Soft Money - Germany

Despite the collapse of the Neuer Markt, Germany continues to offer local and international producers rich pickings from an expansive network of regional and state-based film funds. Thomas Clark reportsIn 1999, all an independent producer had to do to find backing for a project was to log on to www.neuermarkt.de, scroll through the companies listed and double-click on names such as Kinowelt, Helkon or Splendid. Three years on and the situation is rather different. Half of those listed German film companies have gone bankrupt, the others are struggling to survive and the Neuer Markt itself will shut down at the end of next year. But although Germany's most outstanding and once highly-celebrated film funding source has dried out, another one is still left and bubbling, the tax-sheltered film funds. In addition, producers can access Germany's expansive network of regional film funds on the condition that they reinvest the money in the local area.

Tax-sheltered Film Funds
Germany's estimated 35 film funds collected an approximate total of over $1.95bn (e2bn) in sheltered income in 2001 and will reach the same figure this year. But there is a huge lack of transparency about exactly what and where these funds are. Although an international producer does not need a German co-producer to access the funds, most will find it necessary to consult a local German expert to even find a telephone number for each.

Most funds are based outside the major film hubs of Berlin, Munich or Cologne in tiny villages or small towns (Chorus-Apollo, CP Medien) or the Bavarian suburbs (Alcas and Victory Media). In Apollo Media's case, its seven tax-sheltered film funds are financially and legally governed by a company based in the village of Ottobrunn, the head of distribution and promotion sits in Munich, and the adviser in charge of choosing the projects lives and works in Cologne. Each fund is estimated to have collected between $15m-$245m.

On paper, the 35 funds are open to every size, genre and nationality of project. There are no legal or administrative restrictions on where and how the money raised has to be spent. In reality, most specialise in different types of projects and, to maximise the tax benefit, a film has to be fiscally domiciled in Germany. For example, Videal or Victory Media focus on television production, and Target Media and Scopas tend to invest in animation projects.

Many of the funds have formed loose partnerships with established producers and distributors which absorb the lions' share of the millions raised. Munich-based Cinerenta has made a series of projects with Lions Gate Films and MGM, Duesseldorf-based Mediastream works with Universal Pictures, while Alcas has teamed up with Paramount Pictures and Hallmark Entertainment. However, there is still sufficient left-over for smaller independent producers and niche operators to access and the advantages are plenty.

Each fund employs one or two experienced local producers to advise them on investments. Once a production has attracted interest, the fund takes a hands-off approach creatively, as long as the film is delivered on time. The financial risk to the producer is small.

Since February 2001, the government prohibited the popular 'leasing-based film funds' where the fund acted like a bank and required the producer to repay the lent money plus a fixed interest rate, irrespective of box-office performance. Now the fund must carry the risk, but in exchange will own copyright. The producer usually retains exploitation rights, at least for the first decade.

To reduce the risk, most of the funds will not greenlight a project until about 60% of the budget is covered by pre-sales or co-production fees. There is no requirement to spend the money in Germany or on German elements.

So where is all the money coming from' An amendment to the German tax law in 1999 sparked the film fund explosion. They became the only capital investment vehicle whereby tax-payers can immediately deduct the whole sum invested from their annual income. This unique tax-saving advantage makes investors more lenient towards the economic performance of the funds they take a stake in - a perfect attitude for the vagaries of film-making. After all, it is the prospect of paying less taxes and not huge operational profit that leads them to invest in the first place.

However, the government is understandably unnerved by the amount of German tax money (estimated to be 90%) going abroad to foreign projects, and the system is being reviewed. Such is their value to investors that some funds have offered to invest 20%-30% of their funds solely in German projects. For example, Cinerenta is understood to be teaming up with Studio Babelsberg to shoot a slew of projects at the studios.

National and regional film funds
Germany's film subsidies are structured in the same way as the country: there is one national film fund as well as regional funds for each state. In total, film producers can access an estimated $197m annually from these funds. The funding guidelines are very relaxed in accordance with EU rules: an EU national or company must be treated the same way as a German one. All a foreign producer needs is an applicant with a company seat in Germany that brings in 20% of the budget. In short, an international company can access these funds as long as it opens a subsidiary office in Germany.

Based in Berlin, the national Filmforderungsanstalt (FFA) is funded by a 2.3% tax on all cinema tickets sold as well as on video rental and sales. The FFA has around $59m to spend on film production a year, and last year backed 45 theatrical projects.

In quarterly sessions, a panel of nine - seven film industry experts, one representative from the pubic service broadcasters and one from commercial television - grants individual subsidies for script development, production, distribution and theatrical infrastructure.

Unlike the regional Laender funds, where subsidies are only given to productions with positive economic effects to the region, the FFA does not demand a film be shot, post-produced or dubbed in Germany. The FFA also administers the so-called 'success grant', an award paid out to each German producer whose films attract over 100,000 admissions at the local box-office. Financed by a tax on all cinema tickets, the award is on a sliding scale from $98,000 to $1.2m.

Germany's leading regional film funds are in North-Rhine Westphalia (NRW), Bavaria, Berlin-Brandenburg and Hamburg. Like all other regional funds, they receive backing from their respective regional governments and public broadcaster as well as some private investors, such as commercial broadcasters and local studio facilities.

