Michael Geczi

Cast & Crew Financial Services: A Roundtable Discussion September 7, 2018 DAVID BENAVENTE Vice President, Independent Sales and Incentive Services FRED MILSTEIN Chief Executive Officer, Media Guarantors DEIRDRE OWENS Vice President, Incentive Financing JOE BESSACINI Vice President, Film & Production Incentives We do. So you can. Comprehensive Financial Services. In 2013, Cast & Crew launched Cast & Crew Financial Services to bring together its incentive financing and incentive management services for film and television production. Since that time, CCFS has grown significantly, both in terms of services and activity. With the launch earlier this year of Media Guarantors, Cast & Crew’s completion-bonding company, CCFS’ offering has become even more comprehensive. Recently, David Benavente, Vice President, Independent Sales and Incentive Services; Joe Bessacini, Vice President, Film & Production Incentives; Fred Milstein Chief Executive Officer, Media Guarantors, and Deirdre Owens, Vice President, Incentive Financing, discussed CCFS and what it brings to the market. DAVID BENAVENTE: DB FRED MILSTEIN: FM Q. DEIRDRE OWENS: DO JOE BESSACINI: JB What is Cast & Crew Financial Services’ overall strategy and what’s the special deliverable that you bring to your clients? DB: First of all, we are the only “one-stop-shop” for independent services. But, beyond that, given our team’s immense depth of experience, we offer an unparalleled skillset for solving producers’ problems. I’m pleased to say our services have gained a reputation of being “best in class.” And “best in class” – accompanied by the ability to offer very aggressive pricing on financing – is a tough combination to beat. Q. We’re often the first stop. 2 For a client using CCFS services, at what point do they need to start talking to you? FM: For completion bonds, it’s most beneficial for the producer to begin talking to us at the earliest stages of his or her financing process – when the producer has the script and budget – and a shooting schedule – even if those are only preliminary. We’re often the first stop. A producer will find that a bond company’s input will help in finalizing plans and the bond’s letter of intent certainly adds weight and credibility to the producer’s submissions to potential financiers. C A S T & C R E W F I N A N C I A L S E R V I C E S: A R O U N DTA B LE D I S C U S S I O N Q. And for financing? DO: It ranges from production to production, though the most common time is in the planning stages, before the official start of preproduction. Producers need to come to us at this point if they need the financing to complete their budget. Most debt lenders (us included) will not fund until the production has secured sufficient financing to complete the project, so most of the work to put together the financing is done before and during preproduction, so that the financing and bond are closed before the major spending starts closer to principal photography. Q. What’s an example of a production coming to you later in the process? DO: Sometimes producers come to us later if they did not already secure financing against the tax credits. This usually is the case when producers have covered the entire budget to date themselves, or through an equity partner. In those cases, they usually come to us to free up additional cash, if they want to invest in a new project, or if the tax credit funds are not coming in as quickly as anticipated and they want to monetize the credit earlier. And, sometimes, it’s because the producer wants to enhance the project beyond the original budget/production plan. Q. Not all incentives are created equal. Joe, what’s the most important thing(s) that productions need to understand about production incentives when they reach out to you? JB: It’s a pretty simple message: Not all incentives are created equal. There are many factors to consider when comparing incentive programs. Ultimately, for independent producers and studios, it’s having a realistic understanding when they will receive the cash and how much they will receive. W W W.C A S TA N D C R E W.CO M 3 Q. Dave, are there examples of where you have provided a single client services across the board? DB: Yes. With Media Guarantors launching earlier in the year, we are getting more and more requests for bundling of all services and already have a couple of projects where we are providing the full complement of services. More importantly, we have several that we are providing multiple services, but the conversation began by producers’ interest in discussing our ability to offer all services. Q. Deirdre, who is the typical client to which you would provide financing? DO: There’s a wide range. We’ve provided financing for film and television productions with budgets ranging from $2 million to $100 million. Our loans are primarily against tax credits or other incentives, although we will sometimes finance other receivables along with the incentive. Most