Michael Mendelsohn is the Chairman and CEO of Patriot Pictures, and currently manages senior and mezzanine debt portfolios for banks and financial institutions specializing in entertainment.  Michael has arranged production financing for over 258 films, including “Lord of War,” starring Nicolas Cage and Ethan Hawke; “Material Girls,” starring Hilary Duff, and “Holy Cross,” executive produced by George Romero.   Mr. Mendelsohn has also arranged financing for such films as Beacon Pictures and Wolfgang Peterson’s ”Air Force One;” Lakeshore Entertainment produced “The Mothman Prophecies;” the Wachowski Brothers’ “The Matrix;” Icon Pictures produced “What Women Want;” and Quentin Tarantino’s “Reservoir Dogs.”

Seeking to get an inside look from a former banker now producer, I asked Michael Mendelsohn what is really going on with film finance in today’s market.  The following is his down to earth and “genuine” perspective on the indie film biz.

Kathryn Arnold: How did you get started in the film business?

Michael Mendelsohn:  I graduated Wharton School of Business, and shortly thereafter did a 20- minute piece for Johnny Carson.  It was a funny bleeper, bloopers and blunders teaser, and Johnny liked it and turned it into a show.   After that I went on to work at the William Morris Agency in their training program, and then worked for Union Bank, in their finance group, from 1985-1990.  After Union I went to Banque Paribas and started their entertainment finance group, from 1990-1995.  That was an excellent relationship and when I built Patriot Pictures I continued consulting with BP for many years thereafter.

KA: How are you financing films now?

MM:  Some presales, some gap financing, bank debt and equity.

(Bank Debt is when the bank loans against any sales/distribution contracts you have.  They usually discount the amount they loan based on the credibility of the distributor providing the contract.   Gap financing is when the banks loan against available territories, with the idea that the film will be sold for a higher amount when it is completed, so the bank is willing to take the risk on those available territories.)

KA:  Are banks still doing gap financing?

MM:  They are…but not as aggressively as I used to do…(Laugh) The days of 15-25% or more gaps are gone…in the 90’s, on a $40 million movie we could loan gaps of up to 25%, even 30%.

KA:  That’s when it was fun to make movies…there was more flexibility in how a film could be financed.

MM:  Well we got paid back on everything, so we could make those gaps.  Now, with the tight economy and shaky global markets, the banks can’t afford to take those kinds of risks.

KA:  So what are the gaps banks are lending on now?

MM:  Maybe 5-10%…if that.

KA:  How much of your sales are coming from foreign, and how much are coming from Domestic?

MM:  80% from Foreign

KA:  Are you pre-selling Domestic, or are you holding back that territory?

MM:  It’s very difficult to make a Domestic pre-sale…they aren’t making many of their own movies anymore, aside from the big tent-pole films and franchises.

KA:  What are the Domestics looking for?

MM:  They’re looking for action, violence, big star comedies, big special effects, animated movies, movies with well-known actors.  There are some movies that get nominated for Academy awards that certain studios will do.  The Weinsteins will do one or two, Focus and Fox Searchlight will do one…maybe two…but it’s slim pickings compared to what it was 10 years ago.

KA:  So can a movie still be profitable even without a Domestic pre-sale?

MM:  Oh yeah…LORD OF WAR didn’t have a domestic pre-sale and it made a profit, when you look at US + International Sales + DVD sales.  ALL’S FAIR IN LOVE made a profit.  It’s a more complex recoupment landscape, and one has to be patient to get all the various revenue streams in.

KA:  So for independent producers where do you go for distribution before a film is made?

MM:  As I said, it’s very difficult to get a domestic pre-sale.  For instance, I have financiers for a movie right now…a $17 million dollar budget …we have a big director, big stars…and the investors want a letter from a major studio saying they will distribute…and every major studio wants to see the finished film before they make a decision.

(The Studios have gotten burned so many times with both big and small budget movies, even with big stars, and the movies haven’t performed (examples) so they are more cautious….)

And the heads of the studios are my friends, and they’re saying…We can’t send you a letter without wanting to buy it, and we can’t buy it without seeing some of it ….so you need to make it first before we buy it.

KA:  That would be a catch 22…

MM:  Yeah, it’s really difficult.

KA:  So are there other ways to appease the financiers to make them feel comfortable to be able to move forward?

MM:  Well, some of them get it for a single film, and it’s just about finding the right individual or group.  For larger investors, we’re putting together a $20-$30M fund to do Horror movies.  So maybe we’ll find a SAW, or maybe there’s a PARANORML in the slate.

KA:  So rather than doing a single film with investors, if they have to move forward without a Domestic deal, are they more comfortable with a slate?

MM:  Well they like the Horror slate concept…we still do single pictures, but it’s more difficult for the Hedge funds to make their money back on a single picture…. The way we did it at Banque Paribas, is that we did 12-18 pictures a year…a new portfolio every year….So you had clout, you had returns on a number of different movies, a number of different genres, and a number of different budgets…which created the portfolio effect.  When you do just one movie and wait to see how it goes…it doesn’t necessarily yield the kind of return hedge funds are looking for.

(When you pencil out the numbers in a portfolio, where on 10 pictures you expect 1 picture to hit it out of the park, 2 to do okay and the rest fail…the studio and investors are looking to get an 18-25% return on the entire slate.  Which often times is more money than you can get in the stock market or real estate.)