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In lost deal's wake, Maine has nagging questions

By Edward D. Murphy emurphy@mainetoday.com
Staff Writer

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.

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Alan Klapmeier, center, CEO of Kestrel Aircraft Co., holds a news conference at the Superior, Wis., airport Monday to announce that Kestrel was coming to Superior and bringing 600 jobs with it. Wisconsin Gov. Scott Walker, left, and Superior Mayor Bruce Hagen listen. Klapmeier complained that Maine’s failure to put a financing deal together quickly cost Kestrel opportunities.

Jed Carlson/Superior (Wis.) Telegram

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Charles Spies, chief executive officer, Coastal Enterprises Inc.’s CEI Capital Management

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New Markets tax credits aid distressed areas

The New Markets Tax Credit program was created a decade ago to stimulate investment in economically distressed and rural areas. Once an area is designated as distressed or highly distressed, the credits can be used in financing packages put together by Treasury Department-approved "Community Development Entities." Coastal Enterprises Inc.'s CEI Capital Management is the only Community Development Entity currently based in Maine, although those in other states can get involved in Maine projects.

Here's an example of how the program works:

A company needs $10 million to start operations in Maine, but is having trouble lining up favorable terms on conventional financing.

If the company wants to locate in a distressed or rural area, the Community Development Entity can line up an investor, such as a bank or venture capital firm, to provide a loan of about $7.2 million. That triggers tax credits of roughly $3 million, but those are sold for less than face value to businesses looking to offset some of their tax bite. After fees, that leaves about $2.8 million to go into the company, rounding out the $10 million value of the package.

The income from the sale of the tax credits has to be used for company operations at the designated site, but it doesn't have to be repaid. The company pays only the interest on the $7.2 million investment for seven years, when the tax credits expire. Then, that investment must be repaid, but the expectation is that by that time, the company will be on solid ground financially and will be able to get conventional bank financing.

Coastal Enterprises said the four projects it financed with tax credit packages that have reached that seven-year mark have all been able to obtain conventional refinancing to repay the investment.

PROJECTS SUPPORTED BY COASTAL ENTERPRISES INC. CAPITAL MANAGEMENT

CEI Capital Management's goal is to use about a third of its financing capability through the New Markets Tax Credit program in Maine, a third in the rest of the Northeast and a third elsewhere in the country.

It looks for projects that meet its "3E" measures: economic progress, social equity and environmental sustainability. These are the projects it helped finance last year with New Markets Tax Credits:

• ZeaChem Applied Technology, Boardman, Ore. $20 million. Research and development and engineering service center/demonstration facility for the company's cellulosic ethanol technology. 20 new jobs.

• NewWood Manufacturing, Elma, Wash. $25 million. Sustainable materials manufacturing plant to make wood-plastic composite sheets. 150 new jobs.

• Rome Creek Timber, Oregon and California. $20 million. Refinances debt on more than 100,000 acres of sustainably managed timberland. Helps preserve 3,000 jobs.

• Kestrel Aeroworks, Brunswick. $20.7 million. Financing for aircraft refurbishing and upgrade facility. 25 jobs. (Note: This is a separate operation from the company's manufacturing plant, which will now be built in Wisconsin.)

• American Process, Alpena, Mich. $20 million. Demonstration cellulosic ethanol bio-refinery to be built by company that is 85 percent owned by women.

• Berlin Station, Berlin, N.H. $20.7 million. Salvaged boiler facilities from pulp mill converted to environmentally friendly 70-megawatt power plant. 40 new jobs.

• Kennebec Valley Community Action Program, Waterville. $13 million. Funding for Educare early childhood education center. Will serve up to 200 children, primarily from low-income families.

• Axio Green, Greenfield, Mass. $10.8 million. Two solar panels to be placed on top of town's capped landfill. Will save town about $175,000 annually in electric costs. $100,000 also goes to a local college for training in solar energy.

• East Grand Woodlands, Aroostook County. $13.3 million. Purchases more than 12,000 acres of working forest, to be managed using sustainable methods. Helps preserve 100 jobs.

• Echo Renewable Resources, Clinch and Echols counties, Georgia. $21.05 million. Purchases more than 38,000 acres of timberland to be managed using sustainable methods. Will supply local mills, helping to preserve an estimated 2,000 jobs.

• Brunswick Landing/Molnlycke Health Care. $14.26 million. Office and clean manufacturing space at former military base for health care company. Up to 85 new jobs.

• CEI Capital Management received $77 million in tax credit allocations last year. The projects total more than that because CEI partnered with other development entities and used allocations saved from prior years.

Source: CEI Capital Management

COASTAL ENTERPRISES INC. AT A GLANCE

Coastal Enterprises is a hybrid: a private, nonprofit community development company. Its goal isn’t to make money – although several subsidiaries are for-profit ventures that help support the nonprofit activities – but to invest in projects that help fulfill its mission of creating “economically and environmentally healthy communities.”

CEI makes business investments that are funded by interest-bearing notes that it issues, federal programs like the New Markets Tax Credits, and two venture capital subsidiaries. It also supports affordable housing and child care projects.

Location: Wiscasset

Founded: 1977

Employees: 85

Salaries and benefits: $5,229,411 (2009)

Loans and investments outstanding: 626

Capital under management: $371 million

Total loans: $268.7 million

Amount of investments leveraged: $857.8 million

Source: Coastal Enterprises

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.

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