are U.S. and Canadian productions, but we have also provided loans on projects based in other international locations with stable incentive programs. Our loans are primarily against tax credits. Q. What are the characteristics of your typical client? DO: Our financing clients are almost exclusively independent production companies and producers. Studios, mini-majors, and the largest production companies tend to already have large bank facilities they use to finance all their projects and would not have a need for our financing on a single-picture basis. That said, there are numerous producers of large and/or highprofile projects that have opted for our offering over bank financing. Ultimately, it depends on the requirements of the project. Our offering makes the most sense when the higher advance rates from our loan – compared with bank financing – makes a big difference in being able to close financing (as it often does). 4 C A S T & C R E W F I N A N C I A L S E R V I C E S: A R O U N DTA B LE D I S C U S S I O N Q. Fred, what are the factors you consider when determining whether or not to issue a bond? FM: It’s an assessment of the viability of the production plan; it has nothing to do with commercial value of the project. We review the adequacy of budget and schedule in relation to the script … we look at locations, time frames, experience of the key crew members, the producer and director -- all in an effort to make certain that the plan is realistic, and that it will allow the project to be produced and delivered within the time frame and with the resources available. Q. What if you see problems? FM: If we have any concerns we’ll share them openly with the producer and work together to find reasonable solutions. Sometimes that’s reallocating resources and sometimes that’s extending the budget or schedule or rethinking a location. Q. What’s an example of how this type of advice benefits the production? FM: We recently suggested a change of location to a producer and introduced him to a previous client who now is helping re-set the production in that location. This, in fact, opened up the opportunity for some increased incentives and solved a major concern in terms of local crew availability and local shooting conditions. It’s going to work better all around. Q. Work with producer to find solutions. Joe, what are the various services you provide when it comes to incentives? JB: It’s a wide range – from no-cost advisory services to the full management of the incentive process. There are several financial institutions that depend on Cast & Crew to provide an opinion letter estimating the incentive for a production for which they are providing financing. W W W.C A S TA N D C R E W.CO M 5 Q. What’s the biggest mistake productions make – or the biggest misconception they have – about incentives? JB: Incentive programs vary from jurisdiction to jurisdiction. What qualifies in one jurisdiction may not qualify in a different jurisdiction. Even if you have worked in the same jurisdiction before, incentive programs are continually evolving and what qualified the last time may not qualify now. It’s important to have a conversation with us early in the process. Q. Deirdre, what is the single factor that makes your financing offer stand out? DO: Our lending terms, first and foremost, are pretty good. But, ultimately, I believe the most significant differentiator is our service. We do strive to go above and beyond. Although we have built up our financing portfolio significantly, we still are building our brand, and providing superior service is a necessary component of that. The fact is, word gets around, and we want that word to be good. For a producer, securing financing on a timely basis can be the difference between keeping a show together or not. So, we naturally take on the sense of urgency the situation demands for each of our loans. We’re not miracle workers, and there are some requirements that are non-negotiable, but we do everything in our power to get producers over the finish line quickly and efficiently. Q. Expertise, experience and client service. Media Guarantors is new to the market. What makes the company a compelling choice for producers? FM: Experience, expertise and client service … we’re really engaged and responsive to the producer’s needs, especially his need to close the financing as soon as possible. This is the differentiator we bring to each assignment. We’ve worked on so many projects over the years and can bring deep experience to the table for each project that’s submitted. The fact is, a lot of the risk assessment is based on trusting the experience of the key people involved – the producer, director and DP to come up with a viable plan they all believe in, and then use their best efforts to stick to the plan. Things will happen, they do on every show. But most are insured by the production package … the bond is there for uninsured events or things that took longer than expected or cost more than everyone believed they would. 