FILM FINANCING - TIPS # 6 PRE-SALES

In the area of Film Financing, Pre-sales are the act of selling specific territorial rights prior to the completion of the film.  Contracts with buyers around the world are typically based on a number of elements, such as the Script, the Cast, the Genre and Budget for the film, and certain rights to distribute the film in different territories before the film is produced.  Once a particular deal is made, it is the distributor’s responsibility to insist that the producers deliver on elements such as content and making sure the cast have been contracted; if a material change to those elements is made, then the financing may collapse altogether.
Pre-sale contracts with big name actors or directors will often (at the insistence of the buyer) have an “essential element” clause that allows the buyer to get out of the contract if the star or director falls out of the picture and a marquee equivalent cannot be procured.

This helps explain why the movie industry is so reliant on film stars, directors and certain genres and why these actors are capable of commanding such high fees, perks and gross profits.  However, this also bodes well for potential investors as it gives an indication of the commercial viability of the film being invested in.

Buyers typically pay a 20% deposit to the film’s collection account (or bank), with the balance due upon the film’s delivery to the foreign sales agent.
Producers usually pre-sell as many foreign territories as possible so that they can use the value of those contracts as collateral for the production loan that a bank (senior lender) is providing to finance the production.  These lenders also only lend 80%, 50%, or less of the value of the contract, depending on the bank’s history with the buyer. When factors such as the cost of capital, i.e. fees and interest on the loan, as well as the discounted price the buyer is paying to purchase the film in advance of completion, is factored in, then it becomes more evident how important the “creative package” is in providing a valuation of the film to the end consumer.

In some cases, producers may be fortunate enough to be able to procure a negative pick up deal. A “negative pick-up deal” is a deal when a studio agrees to purchase the movie from the producer for a fixed sum at a given date.  Until that date, the financing is the responsibility of the producer, who must pay any additional costs such as up front opportunity costs, including those associated with when and if the film goes over-budget.

A producer will usually have a bank lend against the value of this type of contract as a way to shore-up their financing for the film. This process is commonly referred to as “factoring paper”. Most major North American studios are collateralized by the banks at 100% of the contract value with the lender taking a basic origination/setup fee.