I wrote this a few months ago for a potential investor who had never invested in a film before in order to acquaint them with the process. It seemed only natural to put this up to help educate those interested in traditional movie investing.

Executive Summary

This document will acquaint the investor with the film investment and filmmaking process within the United States. It is designed in a linear fashion so that one step follows the previous and to better educate a potential film investor with all that is involved in the production of a motion picture.

This document assumes little or no knowledge of the film industry or the filmmaking process.

Principal Players

Across the entirety of a film’s production, there are usually only a handful of principals involved at all phases. These are the producers. They are responsible for shepherding production from concept to distributed product.

An investor is usually credited as an Executive Producer in the opening credits of a film, unless they specify otherwise to remain as a silent partner.

We will start with a quick overview of the five phases of film development.

The Five Phases of Film Production

There are five distinct, well-defined phases to any film production, from the studio blockbuster to the low-budget independent feature. Each of these phases has its own set of unique demands and skillsets to complete.

We will go into more detail with some of the finer points later on in this document.

Phase 1: Development

During this phase the story idea is conceived and written, sometimes with the assistance of a producer. The producer may be looking for a specific type or genre of story that will fit in with their overall idea of what they want to produce and sell.

Should the story prove to be viable commercially, the producer will then seek funding for the project. In larger studios, the development phases is also fully funded by paying one or more screenwriters to come up with a concept and develop it into a complete screenplay. Also, a studio may then elect to fund the project as a film immediately if it were commissioned work or choose to leave it on the shelf.

Phase 2: Pre-Production

Should funding become available, the pre-production phase can begin. This typically involves the following tasks:

• A Production Agreement, between the investor(s) and the producer(s) is signed, thereby signalling the start of production.
• Formation of Limited Liability Corporation (LLC) or Limited Liability Partnership (LLP) for the purposes of holding the intellectual property, developing the motion picture, maintaining ancillary licensing, distributing, and marketing
• Creation of account between investor(s) and producers for funding
• Tax incentives are applied for with the state in which the film is being shot
• Insurance for film is purchased which includes a guarantor of completion bond and hazard insurance. This cost is typically factored as ten percent (10%) of the total budget
• Scheduling of principal photography
• Casting of actors for parts
• Hiring of crew, director, and cinematographer
• Locking locations and building of any sets on a sound stage as required or budgeted
• Storyboarding scenes
• Finalizing budget
• Blocking walkthrough with director and crew
• Securing lodging, food, and transportation for cast and crew
• Table read(s) of screenplay for final polishing and lockdown for production

Typically this can take up to three months to complete, but can be done in as little as one month. It should be noted that rushing this phase of production can ultimately end up hurting the final product.

Phase 3: Principal Photography

Using all of the materials developed from pre-production, the film is shot. Depending upon budget constraints and complexity, this can be anywhere from three weeks up to several months. A big-budget studio picture can take up to six months to shoot, whereas a low-budget feature is typically shot within a month.

The usual work day during a shoot can go up to fourteen hours a day for six days a weeks. Work days of ten to twelve hours are not uncommon. This is the most physically demanding phase of film development. Food must be delivered to the set as the cast and crew cannot afford to break for long periods of time to travel to a restaurant.

It is vital to stay on schedule in order to complete this phase on time and begin post-production.

Phase 4: Post-Production

During post-production, the final product takes shape. The common tasks involved are:

• Editing of raw footage
• Color correction and timing
• ADR, or looping, of actors for any dropped lines or bad audio recorded on set
• CGI inserts, if needed
• Soundtrack composition by composer and/or contemporary musicians
• Foley of sound effects
• Sound design
• Final mixdown
• Optional test screenings

At the end of post-production, a final product is ready for marketing and distribution.

Phase 5: Marketing and Distribution

The final phase of production is where the finished film is shown to distributors and screened at festivals for independents. For studios, prints are made and shipped directly to theaters for their initial first-run.

Remuneration

A typical film investment deal requires that the investor be paid back in whole with extra percentage incentives first before any splitting of profits. At the point that all monies are paid back then the investor continues to receive fifty percent (50%) of all net while producers and other principals split the other fifty percent. Producers cannot receive any back-end percentages until the investor is fully repaid.

Incentives to investors usually end up around 120% of their initial investment. This is the amount that must be remunerated prior to the 50/50 split with producers. This also gives incentive to the producers to begin remuneration as soon as possible.

The average and accepted return time on investment to an investor is about eighteen (18) months. From that point forward, returns begin to come in and will continue to until the end of life for the film. The end of life (EOL) time for a film’s initial release is roughly five (5) years. However, that lifecycle has been greatly extended through the Internet and other distribution platforms.

Release

A Prints and Advertising (P&A) budget is used to create marketing materials, including prints of the film for release. This is the largest differentiator between studios and independents. A typical 6-reel 35mm print of a feature film can run in the range of $8,000 to $10,000 per screen. Digital cinemas, while small in number compared to their celluloid brethren, do provide an alternative without having to distribute physical media, keep costs down, and maintain control over the product.