6 C A S T & C R E W F I N A N C I A L S E R V I C E S: A R O U N DTA B LE D I S C U S S I O N Q. Joe, your advisory work, of course, is contingent on being up to date on incentives and locations. What kinds of relationships do you have with the various film commission offices? JB: We work hard at developing and maintaining relationships, not only with the film commissions around the world, but with the authorities having oversight of the film program. This might include: the film commissioners, department of revenue, or the economic development department in a particular jurisdiction. We monitor every piece of legislation related to a film production incentive, from the day it is introduced through enactment. Q. Deirdre, how active has your lending service been? DO: Since establishing the business five years ago, we’ve built up a significant portfolio. Most borrowers become repeat customers, so we are in the fortunate position of continuing to grow our business, but we have been active enough to date that we’ve had experience with a wide variety of projects. Q. How competitive are your lending terms? Optimizing money available for clients. DO: Pretty competitive. We’re not going to be priced as inexpensively as a commercial bank that is active in this space. That said, we’ve structured our offering to be more aggressive/generous than a lowercost lender such as bank, while not being as expensive as other boutique non-bank lenders tend to be. This results in our clients getting more money toward their production than with competitors of either type. This is probably because at Cast & Crew we view this business as a way to expand our relationship with our production clients, and to support our payroll, bonding and production incentive management businesses. This is not to say that we aren’t careful in our underwriting -- we ensure that our risk is appropriately mitigated and that we achieve a reasonable return relative to the risk we do take on -- just that we have broader considerations from each deal then simply maximizing returns. W W W.C A S TA N D C R E W.CO M 7 Q. Joe, what’s involved in your incentives management offering? JB: It’s A to Z. Our services include having a conversation about what costs/fringes do and do not qualify in the jurisdiction; advising on the free field coding to be used; providing an estimate of the incentive based on the budget; timely filing the initial/final applications; monitoring spend throughout production; providing intermediate estimates of the incentive; providing guidance on requirements for audit; recommending third-party auditors; working with the production contact when questions arise during the audit, and recommending tax credit brokers. You name it. Our services go from A to Z. You name it. Q. Fred, what’s your relationship to the production during the course of the production? FM: We want to be viewed as a resource and a partner by the production. We monitor the progress by reviewing call sheets, daily production reports and weekly cost reports, and speak to the production on a regular basis. The bond company has no view on what is happening creatively, just that the production is staying on schedule and within budget and will be ready for delivery on the contracted date. If we see the project trending incorrectly, we’ll speak to the show and assist the producer in resolving whatever the issue may be to get back on track. It’s not in a guarantor’s interest to “take over” a film—it’s the last thing we want to ever do. We want to help the show itself resolve any issues. Q. And your relationship to the financier? FM: We provide objective production expertise to advise them and provide a financial safety net to protect their investment. They take the credit risk, but usually have little experience in actually making a movie. They engage us to take the production risk. We report regularly and -- if there is a problem – we let them know how it’s going to be solved. It’s insight into the nuts and bolts to help mitigate their investment risk. 8 C A S T & C R E W F I N A N C I A L S E R V I C E S: A R O U N DTA B LE D I S C U S S I O N Q. What is your role regarding distribution agreements? FM: So the bond takes on the obligation of delivery to the various distributors whose contracts the financiers are using as collateral. We make sure that what constitutes “delivery” -- what’s in the “box” of stuff that needs to be delivered – is, in fact, deliverable, budgeted and delivered on time, when it’s supposed to be. We review each delivery schedule and all the delivery obligations and also make sure that the schedule allows sufficient time to complete post-production and still make delivery when contracted. Except for certain exclusions, the bond company has an unqualified obligation to complete and deliver the film, with first-class technical quality, based on the approved screenplay, with the productions elements that have been