A Minnesota company’s plan to build airplanes at the former Brunswick Naval Air Station was seen as a major boost, both to base redevelopment and the midcoast Maine economy, when it was announced in July 2010.
But when Kestrel Aircraft Co. finally reached a $100 million agreement last week on where to build a manufacturing plant, it was Wisconsin, not Maine, that signed on the dotted line.
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Beyond sending 600 aircraft manufacturing jobs to Superior, Wis., instead of Brunswick, the company’s decision exposed limits in Maine’s ability to compete for such projects: Wisconsin was able to quickly put together a land and tax-credit package with a big enough incentive to close the deal; Maine was not.
The incident also put the spotlight on a federal tax credit program that was a critical part of both states’ efforts to seal a deal with Kestrel, and on a Maine company that administers those tax credits. And it raised questions about whether Maine is able to take advantage of those credits as effectively as it could.
Both states were using federal New Market Tax Credits as the central feature in their business-incentive offers to Kestrel. These credits offset some of the money a company or other entity would need to borrow in startup costs — for building a new plant, for example. For the next seven years, the company need only pay interest on the borrowed portion, which reduces its expenses during its critical startup period.
Wisconsin put together an incentive package containing up to $90 million in tax credit-supported investment — more than four times what Maine offered.
Maine’s offer was put together by Coastal Enterprises Inc., headquartered in Wiscasset, a relatively obscure private nonprofit company, and the only one in the state authorized to distribute the New Market credits. Wisconsin’s tax credit package was put together by a state agency, the Wisconsin Housing and Economic Development Authority.
Some experts say a state agency has advantages over a private company. In light of the Kestral outcome, some Maine officials are saying the state may need a public agency of its own to leverage private investment in big projects like this.
Gov. Paul LePage blamed Coastal Enterprises for the failure of the Kestrel deal, saying that what it offered in financial help — $20.7 million — fell short of Kestrel’s expectation for about $60 million.
However, Charlie Spies, CEO of Coastal Enterprises Inc.’s CEI Capital Management, a for-profit arm of the company that handles New Markets Tax Credit financing, said he never offered Kestrel more than $20 million, either on paper or in conversations.
Spies said he told Kestrel executives that he would try to find other entities that deal in the tax credits to help with some of the rest of the $100 million in financing the company needed for the plant. But he said he made it clear that Coastal Enterprises wouldn’t take on the full $60 million that Kestrel was seeking from the tax credits.
Spies said he contacted four other organizations that distribute the tax credit allocations. One never responded, two declined and one contacted Kestrel for information, but never followed through with a financing package, he said.
NONPROFIT’S PROJECTS NATIONWIDE
Coastal Enterprises was first authorized to issue the tax credits in 2004 and uses them to help finance projects around the country.
Since then, it has received tax credit allocations that have translated into $683 million in investment capital used to finance 50 projects in all. Of that, $221.3 million has been invested in Maine.
Spies said Coastal Enterprises aims to steer a third of the investment money generated by the tax credits to Maine, a third to the rest of the Northeast and the other third to projects around the country.
In Maine, the credits have been used to finance 16 projects, including nonprofits, such as $4.1 million to help finance the Gulf of Maine Research Institute in Portland; and for-profit ventures, such as $11 million for a 93-room Hampton Inn motel in Presque Isle.
William Luecht, an associate manager at the federal Community Development Financial Institutions Fund, which oversees the tax credit program, said Coastal Enterprises is known for its willingness to work with other tax credit entities on projects. The company has financed projects as diverse as helping a town in New Hampshire buy more than 5,200 acres of land for a “community forest” to a eucalyptus plantation and veneer mill in Hawaii. It has also financed projects in New York, Vermont, Massachusetts, West Virginia and Louisiana.
Spies said the credits are a valuable source of financing in a time when banks are reluctant to take on much risk.
“It allows projects to get done in this (economic) environment,” Spies said. “Without New Markets Tax Credits, they wouldn’t get financed.”
They are also an important part of Maine’s economic development strategy. They can be an important draw for a business that’s looking for a place to set up shop or expand.
