Industry Report: Produce - Coproduce...
Case study: A UK production
by Julio Talavera Milla
- Characteristics of the film
The case study is a British project directed by a UK established art-house director with much more international appeal than in his own country. It stars his pet actress, a well-known local star. The production company has already produced two films with this director before. The story is set up in the present time and most of it takes place in the countryside, as well as partly in London.
Financing the film
The project is a 100% UK production with an estimated budget of £3,75 million. Both the director and the leading actress agree to defer their fees (£200k and £150k respectively). BBC makes an offer to purchase the national free TV rights (£500k), also investing some equity (£325k).
The producer makes a pre-sale to a UK distributor, getting a minimum guarantee of £90k. A 35% fee is agreed upon in exchange of the copyright for all the windows in the UK and Eire except free television, already licensed to the BBC. Something similar happens with the world sales deal, where a world sales company acquires the world rights except UK and Eire for all windows, contributing £350k as sales advance to close the deal and secure the film. The world sales fee is established in 20% of the foreign net receipts.
The UKFC, a regional fund and a hedge fund put money in the project. This last will have a first position recoupment and will get a 10% bonus.
According to the UK Revenues and Customs Office, a production company can claim a tax relief of 25% of up to 80% of the UK qualifying expenditure for film productions with a budget under £20m. The money will be recouped upon delivery of the film. In this case, since the film is integrally shot and post-produced in the UK, 100% of the money is spent in Britain. The qualifying costs do not include spends such as the financial costs, a completion bond or the development costs. In this film the completion bond cost is £65k and the cash-flow financing cost amount to £75k. The development cost is £110k.
British expenditure = £3,75m
Non qualifying expenditure= £65k + £110k + £75k = £250k
Qualifying expenditure = £3,75m - £250k = £3,5m
Tax relief = 25% x 80% x £3,5m = £700k
Cash-flowing the film
Part of the money involved in the film financing is paid on the signature of the agreements; however, there are other parts the producer will only get after principle photography, on delivery of the film or even after. For instance BBC pays 20% on signature of the contract, 20% on the principle photography and 60% on delivery of the film; the tax relief is paid after having finished the shooting. Therefore the producer will need to cash-flow the financing of the film. For this purpose he asks a bank for a loan, but since the fee is £120k he negotiates with some facility companies to pay them after the film has been delivered, reducing the amount of money to cash-flow. At the end the financing costs are £70k plus the interest rate.
The share of revenues
a) Theatrical release. Box Office in the UK
The film makes 570.000 admissions in the UK, with a box office of £2,95m.
The distribution agreement establishes a 35/65 share between the distributor and the producer. The MG is £90k and the print and advertising cost (P&A) amounts to £280k; both will be discounted from the producer’s share. The exhibition agreement stipulates a share 30/70 between the distributor and the exhibitor.
Box Office £2,95m
Exhibitor share (70%) £2,065m
Gross Receipts (30%) £885k
Distribution fee (35% of GR) £309,7k
Producer share (65% of GR) £575,3k
-Repayment of P&A £280k
-Repayment of the MG £90k
Net receipts £205,3k
At this point the distributor has recouped all expenses (MG and P&A) and has earned £309,7k. The remaining amount should repay the deferments and the different equity participations. In this case the parties have agreed the following recoupment schedule:
- the hedge fund (£300k) plus its bonus (£30k),
- the director’s and actress’ deferments (£350k),
- the producer deferment (£75),
- the other investors -BBC (£375k), the Regional Screen (£300k) and the UKFC (£750k)- will be repaid in a pari passu pro rata basis; which means 26,32% for the BBC, 21,05% for SS and 52,63% for the UKFC,
- equal share of the net profit between the talent and the money. The investors (the hedge fund, the Regional Screen, the UKFC and the BBC) will share their part in a pari passu pro rata basis and the talent agrees a share of 40/40/20 for the producer, the director and the screenwriter respectively.
At this point only the hedge fund would have partially recouped its investment (£205,3k out of £300k).
b) Other windows in the UK
Gross sales revenues: £2,5m (From local distributors’ MGs and overages)
Sales expenses: £100k
Sales advance: £300k
World sales company fee: 20%
Gross sales revenues: £2’5m
World Sales (20%) £500k
Producer (80%) £2m
- Repayment of sales expenses £100k
- Repayment of sales advance £300k
Net receipts £1,6m
Other national rights producer’s net income + Foreign net receipts £1,836m
Here, again, the same recoupment schedule is to be applied: The hedge fund gets the remaining amount to recoup (£94,7k), as well as its 10% bonus. The director and the actress recoup their deferments (£325k), the producer gets paid (£75k) and the BBC (£375k) and the UKFC (£750k) recover their investment. The film breaks even at this point, when nobody is left to be repaid. Now the investors and the talent will share equally the remaining money in the pot (£186,3k).
Net profit £183,3k
50% for the money £91,65k
17,39% for the hedge fund £15,94k
17,39% for the Regional Screen £15,94k
21,73% for the BBC £19,91k
43,49% for the UKFC £39,86k
50% for the talent £91,65k
40% for the producer £36,66k
40% for the director £36,66k
20% for the screenwriter £18,33k
Therefore the investors have recouped all their investment and furthermore, since the film has broken even, all parties involved (money and talent) have participated in the distribution of profits as stipulated in the several agreements.