The Filmboard Berlin Brandenburg has a budget of $16.7m and last year supported 30 feature films with an average amount of $246,000-$492,000, according to chief executive Klaus Keil. The highest award a single project has received lately is $1.2m for the animated The Little Polar Bear, which was co-financed by the Target Media film fund and distributed by Warner Bros Germany. As with the other regional funds, the Filmboard insists that 100% of the allocated sum be reinvested in the region.

The Filmstiftung North-Rhine Westphalia has played an important role in establishing a strong film and television industry around the region and in Cologne. It has an annual budget of $32m to invest in feature and television production and last year spent $26.3m on 41 theatrical films. The only requirement for producers is to reinvest the full subsidy amount in the region. The FilmFernsehFonds Bayern (FFF Bavaria) ($29.5m) has much the same rules.

In Hamburg, the Filmforderung Hamburg (FH) is a different ball game, in turn both stricter and more liberal. According to Eva Hubert, FH's managing director, 150% must be reinvested in the region, although this refers across the film fund's entire budget, not to a single film. "This gives us the flexibility to occasionally fund a project where there are no regional effects," says Hubert. One of the latest films to receive FH backing was UK comedy Bend It Like Beckham which pocketed $492,000. The production shot for nine days in Hamburg, easily spending the $738,000 required.

Case Study: Enemy At The Gates
When Peter Strauss, managing director of Mandalay Pictures of the US, was trying to raise finance for the $81m Enemy At The Gates in August 1999, he headed to Stuttgart. The south German town was at that time home to CP Medien (previously known as KC Medien), which boasted some serious tax-sheltered film funds.

In 1999, these funds had to compete with the Neuer Markt companies for commercial projects from the US. Roland Pellegrino, CEO of CP Medien initiated the relationship with Mandalay on a trip to Los Angeles two months earlier. "We prefer to establish links with well-known production houses with the view to creating a long-term partnership," says Pellegrino. "It is always better to do a series of films with the same partners."

Today, Strauss is a regular at the Ludwigsburg headquarters of CP Medien. Mandalay and CP Medien have made several more films together including Serving Sara and Beyond Borders, and there are understood to be some 20 more are in the works.

CP Medien invested $24m in Enemy At The Gates, when all Strauss had attached was director Jean-Jacques Annaud, a tentative cast list including Joseph Fiennes and Ed Harris, and a production budgeted at between $80m-$100m. Enemy At the Gates is set during the World War II battle of Stalingrad, and initially Annaud wanted to shoot in Stalingrad (now Volgagrad). But it had been completely rebuilt since WWII and Annaud turned his attention to other towns in Eastern Europe. It was CP Medien that eventually made the decision to film in Germany. "Otherwise, we would not have participated," says Dieter Meyer, a producer for CP Medien. "We never had any doubt that our country had the facilities and the studio capacity to shoot a movie of this scale."

Mandalay agreed to shoot in Babelsberg Studios, outside Berlin. Strauss says it was an economic decision and no artistic compromises were made, but he estimates shooting in Germany pushed costs up by $10m due to crew costs. To level this financial disadvantage, Mandalay and CP Medien tapped into Germany's various regional and state funds, securing backing totalling $3.7m (Euros 3.75m) from the FFA, the Filmboard Berlin-Brandenburg, and the structural support centre Investitionsbank des Landes Brandenburg (ILB).

Rolf Bohr, head of the Berlin-based FFA, highlights the political and psychological importance of a project of this scale to the region, hoping that an investment in Enemy At The Gates would raise the profile of the FFA. It granted the production $74,000 as an interest-free loan, to be paid back only if the film turned a profit. The FFA refrained from any interference in the script or in other artistic decisions.

Filmboard Berlin-Brandenburg awarded $492,000 to the project seeing huge advantages for the region. (Additional finance came from the ILB which provided a low-interest loan worth $1.5m). A large set was built in economically-depressed Lausitz, a region close to the Polish border, where a flooded open mining pit would serve as the river Volga in the film. The cast and crew would spend several weeks spending their money on Lausitz services. "We put $492,000 into the project but the expenditure for the direct production cost alone was almost $29.5m," says the Filmboard's Klaus Keil. "Adding indirect effects such as living expenses for the crew, we might end up with a sum of around $34.5m."

Unlike the FFA, the Filmboard does get creatively involved with its investments. "We discuss the script and possible changes in an intensive way, yet we do not interfere in the cast or screenings," says Keil.

Although the Munich-based Bavaria Studios lost out to Babelsberg, the FilmFernsehFondsBayern invested $492,000 in Enemy At The Gates, even though only the hunting scene at the start of the film was shot in Bavaria. However, the fund charged 6.8% interest on the loan.

Enemy At The Gates was produced by a company set up in Munich under the name MP Film Management DOS Production, a subsidiary of CP Medien. Mandalay took worldwide distribution, with Paramount Pictures, with which it has an output deal, taking North American rights for $45m. Constantin Film bought German rights for a minimum guarantee of an undisclosed sum. As late as spring 2000 (shooting started in January) two co-producers were taken on board: UK producer Swanford, which invested $16m in the project, and Dublin-based Little Bird which brought in $8m.

Enemy At The Gates managed only 205,000 admissions in Germany, but the film has taken $120m worldwide. "We have already received some payback rates," says the FFA's Bahr. "I am positive we will get the full amount of the subsidy back after the final pay-off for the video release and television sales. That does not happen too often."