Cost of Cash Means Small Films Pay Big Legal Fees

NEW YORK -- Arranging financing for small- to midbudget independent films has never been easy. But with the recent influx of Wall Street money, coupled with countries and states fighting to lure productions and banks that are less reluctant to extend bridge loans to complete shooting, one might expect the cost of putting together a film fund to be on the decline.

But don't tell that to independent producers like Holly Wiersma ("Factory Girl," "Wonderland"). With "so many cooks in the kitchen," she says getting money has never been so expensive. Financiers, banks and tax credits may promise an influx of new capital, but with them come the high-priced lawyers who are increasingly necessary to arrange complex financing terms.

In most cases, the producers themselves must pony up the high fees generated by these attorneys. According to insiders, fees on even the smallest pictures have risen to as much as $500,000-$750,000 per film, or 5%-10% of a typical independent film budget. That's five to 10 times what they were just a few years ago.

"We used to just hire a production lawyer to do the (one) financing deal," Wiersma says. "Now all these deals are so complex and time-consuming, it's law fees that are emerging as the biggest issue that film producers face."

Producers' lives might be easier if they were responsible only for the cost of their own lawyer or law firm. But many newcomers to film production are surprised to learn they also can be on the hook for outside counsel costs of their financiers.

Andrew Hurwitz, a partner at Epstein Levinsohn Bodine Hurwitz & Weinstein whose clients include many of New York's leading independent producers, says all legal fees traditionally have been absorbed by producers as a cost of making a film. But with financing structures changing and more players becoming involved, each shot of cash brings with it a new legal bill. These quickly mount.

On Infinity Films' upcoming "Butterfly on a Wheel," producer David Valleau ("Capote") spent more than $500,000 of his budget on lawyers who helped arrange U.K. and Canadian lease-backs as well as bank mezzanine financing. Valleau says other producers have spent more than 10% of their budgets.

"I'd prefer not to have to pay legal costs," Valleau says. "(But) what happens is there is a finite amount of financing, and you have to pay those legal fees (to get it). The bank's (fees) come first (and are) not included in the 1% fee and interest rates they charge you. And usually your total budget stays the same, so you have to sacrifice production elements. What goes on the screen becomes less."

Getting money is never as simple as pledging a portion of expected revenue for a large check, either. Not when a film has multiple financial backers. Increasingly, investors fall out of deals or make demands that require a producer's attorney to revisit prior financing arrangements and commitments, increasing legal costs. Hurwitz likens the difficulty of multiparty, multijurisdictional film finance dealwork to a "house of cards -- one crumbles and the rest fall down."

The window for completing a film is always short -- with actors, directors and other talent committed to other projects elsewhere. In turn, the pressure on a producer to come up with money quickly increases. Lawyers become necessary cogs toward finishing deals and pushing a project forward. Only later do those costs get noticed.

Few people in the independent film industry fault the lawyers for charging what their firms demand. And producers certainly are not the first to complain about legal costs. But what makes these fees unusually painful is the fact that producers typically aren't the ones picking the lawyers -- or negotiating the rates.

Danny Mandel, director of Newbridge Film Capital, which extends gap loans to independent filmmakers, points out that banks are often tied at the hip to their legal service providers.

"Banks have a short list of approved lawyers," he says. "If you are JP Morgan, you are giving your global legal work to just a handful of law firms. They try to consolidate all the work, whether it be in the energy industry or the film finance industry, so they have purchasing power and get discounts."

Mandel admits, though, that a top-shelf law firm's discount to a bank often provokes sticker shock to an independent movie producer.

Filmmakers are dealing with the headache in a variety of ways.

Paul Brennan, a partner at Sloss Law Office who represents a number of producers, says it's becoming more customary for clients to try to negotiate a fee cap. The strategy has found only limited success.

"These are not cookie-cutter deals," Brennan says. "You (as a producer) can try to negotiate a cap, but a lot of times you will hit resistance from the law firm, or as the cap approaches, you limit what kinds of deals you can do."

Valleau agrees. "They never turn out to be capped rates," he says. "They tell you they will cap the rate, but if anything becomes more complicated, you can guarantee you're going to get a higher bill."

Other producers, according to sources, are coming to arrangements with law firms to get discounts on hourly rates in exchange for including them in other work, such as acting as the agents negotiating foreign distribution (a task typically reserved for the producer's own inside counsel).

Some producers like John Hart ("Boys Don't Cry," "You Can Count on Me") believe this to be a dangerous precedent. Hart prefers a third option: sometimes turning away film financiers interested in investing in his movies.

"It's not worth it if they come with too many strings attached," he says of financiers who try to tack on legal costs. "The investor should come to the same terms as I do. He knows the term sheet has mechanisms in place to protect the investment, and if it's not good enough, it becomes too expensive. In some ways, financiers act as both the Sheriff of Nottingham and Robin Hood all in one. They want to screw you and get as much money as they can."

But turning down money is sometimes easier said than done.

Despite higher costs, resorting to financiers "becomes the difference between whether you want a movie made or not," Wiersma says. "These are often passion projects. People aren't doing it for the money. So ultimately, the legal fees end up coming out of the producer's fee."

Wiersma pauses before adding, "It's certainly not fair."