contracted. Q. Dave, how does Cast & Crew Financial Services work in concert with your legacy payroll services? Working in conjunction with payroll services. DB: Once a conversation begins about CCFS services, there’s never a second thought with respect to payroll services. The conversation always starts with the idea that pricing of services is going to be contingent on using Cast & Crew for payroll. Q. Thank you. W W W.C A S TA N D C R E W.CO M 9 GLOSSARY CASH REBATE/GRANT: A sum of money given to a qualifying production based on program criterion. No tax return is required for a cash rebate. COMPLETION BOND/GUARANTY: A form of insurance that guarantees financing to complete a film or television project within budget, in accordance with the script and on schedule. They sometimes are required by banks and investors to secure loans and investments in a production. Should a bond be invoked, the completion guarantor may assume control over the production and be in a recoupment position superior to all investors. GROSS BUDGET: Budget total before any tax credits. LOAN-OUT COMPANY: A personal services company set-up by many artists and high paid individuals in which their personal services are engaged through the company instead of directly with the production company. NET BUDGET: Budget total after tax credits (i.e. Gross Budget less Tax Incentives =Net Budget). NON-REFUNDABLE, NONTRANSFERABLE TAX CREDIT: A tax credit which can only be used by the qualifying production entity to reduce its own tax liability. NON-REFUNDABLE TAX CREDIT: A tax credit which can only be used to reduce tax liability, i.e. no refund will be made. PRODUCTION INCENTIVES: Anything that encourages productions to film in specific regions, whether it be a city, county, state, or country. (aka Film Incentives aka Tax Incentives aka Tax Credits) REFUNDABLE TAX CREDIT: A tax credit in which a refund will be given if the tax credit is greater than any taxes owed. SALES TAX REBATE: A refund on regional sales tax on qualified spend. The production pays the sales tax at the point purchase but gets a refund after filing a return. SALES TAX WAIVER: The production is granted a waiver from paying sales tax at the point of purchase. TAX CREDIT: A benefit given to a production in the form of either a credit on taxes the production company may owe, or a tax refund if no taxes are owed. The production company must file a tax return to receive the tax credit benefit. TRANSFERABLE TAX CREDIT: A non-refundable tax credit which can be sold to another tax payer, i.e. the production company does not have to use the tax credit for their own tax liability but may sell (transfer) the tax credit to another tax payer. 10 C A S T & C R E W F I N A N C I A L S E R V I C E S: A R O U N DTA B LE D I S C U S S I O N BIOGRAPHIES DAVID BENAVENTE Vice President, Independent Sales and Incentive Services Experience Cast & Crew Entertainment Services, Burbank Vice President, Independent Sales and Production Incentive Services February 2016 – Present Stephen David Entertainment, New York Chief Financial Officer April 2015 – December 2015 Hollywood Business Improvement District (BID), Hollywood Entertainment District Board member November 2013 – October 2014 Shine America, Hollywood Senior Vice President, Production Finance & Administration February 2010 – September 2014 Telepictures/Warner Bros. Senior Vice President, Finance & Administration 1987 – 2009 Education University of Southern California BS, Business Administration 1983 FRED MILSTEIN Chief Executive Officer, Media Guarantors Experience Media Guarantors President and CEO Mar 2018 – Present Pinewood Consultant August 2016 – Present Seven Stars Entertainment Chief Executive Officer Jun 2012 – Jul 2016 Aon / Albert G. Ruben Managing Director July 2009 – Jun e2012 cineFinance President 1997 – 2009 Education University of Pennsylvania BA, Communications 1968 – 1972 W W W.C A S TA N D C R E W.CO M 11 DEIRDRE OWENS Vice President, Incentive Financing Experience Cast & Crew Entertainment Services, Burbank Vice President, Production Incentive Financing August 2013 – Present Grosvenor Park Vice President, Finance September 2006 – August 2013 RBC Capital Markets November 2001 – August 2004 Tucker Anthony Investment Banking Analyst July 2000 – October 2001 Education UCLA Anderson School of Management MBA 2005 – 2006 Harvard University AB-Economics 2000 JOE BESSACINI Vice President, Film & Production Incentives Experience Cast & Crew Entertainment Services Vice President, Film & Television Production Incentives June 2009 – Present Production Incentive Consultant March 2008 – Jun 2009 Axium International Inc. Consultant Jan 2007 – January 2008 12 C A S T & C R E W F I N A N C I A L S E R V I C E S: A R O U N DTA B LE D I S C U S S I O N Warner Bros. Pictures Executive Director - Tax July 1979 – December 2006 Education Golden Gate University M.S., Tax University of Rhode Island – College of Business Administration B.S., Accounting