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Kestrel in Brunswick: How blue-sky promises came crashing down

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Kestrel in Brunswick: How blue-sky promises came crashing down

BRUNSWICK — Alan Klapmeier had good timing.

When he first visited Brunswick Naval Air Station in spring of 2010, shopping for a place to build airplanes, the Midcoast Regional Redevelopment Authority was looking for a fresh start. Still smarting from the fallout over its flawed courtship of airplane refurbishing company Oxford Aviation, MRRA needed a tenant with a track record.

That's what Klapmeier's new company, Kestrel Aircraft, seemed to promise.

The co-founder of Cirrus Aircraft, Klapmeier has been called "the Steve Jobs of aviation" for his vision and attitude. Around the time he signed a lease with MRRA for Hangar 6, considered the crown jewel of the former BNAS, The Atlantic magazine prophesized that his latest venture, Kestrel, could be as successful as Pixar.

Never mind that the company's product, a composite propeller airplane, hadn't progressed beyond the prototype stage, or that it would retail for an estimated $2 million to $3 million. Klapmeier was eloquent, and convincing, as he responded to questions about the marketability of the new plane.

"One of the hardest things about the aviation industry is convincing the business world that there's a market," he said in July 2010, just after former Gov. John Baldacci formally announced the company's lease with MRRA.

"To us, the question is, 'Do people need transportation?'" Klapmeier said. "The answer is 'yes.'"

But a year later, according to state documents obtained through a Freedom of Access Act request, there were indications things were already going south.

During an Augusta meeting about how to improve Maine's ability to attract businesses like Kestrel, Klapmeier expressed frustration to George Gervais, commissioner of the Department of Economic and Community Development, and Steve Levesque, executive director of MRRA, about how difficult it had been to get the financing he assumed was in the bag.

Klapmeier had been expecting a $100 million allocation of New Market Tax Credits, a federal program designed to encourage investment in low-income, rural areas, but had only received about a fifth of that amount. The company was strapped for cash, and a few months later would stop paying rent on the hangar it leased from MRRA.

Despite the funding problems and Klapmeier's concern, neither Levesque nor Gervais would later say there were indications that Kestrel was considering building airplanes anywhere but Brunswick.

Six months later, Klapmeier had decided to do just that.

Gervais' email records reveal that a rift between Kestrel and Coastal Enterprises Inc., the Wiscasset-based private, nonprofit community development institution that provided tax credits to the company, led Kestrel to look elsewhere for financing.

The documents also show that state officials hustled to find a way to keep the company's manufacturing facility in Maine, but eventually Kestrel stopped providing the financial information needed to close the deal.

An examination of the records also raises other questions: Is Kestrel the kind of company the state, and MRRA, should have been wooing in the first place? And should officials have done a better job scrutinizing the company?

Early warning

In February 2011, a crowd dwarfed by the size of Hangar 6 gathered around a Kestrel prototype as Gov. Paul LePage announced the first ceremonial transfer of property from the U.S. Navy to MRRA. Afterwards, guests climbed into the cockpit of the small plane and ran their hands over its shiny wings as Klapmeier shook hands with state and local politicians.

In a phone call after the meet and greet, Klapmeier told a reporter he was frustrated by the bureaucracy involved to get New Market Tax Credits. He complained about the excessive amount of due diligence required and the "layers upon layers" of assurances he had to provide. Klapmeier wanted to  convince his investors to believe in him with an emotional appeal, not by providing reams of detailed financial information.

"What we are removing from the process of life is the ability for people to rely on judgement," he said. "Is this really the right way to protect ourselves?"

The answer for his investors was yes.

After a thorough check of Kestrel's financials and an independent review, the board of CEI Capital Management decided the company's airplane manufacturing business was too risky an investment. Instead, they chose to fund a safer side of the company, Kestrel Aeroworks.

"We worked with the company to develop a plan to fund the maintenance-and-repair operation," Charles Spies, chief executive officer of CEI Capital Management, said recently. "Where we ran into issues was going beyond that."

In April 2011, Kestrel received $20.7 million in New Market Tax Credits, netting the company about $7.8 million in cash.

Spies said he knew Kestrel wanted more money, but his board did not feel comfortable investing further in "an early stage company with a commercially unproven product," as he described Kestrel in a Nov. 1 letter to Gervais.

"We're stewards of the taxpayer dollar," Spies said. "So across our whole portfolio we're trying to limit that risk."

But the Kestrel team expected CEI to funnel the company more tax credits.

Klapmeier did not respond to several recent requests for comment, but in an interview last October, after Kestrel had started looking out of state for financing, he suggested that something had gone awry with the CEI deal.

"The financing we've gotten to date is not the amount or the schedule we'd originally anticipated," he said.

Privately, a Kestrel spokesman was more specific.

"I believe the fastest way to bring closure to this funding gap, is to utilize political assets to pressure Coastal to honor its commitment," Kestrel spokesman Scott Prinz wrote to Gervais in an Oct. 26, 2011, email.

But CEI wasn't alone in its reluctance to invest in Kestrel. Other organizations that administer New Market Tax Credits also balked at the prospect.

According to Spies' letter, three additional organizations expressed interest in obtaining tax credits for the company. One reversed itself after an initial look into the company's financial records, a second decided to wait until later, and Kestrel rejected the terms of the third.

