to pack your bags.

If you’re packing your bags already, my recommendation inside the U.S. is Michigan (you’ll have to bring in your own crew). Outside, I recommend Canada (time to dust off your passport), Puerto Rico (if your ATL is low), Isle of Man (weather permitting), Germany (while it lasts) or China (if you can handle all the red tape).

Jeff Steele is a noted film finance expert and owns the website FilmClosings.com.  Most recently, Jeff was CFO of Magnet Media Group, an equity finance, production, and distribution fund for $10 million - $50 million feature films.  Before that, Jeff was the director of film finance for Screen Capital International and a producer for Sony Classics' "Who Killed the Electric Car?"