By BENJAMIN MARK COLE
Before a bank forks over as much as $50 million to finance something so risky as an independent Hollywood movie, it wants at least one basic guarantee that the film will be completed, on time and on budget.
And if the production doesn’t beat the clock, bankers want their money back pronto.
“On every single movie project we finance, we want a guarantee to assure delivery of a picture consistent with the terms of the contracts,” said Ken Whiting, entertainment industry manager for Los Angeles-based Sanwa Bank California. “And those contracts also specify budget and time.”
And so arises the need for completion bonds, and completion bond companies.
“The completion bond is a guarantee to lenders of an on-time, on-budget delivery of the film,” said Michael Hobel, partner at law firm O’Melveny & Myers, and a 17-year veteran in the entertainment law business. “If the movie is not produced in time, on the budget, then the bond company pays off the lenders.”
Completion bonds are needed because of the way most independent films are financed. Typically, when independent production companies are hustling up dough, they first thing they do is line up, in advance, buyers for the film generally, distributors or major studios who promise to purchase the film’s negative after production is completed.
Once the producer has these commitments in hand (usually signed contracts), he or she then turns to bankers or other financiers most of whom insist that independent producers purchase a completion bond before agreeing to finance the production.
In Hollywood, there are only a handful of completion bond companies. The grand daddy of them all is Los Angeles-based Film Finance Inc., which has been in the trade for nearly five decades. Film Finance posts completion bonds on more than 100 productions a year, ranging from $500,000 documentaries, to television shows, to CD-ROM interactive entertainment, to large-scale $50 million independent movies.
Completion bonds companies are experts at examining a film’s budget, schedule, script, cast and crew, and making a good guess as to whether a production can be brought in on schedule, without cost overruns, said Steve Ransohoff, executive vice president at Film Finance, which also has offices in Great Britain, Australia, France, Italy and Canada.
Film Finance also demands to see cast contracts, principal cast agreements, director agreements and producer contracts. The fee for a completion bond is generally 3 percent of the movie’s budget, Ransohoff said.
Are there any directors, producers or companies that are not bondable, by Film Finance standards? Ransohoff is discreet, and begs off the question. But Richard Soames, the company’s president, was less circumspect when he told the Hollywood Reporter in 1991: “Well, there are various complete lunatics who from experience we just don’t want to deal with. There are some people who are notoriously irresponsible.”
Aside from certain personalities to be avoided, completion bond companies have other reasons not to post bonds, the most common of which is that the film’s budget should be larger, or the scheduling more lax, said Ransohoff.
“There are lots of reasons we don’t approve the project as submitted (for completion bonding), but often we don’t believe it can be made for the money they budgeted,” he said.
If a production’s time or budget schedules fall apart, then the bonding company has the right to take over production, and take rights to the film. This very thought sends chills right down producers’ spines. “The creative people don’t want to lose control of production,” said Hobel, of O’Melveny & Myers.
Of course, most bond companies also would prefer not to take such drastic action. A bond company taking over production, firing the director and producer, is regarded as a sort of “scorched earth” solution, akin to a lender foreclosing on property, and being stuck with the headaches of managing the property.
It has happened, but not often. Industry completion bond mavens can only point to the now nearly 10-year-old “The Adventures of Baron Munchausen,” as an example of a prominent film where a bond completion company was forced to step in, after the film went substantially over budget.
“I would guess we have problems with less than 5 percent of productions,” said Ransohoff. “And that doesn’t mean we take over production. It just means things have to be worked out.”
Usually, more oversight, and a few table-pounding sessions are enough to get a film back on track. A bonding company may require certain scenes be shot more cheaply, such as on a set instead of on-site, or that some exotic scenes, requiring expensive preparations, be cut or re-engineered.
A bonding company employee may even take up a permanent position on the set. In one instance, Film Finance noticed that a movie, dangerously close to running over budget, had rented 85 hotel rooms for a on-location shoot. Moving the shoot back to sets in Los Angeles saved not only production costs, but outsized hotel bills.
Bonding companies reinsure their risk with larger insurance companies; Film Finance, for example, goes to Lloyds of London. If a film is taken over, it is ultimately Lloyds that will pay off the banks.
Though completion bonds are negotiated on a movie-by-movie basis, the bonding companies do have standardized bond contracts in-house akin to standard industrial leases or other boilerplate contracts. In fact, Film Finance receives so many questions about bond agreements it has posted bond boilerplates on its Web site, www.filmfinance.com.