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Nothing beats free money and producers love it!

Money for nothing - Or how I stopped fearing the shortfall and learned to love the subsidy!

I’ve been on a bit of a busman’s holiday but I’m back in harness so I thought I would write a few pieces on every producer’s favorite Holy Grail – Soft Money.

Over the past number of years I have heard more and more people talk about the benefits of soft money.   It seems as if every independent producer I meet with wants to explore how to access soft money or to explain what a great deal they are offering due to how they’ve put together their co-production partnerships.

Now, even if you are not a producer or investor, you might have wondered how all of these seemingly complex deals get put together where a company in Ireland does the post, a Canadian company does the pre-production and the animation goes to China. 

Some of you may have worked on a show where you only did the sheets or the storyboard and everything else was split up and done elsewhere.   What drives these deals and can cause a very awkward division of creative input and production services?  Why of course it’s money, and most often the access to soft money.

So what exactly is soft money?  Does it bend easier than hard money and by the way, what is hard money?  Does soft money fit better in your wallet or what?

At one time studios used to refer to the parts of their budgets that were already in place and part of their normal expenses as ‘soft’.  This simply meant that these expenses would be shown in the budget and charged against the production but were not included in the figure that was actually needed to be raised/spent to produce the show.  The intent of this is understandable but has no connection to the term as it is currently used. 

The meaning of the term as it is used today is simple; Soft money is money that you don’t have to pay back in kind or with equity.  There are certain conditions you have to accept in order to qualify to receive it, but considering that someone/something is paying for part of your production, most producers are happy to take the money and abide by the restrictions.

There is any number of schemes or plans currently offered by countries, states, regions and provinces to stimulate and support the growth of the film industry within their boundaries.  Historically Canada and Western Europe have been the most active and effective in providing these type of subsidies.   These nations utilize a network of treaties that act to alter the requirements of the scheme to favor production services being shared between treaty members.   Lately Asian countries have joined the give-a-way and don’t want to be left out.

To figure all of this out can get one scratching his or her head.  Each country has a slightly different formula that needs to be met to qualify for the subsidy and these formulas can change rather quickly.  The Europeans are fairly uniform but not doppelgangers as such.  There are people in each major studio in countries that subsidize that specialize in the filing for subsidies and they need to know precisely how to fit all the pieces together to maximize the flow of soft money.

In order to explain this clearly (perhaps the wrong word for this subject) let me offer an example. 

Let’s start by saying that you are a producer and have a wonderful project that you believe would make a successful animated theatrical film.  For the sake of this exercise let’s further say that you are Canadian and have a company in Canada.  You take a look around and see how hard it is to raise equity investment in this present environment. (We will explore equity, gap loans, mezzanine loans, grants, convertible debt and bridges in a later piece.)  You could shop your project around to the majors but you just don’t feel they would understand your vision and besides, you don’t want to give everything away.  Good for you!

At the end of the day you decide to do this on your own, well sort of….  You sit down and create a tight but workable budget  - say the number is $8,000,000.00.  Certainly not a big number for a feature film.  So now you have a property and a budget – where do you find the money to produce your film? 

Remember you’re Canadian eh!  You are a citizen of a country that supports the film industry so you take out your budget and after a few careful calculations you get on the phone and call some friendly producers in other countries that you feel you could work with and start talking about the project.  For the sake of argument let’s say you call a producer in Australia or perhaps France.  You also call several Asian studios in countries with which Canada has economic treaties.  Say you talk to a studio owner in China. 

To continue we will say that you come to an agreement with the Chinese studio to perform the animation and the Australian studio to join your company in sharing the pre-production and post production work.

So let’s see how this may look on paper:

Canadian spend is:                           41.25% of budget or                 $3,300,000.

CA Labor spend is:                           75.00% or                              $2,475,000.

*Note that the labor spend # is key in that is the base that all subsidies are derived from (percentage wise). 

The Subsidies that may be applied for based upon 75% of CA labor spend are:

Provincial Tax Credits                      (Total for all 5 - $2,986.000.00) *Current formiula

Regional Advantage

Federal

CTE

OCASE

Let’s stop here for a minute.  If you take a look at the numbers above you will see that you (Canadian Producer) has covered nearly all of your 3.3 million dollar part of the budget,  with what….?  Soft Money.  You now have to raise just a drop over 300K to have your end of the production covered.

Moving on….  Maybe, just maybe you can find a few more bucks in the land of the maple trees. 

What about a Provincial partner?  Maybe you send part of your work to… Oh, I don’t know, maybe there’s a studio in Prince Edward Island that wants to join in… How would that help?  Well any labor money spent at that studio will count for your Canadian spend and for an additional Regional Advantage program of subsidies.

Say you are going to send about 1.36 million worth of work out to the PEI studio and they draw a 37.00% subsidy.    Now you have brought another $503.2K worth of soft money into the production funding pool.

Next let’s look at our Australian partner. (Could be German/French/English)

Lets say our Australian friends want to come in for 20% or $1.6 million of which they will apply for their own grants/tax credits/subsidies at around 50%.  Using this equation we have now added another 800K of soft money to apply to our overall budget.

Next we will look at our Chinese Studio partner. 

Let’s make another assumption – say our Chinese Partner is willing to come in for 21.25% of our budget or $1.7 million.  Now there are a number of possibilities for the studio to apply for provincial subsidies or to take an equity position through national funding.  However, let’s say there is no subsidy available at the time of our production.  Let’s see where we are:

We can project that we can count on a minimum of $1.7 in presales for Canadian, Australian, Foreign and American contracts. 

Let’s add this this up….

SOFT MONEY

Canada                       $2,986,000.00

PEI                             $  503,200.00

Australia                      $  800,000.00

TOTAL                         $4,289,000.00

EQUITY/GRANT (?)

Chinese Studio              $1,700,000.00 (Equity?)

TOTAL                         $1,700,000.00

PRESALE MONEY

Pre-Sales                     $1,700.000.00

TOTAL                        $1,700,000.00

GRAND TOTAL            $7,689,200.00  (Soft $/Presales/Equity-Grants)

Okay, what have we learned here?  Well if my formulas are correct and I believe they are (at least for today), you can produce an 8 million dollar feature for less than 2 million dollars if you live and work and are a citizen of a country that supports your craft and your partners all have treaties with your country, in this case Canada. But remember a similar scheme could also work with Germany or England partnering and sending their work to China.

Now if the Chinese will take a full equity position in the project you will need to raise less than 500K in hard money but bear in mind that if you bank these subsidies/tax credits you will need to give up some points on the money as a fee.  Nevertheless, it is quite a nice piece of candy these folks are offering and if you are a small or even medium sized outfit, clearly it is a path you would need to take to compete with the large media companies that can write a check for anything they want….

I have tried to simplify this example as much as I could.  Bear in mind, as I have said above, that in order to keep the production cash flowing some of the paper here might need to be banked which will add fees, but all in all I know companies that have build their entire business over a number of years taking advantage of these kind of schemes.  Next time I’ll finish up with this and we can take a look at state subsidies here in the U.S. and also take a look at what is happening in Asia and in the Middle East.

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