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October 10, 2023
The Waterfall in Film Finance
Producers, directors and all aspects of filmmakers are afraid of “the waterfall” when discussing film finance. And though the concept is extremely important and one that shouldn’t be taken for granted, it’s a legal concept that is fairly easy to grasp.
In film finance, the waterfall is a contractual agreement that outlines the order in which different parties will be repaid or compensated from the film’s revenues. The waterfall is typically structured so that debt holders are paid back first, followed by equity investors, producers and other financial stakeholders. It is also known as a recoupment schedule.
How Waterfalls Work
The waterfall is important because it provides a level of certainty for debt holders and equity investors. They know that they will be repaid before other parties, even if the film does not perform well financially. This reduces their risk and makes them more likely to invest in films.
Below is a simplified example of how a waterfall might work for a film production:
Distribution Fees- The distributor takes a fee to cover the costs of marketing and distributing the film; this fee is oftentimes 10-30% of the project’s gross receipts.
Debt Repayment- The production company repays its debt, including any interest accrued on the debt.
Equity Distribution- Equity investors receive their share of the profits, according to the terms of their investment agreement.
Producer's Fees- The producers receive a fee for their work on the film.
Profit Sharing- Any remaining profits are shared among the various participants in the film, such as the cast, crew, and other financial stakeholders.
It is important to note that the waterfall can be structured in many different ways, depending on the specific needs of the film production. For example, some waterfalls may give priority to certain types of debt, such as loan’s against the project’s tax credits, or to certain classes of equity investors.
Why Waterfalls are Important
Waterfalls are important because they help to ensure that everyone with a financial interest in a film is fairly compensated and paid in order of priority. They also help to protect investors, who are the ones taking on the majority of the investment risk. By understanding how they work, filmmakers, investors and their counsel can better structure their deals and minimize their risk.
As a filmmaker, lender or investor, don’t hesitate to reach out to BANKABLE if you have a question on the correct application of the waterfall for your film project!
