Alex Du is a lawyer at the Toronto law firm of McMillan Binch and a member of the firm's KNOWlaw Group.

obtaining enough financing to complete a project is one of the most important tasks a producer will face during a film and television production. Over the years, producers have learned how to be creative and flexible, learning new structures and financing techniques to ensure that whatever sources of funding they do obtain will meet the production budget.

What to do when you

have a "gap"

With presales to other countries diminishing and production costs rising (not to mention exchange rate risks), producers will often find a gap in their budget. In the film and television industry, the term "gap" typically refers to the difference between the production budget for a project and the total amount of contingent or anticipated sources of funding obtained to date.

For example, if a producer secures $1 million in presales and other sources of contingent funding for a project with a $2-million budget, the project would have a $1-million gap or deficit. Gaps are typically reduced by future or anticipated sales to distributors in either domestic or foreign markets.

The following is a brief analysis of how gaps arise and how some producers attempt to get around them when financing their projects.

Interim financing

In most cases, funds representing presales, tax credits, deferrals, investments and other sources of funding are not immediately available and are contingent on certain events occurring before a producer can have access to them.

For example, many presale contracts stipulate that amounts due to the production company are not payable until the project is delivered.

Meanwhile, money is needed to pay production costs, virtually all of which are due before delivery. Since producers cannot use these contingent sources of funds to directly finance the production, they turn to banks to lend them the money they need to provide the needed cash flow. Banks will look to the presales and other contingent sources of funding as collateral for a loan. This type of a loan is often referred to as interim financing.

Traditionally, banks will provide production interim financing if they know there are enough presale commitments and other sources of funding to meet the production budget (i.e., there is no gap) and that the producer has obtained a completion guarantee or bond for the benefit of the bank.

If a project can't be finished on time or on budget, a completion guarantor usually agrees to continue production and undertakes delivery of the project by a certain date. A completion guarantee provides the bank with a certain degree of comfort because they know someone with the proper expertise will complete and deliver the project on time and therefore, trigger presale obligations needed to pay the production loan back to the bank.

Essentially, a completion guarantee or bond permits the bank to accept presales, tax credits or other sources of funding as security for its production loan.

Gap financing

While it is true that some banks in Canada have become more sophisticated and knowledgeable of the film and television production business, as a general rule, most of them will not offer production loans if a gap exists in the budget.

A gap represents insufficient collateral for a bank to lend against, and since banks are generally uncomfortable with unsecured lending, they have traditionally stayed away from lending in this kind of situation. Moreover, with the exception of a few, most banks in Canada do not or have not yet acquired the expertise and experience to assess the risks associated with anticipated or future sales of a film or television project in various unsold markets.

Does this mean that Canadian banks do not provide gap financing? No. Some banks in Canada have already developed an understanding of the film and television production business, formed relationships with, or have learned about the reputations of, certain sales agents and producers and can comfortably take risks that other less experienced banks will not tolerate. These are the banks that are most likely to have, or are willing to provide, gap financing for Canadian productions.

However, as time goes on, more banks will begin to understand and become sophisticated about film and television production. With this increased understanding will come more competition among the banks and they will have to differentiate themselves from each other. As the Canadian film and television industry matures, banks may take a greater interest in gap financing since the risks will be better understood and the fees that a bank can earn for this type of lending can be lucrative.

In deciding whether to provide gap financing, banks will assess their risk by looking at several factors such as:

* the production budget and the size of the gap;

* the production company's history of completing its projects;

* the producer's sales forecasts or projections for unsold foreign and domestic markets; and,

* the reputation and past successes of the production company or a sales agent in obtaining sales in unsold markets or territories.

So, while banks in Canada are no longer saying no to gap financing, they are saying yes only to established producers with a proven track record and reputable sales agent.

Those banks that are prepared to provide gap financing will limit the size of the gap they finance. Banks will typically charge higher interest rates and a fee for gap production loans to compensate for the risk they are taking. Also, keep in mind that gap production loans typically have an interest reserve (i.e. the portion of the total loan that a bank will hold back from the production company in order to ensure that enough is available to at least repay the interest on the loan) that is larger than in traditional production loans since the gap loan will not be repaid until some time after the project has been completed and delivered to distributors.