Superman, The Empire Strikes Back, Never Say Never Again and Lone Survivor. What do these films have in common?
They were all financed and distributed according to a negative pickup arrangement. Even Terry Gilliam’s Brazil, a negative pickup for Universal Pictures produced by Arnon Milchan: in this particular case, the studio had creative disagreements with the director over choice of star, content, and duration, and failed to resolve these issues to its satisfaction, because the negative pickup had essentially granted Milchan final cut.
The negative pickup is a type of film financing arrangement, an interparty agreement in which the parties involved are bank, completion guarantor, producer, and distributor, usually bank financed with the collateral being a Distribution Agreement from a trusted and creditworthy Distributor or Studio then owning distribution rights upon delivery of a completed film negative by a stipulated date and in accordance with the terms of the agreement, where the pickup price shall include cost of budget (which has to include a completion bond which premium usually amounts 3-5% of the production budget and contingency), cost of interest, origination fee, bank and legal expenses.
The Producer, having agreed to sell distribution rights for certain territories to a Distributor (or two, in the case of a split rights deal where one gets domestic and the other international rights) who has in turn agreed to pay on delivery within the Distribution Agreement, borrows funds for production to be repaid on delivery from a Bank within the Loan and Security Agreement, whereas a Completion Guarantor oversees production and has right of takeover within the Producer’s Agreement, and agrees to guarantee delivery per Distribution Agreement or repay the bank within the Completion Guarantee.
The interparty agreement defines effective delivery, inspection, quality control (usually 10-14 days), cure periods (usually 10 days) and arbitration procedures (a period of time that bears interest) as defined by IFTA if Distributor, Producer and Completion Guarantor argue over whether effective delivery has occurred or not, and thereby who repays the Bank, the Distributor if effective delivery has occurred or the Guarantor if it has not, and at that point the Guarantor owns the film. Therefore the Guarantor has both Preliminary (Production Analysis) and Balance of Requirements (Document Analysis) and reviews all the related documents before issuing the bond: the Guarantor does not like essential elements (e.g. stars), and also can stop enhancements (additional items added to production) and force the producer to pay from his own salary.
Pre-sales is a variation of negative pickup in which distribution rights are sold territory by territory resulting in multiple Distribution Agreements that are used as collateral for the loan, where there is usually a Minimum Guarantee plus revenue share arrangement for each primary territory (secondary territories are usually not accepted as collateral), an advance paid immediately and the rest upon delivery, there is usually one or more sales agents who get a 10% fee collectible once the bank has been paid back (so agents usually oversell till 120% to get their fees), unsold territories can be added up as collateral paying an extra interest on the gap and usually only if they are worth twice the financing gap and such gap does not exceed 20%.
A negative pickup arrangement reduces the downside risk for investors that the film does not find a distributor at all, perhaps because it is not as good as anticipated, from the studio’s point of view it is not taking much risk because if the negative is not delivered or delivered not exactly as agreed, then the studio has no obligation, and safer also for the producer because such requirements are purely contractual and not regarding artistic value of the work. Furthermore, the distributor does not share the risk that the film goes over budget, since a completion guarantee will have been provided, the producer may get a better deal from competing distributors upon a potentially good film, and it enhances foreign sales potential. However, the producer still has to obtain financing from sources other than the studio or distributor that is a bank or other investors; also, the arrangement embeds a risk/reward ratio in the sense that the more risk the producer assumes relative to the distributor, the better deal the producer will be able to negotiate, and is potentially less rewarding for the producer and less expensive and somehow speculative for the distributor, requiring complex transactions and high therefore high transaction costs, thus definitely belonging to producers with a proven track record, major and trusted distributors and a relatively small circle of qualified professionals and financiers.