Posted: Fri., Feb. 28, 1997

Bankers fish for upscale indies

By PAUL DURAN

With the recent announcement of this year's Academy Award nominations, the juggernaut that is independent filmmaking appears to be hurtling onward into rarefied territory, picking up new passengers all along the way. What has always made an independent film an independent film --- besides, of course, its unique vision and more daring subject matter --- has been it's "outsider" funding. Today, though, that outsider financing is becoming more and more insider as the indies takes their rightful place alongside and amongst the major studio players.

And while indie productions have always been typified by smaller budgets and edgier material, at least part of that equation appears to be changing. "Today it's the market that is demanding the larger films," says Lew Horwitz of the Lewis Horwitz Organization, which specializes in financing for independent films. "And so filmmakers are making more expensive films because those are the films their buyers are looking for." And since those buyers are no longer the action/genre "chop-socky" video mavens of old, but more sophisticated international television and satellite conglomerates feeding a much broader audience, they are clamoring for better stories with better production value and at least a modicum of star appeal.

Moving up

These kinds of films, in the 15 to $30 million range, used to be the sole province of the studios, but with the majors all but abandoning them to pursue the huge payoff of "event" filmmaking, the void is being filled by the indies. "The independents are coming into this market because they believe they have a way to make it work from a taste standpoint," says Joe Woolf, vice president and manager of film finance for Sumitomo Bank. "They also believe that they can put together a movie in that range to justify the economics, but really that's a ton of dough given the sort of structuring and financing mechanisms that are involved in the classic independent marketplace of foreign presales and estimate financing. The structure remains the same, you're just raising more money. A larger dollar amount might be a tougher burden for some of the foreign distributors.

The answer, it seems, does not necessarily lie solely in the seemingly lucrative markets overseas, but rather, the key may be right here at home, claims Horwitz. "The international sales become pretty sizable when you can assure the international distributors that you will have a United States theatrical release. It's very meaningful for the foreign distributors to say to their public, two thumbs up by Siskel and Ebert. It shows A, that the Americans feel that there is value there and B, it shows that somebody was willing to put their money where their mouth is in order to distribute the picture."

Mary Yoel, senior vice president and assistant manager of the entertainment division of City National Bank concurs. "From our experience, the North American market is still the engine that pulls the train. There have been a lot of changes in the independent financing arena, with all the mergers and acquisitions and label deals. What it's shown though is that independents have to be affiliated with a major distribution system."

This trend, according to Michael Mendelsohn, chairman and CEO of Patriot Pictures and group portfolio manager and consultant for the Media Entertainment Finance Group of Bank Paribas, is fueled by "a demand for a certain type of product which only the independents can supply, number one. Number two, its the need of the studio, which has a high distribution overhead, to acquire additional product outside of its in-house production. Whereas the studios can distribute 30 to 40 films a year, they may only be able to manage the production of 10 to 15 a year, so they have a domestic distribution apparatus which has room for more product than they can create in-house."

Labels of love

Indie producers such as Mike Medavoy at Pheonix and Sigurjon Sighvatson of Lakeshore are taking advantage of this need by forming label deals with major studios. "Studios are more in an advisory type of position rather than a hands on position which is how these label deals originated," says Mendelsohn.

"We're creatively autonomous," says Arnie Messer, president and COO of Phoenix, whose upcoming projects include Oliver Stone's untitled project with Sean Penn, Jennifer Lopez and Nick Nolte, Bryan Singer's "Apt Pupil," and Terrence Mallick's screen version of the classic James Jones WWII novel, "The Thin Red Line." "They have no say except on very high budget pictures. At the 20 to $30 million range they just take what we give them, based on their confidence in Mike [Medavoy] and also on the financial structure, they know their money is relatively secure."

Even with the higher budgets and the umbilical cord to the studios, these companies and producers still stake their claim to the title of independents. "Sometimes it's a mistake to say that an independent movie is based on what its budget size is," says Mendelsohn. "A lot of times an independent movie is based on the spirit of the producer."

But for the producer who does not have ties to a major distributor or studio, this midrange is still problematic. "Unless you've got some decent cast in that range to really carry that type of budget, it's a very tough part of the marketplace to address," says Woolf.

"You can't recoup enough from the various markets after you pay for the P&A because you can't compete with the studio," adds Yoel. "You either have to be small enough that there is a market for you and there is a chance for you to recoup or you have to be a mega-film. A lot of these other films which are ostensibly independent, have all this studio machinery driving them which kind of pushes them into another realm."

For smaller independents though, there is still opportunity at the lower budget ranges. "It's a terrific time for the indie producer," enthuses Woolf. "There is a real desire to do independent films, as evidenced by how those films have performed in the general marketplace, particularly from an artistic and an award-winning perspective. ."

For lower budgeted films, "the genre becomes important, as well as the actors," according to Horwitz. Adds Mendelsohn, "the demand for product is more specific and the market for the product has become more mature and sophisticated, so some C or D level chop, chop action movie may have its niche if its done well, but if its not done well it may not get picked up at all."

"Another extremely important part of the equation is the relationship with and the ability of the foreign sales agent licensing the picture," continues Horwitz, "because first we must trust his estimates. Second is the number films they have which therefore becomes the amount of clout they have so that you can help one film with what we call a locomotive pulling another film along.

"For a low budget film, we will give a very small, if any, value to the United States distribution because, while you can quantify the international distribution reasonably well, in the U.S. market, it's totally different. You may get zero, if they don't like the picture."

Still, the domestic rights can play an important part in securing funding. "Each element becomes important to each specific collateral package," says Yoel. "In other words if you have a really strong distributor and you have kind of a weak cast, it'll probably work. If you have a weaker distributor, but a really strong cast, we'd evaluate that. Each package is evaluated independently and for its own merit."

One of the newer wrinkles Yoel is seeing is that producers are now coming to her far in advance of actually securing any elements. "Producers are trying to get a template kind of financing where they will come and say 'what if we have North American sold for this amount and its to a U.S. major, and we have these territories sold to one of these two majors?' That way they can kind of have almost a pre-approval in place."

But reinventing the wheel is probably what the independent producer does best. And while their flag is still firmly planted in the under $10 million budget plateau, they're recent successes have sent their wanderlust soaring as they now seek to move above the former treeline of the studios. "Independents have a certain advantage over the studios at this level with their lower overhead and the ability to act more nimbly," concludes Woolf. "And even though it's sort of a tough middle zone to address, they have always come up with ways to make films based on the economics of the situation.."