Maine may need all the incentives it can get. Last month, Forbes magazine put Maine last, for the second year in a row, in its ranking of the best states in which to do business. Forbes cited business costs as well as net population migration out of state and weak job and economic outlooks as key reasons for Maine’s low ranking.
ALLOCATIONS BUDGET LIMITED
Demand for the tax credits is high. Luecht said Congress authorized $3.5 billion for tax credit-generating investments — called allocations — in the last funding round. But the Treasury Department received applications for more than $23.5 billion.
That was part of the reason, Spies said, that Coastal Enterprises was reluctant to provide more financing for Kestrel. The $20.7 million tax credit allocation offered to Kestrel would have been one of the larger deals that Coastal Enterprises had handled under the New Markets program. The $60 million allocation that Kestrel was seeking would have taken the lion’s share of Coastal Enterprises’ $77 million in allocations for all of 2011.
Besides Kestrel, Coastal Enterprises was involved in financing 10 projects last year, including $14.26 million at Brunswick Landing — the new name for the former air station — for office and manufacturing space for Molnlycke Health Care, which will produce up to 85 new jobs.
Coastal Enteprises also supplied financing to help buy more than 12,000 acres of working forestland in Aroostook County, which the company said will preserve guide and lodging jobs; and $13 million for an early childhood education center in Waterville.
Coastal Enterprises’ use of New Markets Tax Credits inspired the Midcoast Regional Redevelopment Authority, which is overseeing the redevelopment of the Brunswick base, to apply to administer the tax credit allocations so it can put together its own financing deals at Brunswick Landing. The redevelopment authority has been approved to administer the tax credits, but it won’t hear what its allocation is — it has requested more than $60 million — until sometime next month.
The redevelopment authority had hoped to use its allocation of credits to provide more financing for Kestrel, but the company’s CEO, Alan Klapmeier, told authority and state officials that he would take the first offer that provided full financing for the plant. That turned out to be Wisconsin’s.
A PUBLIC AGENCY’S ADVANTAGES
George Gervais, Maine’s economic development commissioner, said after Kestrel’s decision was announced that Maine should have a public agency of its own to issue tax-credit financing packages. That could be the Finance Authority of Maine, the Department of Community and Economic Development, or some other agency, he said.
There are reasons this might work to the state’s advantage.
Coastal Enterprises puts together financing packages for projects around the country. A state agency, however, would focus exclusively on Maine, and keep the state’s economic needs in mind when planning how to use the tax credit packages.
It could, for example, set aside some of the credits year to year so financing would be available should a big project, such as the Kestrel proposal, come along.
Klapmeier complained that Maine’s failure to put a financing deal together quickly cost Kestrel opportunities. Once Wisconsin put its package together, he wasn’t willing to wait to hear whether the redevelopment authority received enough tax credit allocations to provide financing in Maine, he said.
CONSULTANT: MAINE CONSIDERED STINGY
Maine’s experience illustrates why the tax credits are “a huge opportunity, but cumbersome to administer,” said Ed McCallum, owner of McCallum Sweeney Consulting, a site selection consulting firm in South Carolina.
McCallum said the tax credit packages often can’t be put together fast enough for a business looking to make a siting decision quickly.
McCallum said if Maine can figure out how to put the federal tax credit deals together more quickly, it could help, because the state is considered pretty stingy when it comes to attracting new businesses.
“Maine doesn’t have a lot of incentives,” he said. “There are states that are really good, and Maine isn’t one of them.”
McCallum said that word about the loss of Kestrel will get around in site selection circles, because a $100 million project with 600 jobs is considered a big loss. In itself, it might not hurt business recruitment efforts by the state, he said, but that could change if it happens again.
“It has an impact, but it matters whether it’s a single event as compared to a series or trend that we look at,” he said. “If it continues to happen over and over, then we start asking, ‘Why does this keep happening?’ “
Staff Writer Edward D. Murphy can be contacted at 791-6465 or at:
emurphy@pressherald.com
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