Years after Kestrel deal, unmet goals and hard feelings

A top official for one of Wisconsin's economic development agencies called a project to build a plane manufacturing facility in Superior the most risky investment the organization had ever funded through the federal New Markets Tax Credit program.

Still, records show state officials gave taxpayer money and incentives to what was then Kestrel Aircraft, the company responsible for the project - despite the risk and without proper review, in an effort to create hundreds of jobs.

While officials say Kestrel is current on all loan payments, the job-creation goal has yet to be realized. After three years, there's still no plane and no manufacturing facility.

Spokesmen for state economic development agencies now say Kestrel - which joined with New Mexico-based Eclipse Aerospace to form ONE Aviation Corp. earlier this year - has faced challenges raising money and meeting requirements to receive financing under federal programs.

Meanwhile, Alan Klapmeier - founder of Kestrel and CEO of ONE Aviation - says the state didn't follow through on its word to provide more loans and incentives as they had agreed. Klapmeier, who also is a co-founder of the Duluth airplane manufacturer Cirrus, said paperwork set the project back and that the delay caused a domino effect.

"When those pieces of the financing didn't happen on time, it's disconcerting to the other financial people and they delay theirs as well," Klapmeier said.

Klapmeier said the company's success in building the Kestrel 350 single-engine turboprop hinged on the state's word.

"We're considering a number of other locations besides Superior," he said. "From our point of view, the economic development project as originally envisioned didn't happen."

Job promises

In January 2012, Wisconsin Gov. Scott Walker visited Superior to announce the project, which was billed as the city's largest job creation effort by a manufacturer since World War II. The plan was for Kestrel to receive $4 million in state and federal loans, as well as $18 million in tax credits through the Wisconsin Economic Development Corp. The Wisconsin Housing and Economic Development Authority would also help Kestrel get up to $90 million in three rounds of tax credits.

During the visit, Walker said the loans and tax credits depended on the company creating 600 jobs.

"We've put incentives, whether it's tax credits or other incentives, on the line. But they're all tied specifically into the number of jobs that are created," Walker said at the time.

Two days later, WEDC - an agency Walker helped establish during his first days in office - signed off on tax credits and a loan for the company without formal staff reviews.

In the months that followed, Klapmeier said, the state didn't provide additional incentives they had pledged. He said WHEDA didn't follow through with help to secure two more rounds of tax credits for the project.

Delays in financing

"There were delays in securing the federal SSBCI (State Small Business Credit Initiative) loan, primarily because of delays in the company finding eligible match funding as required by the federal program and because of the complexities involved in securing the federal (New Markets Tax Credits), which were administered by WHEDA," explained then-WEDC spokesman Mark Maley in an email.

WHEDA spokesman Kevin Fischer explained that delays in financing occurred because the company offered collateral for a tax credit award that already had been offered to receive tax credits for another project in Maine.

"The sharing of this collateral needed to be negotiated with the other allocate - Coastal Enterprises Incorporated," Fischer said in an email. "There also was a need to get a special appraisal for the valuation of the intellectual property being offered as collateral."

In documents obtained by Wisconsin Public Radio, WHEDA outlined several risks with the project as they worked for months to award Kestrel with $30 million in federal tax credits.

For one, the agency was concerned that the newly formed company lacked audited financial statements.

"WHEDA/WCDLF (Wisconsin Community Development Legacy Fund) is only requiring proof of engagement of an auditor since the audit could take 60-120 days to complete," wrote WHEDA Economic Development Director Farshad Maltes in a May 2012 memo to WHEDA Executive Director Wyman Winston.

Maltes wrote that WHEDA could lessen the risk of the investment with reporting requirements on the funding provided. However, the agency also knew Kestrel was delinquent on its reporting requirements for the tax credit project in Maine, according to agency meeting minutes.

Questions were also raised over Kestrel's dependence on additional rounds of tax credits because the future of the New Markets Tax Credit program was uncertain.

Moreover, WHEDA had doubts Kestrel could build the plane, because doing so hinged on Federal Aviation Administration approval. The agency noted the company had already tried twice to certify the plane in Europe and Maine. Klapmeier has said that Europe's certification process is much more stringent than the U.S. and that issues with "fine print" on the Maine tax credit deal proved to be a barrier; he maintains that raising enough capital is the one and only obstacle to certification.

In a June 5, 2012 committee meeting, WHEDA Chairman Lee Swanson noted the project was "very risky" and "more akin to venture capital," according to meeting minutes.

Despite these concerns, WHEDA Marketing and Communications Director Brenda Marquardt said Kestrel has met all requirements of receiving tax credits through the federal program. She said outside reviews confirmed the project had a reasonable chance of success.

"Ohio National, an insurance company with an (Standard & Poor's) AA-rating, fully vetted the deal and agreed to be both the lender and tax credit purchaser in this transaction," Marquardt wrote in an email. "They are the entity assuming the financial risk in the project and determined the borrower covenants needed to finance the deal. WHEDA did not use any state funds in financing this transaction."

Marquardt said a WHEDA committee weighed the risks against Klapmeier's successful history with Cirrus, local support for the project and the potential creation of hundreds of jobs.

Local support

Klapmeier said the challenges and delays never would have happened if the state had come through with the financing on time.

Jim Caesar, a consultant for the city of Superior on the project, said the state was dishonest and/or incompetent in its handling of the deal.

"Knowing what their process is and the time that it takes to do that due diligence and all those things, then if it was going to take longer than that, they should've indicated so," Caesar said.

WEDC said the company has created 24 jobs; Klapmeier has said Kestrel has about 35 employees, according to the Wisconsin Center for Investigative Journalism.

WEDC has modified its loan agreements with the company to provide interest-only payments until October.

"WEDC has supported and will continue to support Kestrel's efforts to grow in Wisconsin," Maley said. "However, Kestrel - like all companies receiving awards from WEDC - must comply with the terms of its contracts."

Douglas County also modified a loan of about $500,000 to interest-only payments that began in March.

Dick Nystrom, president of the Douglas County Revolving Loan Fund, noted that Cirrus also faced challenges certifying aircraft in the early days of the company.

"I think the same thing is going to happen here," he said. "First thing is they (have) to get it certified and then they (have) to get a production facility and get it into production. It takes a lot of capital to do that."

The city of Superior offered Kestrel two parcels of land and $1.125 million in tax increment financing, as well as a $2.4 million loan. Kestrel has paid back about $369,000 so far, with another payment coming due next month.

Superior Mayor Bruce Hagen said he had, and still has, high hopes for the project.

"Show me another place where there are 600 jobs that are potentially available with great growth opportunities similar to what Cirrus is in Duluth," he said.

Hagen said he's interested in offering incentives or whatever the city can to keep Kestrel's plans for a manufacturing facility in Superior.

"If the state is not going to further any opportunity for Kestrel, then as I've told Alan, let's get it done right here by ourselves," he said.

After forming ONE Aviation this spring, Klapmeier said the company is in a stronger position to certify and build the plane than ever been before.

When the combination of Kestrel and Eclipse was announced in April, a ONE Aviation spokesman spokesman said the Kestrel aircraft was still under development and still 18 to 24 months away from its first flight.

The News Tribune contributed to this report.

Wisconsin Public Radio can be heard locally on 91.3 KUWS-FM and online at wpr.org.