Markets for Revenue Generation

Theatrical releases are no longer the only method of revenue generation for a film. While a print can be made and shown in limited release, there are other platforms that have proven to be profitable for smaller-budget filmmakers.

Home Video

DVD and Blu-Ray, or home video releases can account for up to 70% of the total revenue of a film over its lifetime. Working with a distribution house can ease the burden on the producers to get the product out. However, this is becoming less and less so. Distributors in the United States have been closing up due to economic factors as well as the proliferation of easy-to-use tools and services that supplant the existing distribution model.

Video-On-Demand, Pay-Per-View, and cable broadcasting can give a quick shot to the recuperation phase of release. A broadcaster may sign a deal giving them rights to broadcast only within a limited time frame, usually about 1 year, and within a limited territory such as the U.S. This frees up the broadcast rights to be sold to foreign markets.

Internet-based distribution is now a serious platform that cannot be ignored either. This can put the profits directly into the hands of the principals involved in the production without the need for a distributor at all.

Other distribution platforms include:

• iTunes Store
• Netflix
• Indieflix
• YouTube, through online rentals
• Redbox

These platforms extend not only the initial life of a film but also give a film a larger marketing surface area, allowing it to reach a wider, more global audience. And these are by no means the only ones out there.

Film festivals and markets provide an excellent entry to market for any film these days, provided the producers are willing to travel with their film and promote it. This has a strong benefit of being able to screen a film for a large audience, garner accolades, and possibly get picked up by a larger studio for more general theatrical release.

While a distributor can help take up the slack, many of them are not reputable. For instance, a distributor may charge the production $4,000 for a single movie poster so as to show a loss, thereby preventing full remuneration to the investor and the producers.

In today’s world a distributor is not as necessary as before. Marketing for even a smaller film can be handled through many free or low-cost channels that reach global audiences. Producers need only put in a little extra work in order to promote and distribute without a loss of extra percentage points of revenue from a distributor.

Copyright Ownership and IP Chain-of-Title

It is important to maintain a clear chain-of-title for the intellectual property. For this reason, the screenwriter must complete a Form PA (PA for “Performing Arts”) and send it to the U.S. Copyright Office for copyright registration prior to selling it. Up until the point of sale, all rights remain with the author and cannot be transferred without permission.

Upon payment for his or her work, the screenwriter then relinquishes all copyright ownership of the screenplay to the production entity by assigning it through the Copyright Certificate. This establishes the production company as the owner of the motion picture with the ability to legally create a film from the screenplay.

The use of chain-of-title is of high importance for a film production because it crosses multiple mediums of output. Besides the film itself, a production company may also choose to license characters for sequels or prequels, create marketing tie-ins such as books, sell broadcasting rights on satellite and cable, and also market one or more soundtracks. Without full copyright ownership this would not be possible.

With the passage of the Sonny Bono Copyright Term Extension Act in 1998, copyright ownership resides with the company for the life of the author plus fifty (50) years. When a corporation purchases the copyright, this becomes seventy-five (75) years.

Copyright can be extended further by reapplying near the end of the copyright term.

Tax Incentives

Many states in the U.S. offer tax incentives to filmmakers to bring their productions in-state. The amount and types of incentives vary from state to state, but can be categorized as follows:

Minimum Budget

A minimum budgetary requirement is needed for all states in order to participate in their incentive program. For instance, in Georgia and Tennessee, the minimum budget required is $500,000. This will automatically qualify the production in those states for fifteen percent (15%) minimum return back to the production from the state.

To qualify for higher and immediate returns from the state, a higher threshold budget is required. This is typically for films of $1 million or higher.

Credit, Exemption, Reimbursement, and Matching Funds

The type of incentive varies from each state to the next, with the most basic form being the reimbursement. This occurs at the end of principal photography and is applied based on receipts and accounting from the production.

Tax credits are given at the beginning of production and are generally favored because they can be used as an immediate return into the production budget as a savings or begin the remuneration process to the investor. They can also be sold to other investors if more funds are needed, as they are considered legal tender.

Exemptions are not very common but are offered by some states. This gives the production the ability to become exempt from state and local taxes during the course of the production for all purchases made, including materials, food, labor, etc. In Georgia this can result in a return of up to eleven percent (11%) of the budget by itself, not including any other added incentives the state has.

Matching funds are offered by only a handful of states due to their high price tag. New Mexico offers a matching fund against any film budget of $2 million or higher. Essentially this gives the production double their initial budget.

Reimbursement is the most common form of tax incentive for filmmakers in the U.S. This occurs at the end of principal photography with an audit of all receipts and production accounting to determine the total percentage of budget to reimburse.

Higher Tax Incentive Percentages

To qualify for higher percentages of return, there are stipulations within each state that specify what else the production can do to qualify. The most common of these stipulations is to have a crew comprised of more than thirty percent (30%) in-state hires. Further percentage points can be given for more in-state usage of manpower and talent such as composers and musicians.

The upper limit for tax incentives for most states cap out at around thirty-five percent (35%) of the total budget for a film. For an independent feature, this can mean the difference between a theatrical release with prints or a limited-run DVD release, or being able to complete post-production.