More importantly, Spies wrote, Kestrel needed private financing, not only to increase its chances of getting more New Market Tax Credits, but because doing so "shows that professional investors and lenders ... believe in the deal."

Why didn't Maine officials know sooner that Kestrel was looking around, especially since Klapmeier's frustration with the New Market Tax Credit program was already fairly well known?

"Simple," Gervais said in an email last month: Klapmeier hadn't actually said the company was short on funding.

"Alan’s contention over the summer was that the (New Market Tax Credits were) far more expensive and cumbersome to deal with than was expected," Gervais said. "... Nobody was aware there would be a gap to be filled at that time."

The scramble begins

Once word got out that Kestrel was considering Berlin, N.H., Maine officials sprung into action. For the next 2 1/2 months – until Kestrel announced it had chosen Wisconsin – Gervais' inbox was flooded with emails from from potential investors, officials at the Finance Authority of Maine, the Maine Technology Institute, and Cate Street Capital, a Portsmouth, N.H.-based investment firm that had tried to broker Kestrel's deal with Berlin, N.H.

But the publicity meant other states around the country were trying to woo Kestrel, too.

In an October interview, Klapmeier said said he would never publicly pit one state against another to get the best deal. He said the company did not solicit other states, but simply responded to questions from a reporter who discovered Kestrel was considering Berlin.

"If nobody had asked, would we have gone public? No," he said.

At the time, Gervais said he didn't believe Kestrel was using the media to gain an advantage. But he has changed his mind.

"I wouldn't argue with that," he said in response to a question about whether Kestrel used the press as a tool to attract attention.

Throughout October, November and December, Kestrel spokesman Scott Prinz repeatedly reassured officials that Maine was still the company's first choice, saying things like "(Klapmeier's) heart is still with Maine" in a Nov. 28 email.

But a Dec. 8 email from Alexandra Ritchie, director of government and community relations at Cate Street, suggested the company was leaning towards Wisconsin, which could offer a larger package of incentives.

"I am very concerned that they are looking at the immediate future, and their immediate needs, instead of the long-term picture, to base their decision on where to locate," she said.

A month later, Kestrel had stopped supplying financial information to FAME officials who were trying to help the company secure a $10 million loan.

By that time, it was clear Wisconsin had put together a more compelling package. Wisconsin was willing to guarantee Kestrel $30 million in New Market Tax Credits, even though the credits had not yet been distributed for 2012 and the state had no idea if it would receive them.

Kestrel had asked Gervais about a guarantee from Maine, but the answer was a firm no.

"I wasn't willing to even talk about that," Gervais said. "State taxpayer dollars are not used for that purpose."

On Jan. 16, 2012, it was over. Wisconsin Gov. Scott Walker announced the deal with Kestrel in a statement very similar to the one made by former Maine Gov. Baldacci a year and a half earlier.

"I am pleased with the aggressive package we have put forth in conjunction with strong local support to make this major job creation contribution to Superior," Walker said in a written statement.

A month later, Wisconsin did not receive the tax credits it was expecting. As Gervais predicted, the state will have to find some other way to come up with the $30 million it promised Kestrel.

The right kind of company?

Not everyone was upset Kestrel decided to move on.

After the media storm had died down, two economic development experts congratulated Maine officials on not landing Kestrel.

Peter DelGreco and Matt Jacobson, the current and former chief executive officers, respectively, of Maine & Co., a non-profit Portland-based business attraction firm, said Maine should have been skeptical of the company from the start.

"When a company with expansion or growth plans comes along and their first question is how much money Maine can give them ... we should proceed with caution, if at all," they wrote in a candid Feb. 20 opinion piece in the Bangor Daily News. "... Building relationships yields far better results than having a gun put to our heads and caving in to unreasonable demands for financing and incentives."

DelGreco and Jacobson also questioned whether Kestrel was the right kind of company for Maine to attract.

"Does it make sense for Maine to direct its limited resources toward risky companies like Kestrel, or to focus our resources on companies with a better track record ... ?" they said.

A month later, Jacobson did not respond to a request for additional comment. DelGreco, now toeing the Maine & Co. line, would only speak off the record about Kestrel; publicly, he issued a written statement that expressed the opposite of his previously published sentiment.

"While we wish Maine had been successful in assembling a workable financing package for Kestrel ... we wish them great success and look forward to the continued growth of their Maine operation," he said on March 27.

Although CEI ultimately decided only to invest in Kestrel's maintanence-and-repair operation, Spies said there's nothing prohibiting the firm from trying to get New Market Tax Credits for companies like Kestrel in the future.

"Especially in a place like Brunswick Naval Air Station that has a huge, immediate loss of jobs, we're absolutely willing to try to see what we can do," he said.

The MRRA's Levesque, meanwhile, maintains a rosy outlook about Kestrel's future in Brunswick, where the company has paid its back rent – about $78,000 for six months – hired 25 people and is hoping to hire another 75 or so by December 2014, according to a Jan. 16 email from Prinz to Gervais.

In fact, for Levesque, Kestrel never was a too-risky investment.

"Every company is risky, every start-up venture," Levesque said last week. Looking back, he said, he wouldn't have done anything differently.

"It was," he said, "a fairly standard economic development package deal."