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WEDC threatens legal action against Kestrel Aircraft as another deal goes south

Gov. Scott Walker announces a $20 million state economic incentive package in 2012 for Kestrel Aircraft, which promised to bring more than 600 jobs to Superior. Five years later, the company, which received state assistance without a full financial review, has defaulted on a $4 million loan and the Wisconsin Economic Development Corp. is pursuing legal action.

A day before Democrats submitted a petition to recall him in 2012, Gov. Scott Walker flew to Superior to announce a $20 million award for an aviation start-up promising to create 665 jobs and to invest more than $50 million in the state.

Five years later, Kestrel Aircraft has defaulted on its loan repayments after investing $1.4 million and creating 25 jobs, and the Wisconsin Economic Development Corp. says it is initiating legal action against the company.

The sour Kestrel deal is the latest reminder of how hasty decision-making and loose financial controls in WEDC’s early days have cost taxpayers. And though the agency has put in place several safeguards since 2013, the early missteps continue to dog WEDC as it negotiates the largest taxpayer-backed corporate incentive deal in U.S. history.

Last week the WEDC board delayed a scheduled vote on the nearly $3 billion award to Taiwanese manufacturer Foxconn when an unspecified problem with the contract was identified shortly before the vote was to occur.

The board could vote on the Foxconn deal as early as Nov. 8, but as is common practice, members will only be allowed to review a document that a WEDC staff underwriter prepares summarizing the agreement. That document isn’t being released publicly while the board deliberates. The board and the public won’t be able to see the contract itself until after the contract is signed.

WEDC board member Sen. Tim Carpenter, D-Milwaukee, an opponent of the deal, said Friday in an interview he is calling for WEDC to amend its process so that the board can review the contract itself before granting final approval. He said there was some irony in the board at its August meeting being given closed door updates on both the potential Kestrel litigation and the Foxconn negotiation.

“Based off of what happened with Kestrel and the size of this, the contracts should be made available to the board members,” Carpenter said. “If you vote for something as a legislator, you bought the farm, you have to explain everything you voted for. … Because this is so complex and important to know what’s going on, it’s essential we’re looking at this.”

In response, a WEDC spokesman said the process for approving the Foxconn award will follow the same process as other enterprise zone awards — the board will vote to approve a staff review, which details the terms of the agreement, designates the zone and authorizes WEDC staff to finalize the contract. Once the contract is executed, it will be a public document.

WEDC board chairwoman Lisa Mauer said she disagreed with Carpenter’s assessment of the situation and that the board has been kept apprised of the process.

“I have confidence in this process and the work being done by those leading the negotiations and counsel,” Mauer said.

No staff report

for Kestrel

The Kestrel project is one of more than two dozen from WEDC’s early days for which the agency didn’t prepare a formal staff underwriting report. In May 2015, the Wisconsin State Journal reported on a failed $500,000 loan to Milwaukee-based Building Committee Inc., the first public example of a deal for which no underwriting report could be found.

An agency policy requiring a staff review report wasn’t put in place until 2013. But such reports exist for most of the awards from the agency’s first two years.

In an interview, Paul Jadin, former WEDC secretary and now CEO of the Madison Region Economic Partnership, said some awards didn’t have staff reviews, which at the time were presented to the agency’s top executives before contracts were finalized, because an agency executive, rather than an underwriter, led the review. In other cases, such as Kestrel, Walker’s public announcement occurred before the management review committee took place, Jadin said.

“I think we may well have had to forego the management review committee to meet the deadline for that press conference, but that doesn’t mean the deal was rushed,” Jadin said.

He noted the WEDC board signed off on the enterprise zone in a closed session at its December 2011 meeting.

Walker’s office didn’t respond to a request for comment.

Risky proposition

Unlike Foxconn, one of the largest manufacturers in the world, Kestrel came to Wisconsin as a much riskier start-up company, having only built a single prototype for a new six-seater turboprop jet. The design and production had yet to be certified by the Federal Aviation Administration, a process that can take three to five years.

Investing in a start-up aviation company was a much riskier proposition than a typical start-up, said Bill Bower, a retired aerospace engineer from Albuquerque, New Mexico, where Eclipse Aviation went bankrupt in 2008 after trying to build an aircraft similar to Kestrel’s with more than $500 million in investments.

“If you had a bunch of people on the state board looking at this and there was nobody who really knew anything about the aircraft business they might get all starry-eyed and thinking this is like getting into show business,” Bower said. “If anybody on that board had talked to anybody in the aviation business, they would have rolled their eyes and thought, ‘You ought to look into that. Because everyone knows boutique aviation is loaded with dreamers and crackpots and con artists.’ ”

Kestrel CEO Alan Klapmeier didn’t respond to a request for comment. Kestrel merged with Eclipse in 2015 to form One Aviation.

The Kestrel deal was also suspect because the company had already struck a deal in 2010 to locate its facility with up to 600 manufacturing jobs in Brunswick, Maine. When the financing for that deal didn’t come through, the company turned to Wisconsin for help. It filed its application in October 2011.

Wisconsin offered to create an enterprise zone for the company with up to $18 million in tax credits contingent on actual job creation. The deal included a $2 million Business Expansion and Retention Investment Loan.

The agency awarded a second $2 million Small Business Credit Initiative loan, which was federally funded, after Jadin left the agency. WEDC’s second CEO Reed Hall, who signed off, didn’t respond to a request for comment.

Separately the company was working with the Wisconsin Housing and Economic Development Association and other groups to obtain $90 million through a federal tax credit program that required private investors. WHEDA agreed to provide $30 million, but Kestrel was unable to access additional funds because the project had been in default with two other investors, did not have $60 million of qualifying expenses and other backers wouldn’t accept the intellectual property pledged as collateral for subsequent allocations, WHEDA spokesman Kevin Fischer said.

The company opened an office in Superior with two dozen employees and has since collected $717,500 in tax credits from the WEDC enterprise zone program. It made $1.1 million in capital investments and spent $380,000 on employee training.

After not making payments on its loans in late 2013 and early 2014, WEDC agreed in June 2014 to defer payments until November 2014, when it would begin making interest-only payments.

Kestrel has made payments to the state totaling $865,490, though none since November 2016. It still owes the state more than $3.4 million.

WEDC and local officials met with the company in Superior on Dec. 9 to discuss a path forward. They asked the company to provide a plan, but then didn’t receive any communication or response, including to two default notices sent in January and February.

In March WEDC Secretary Mark Hogan contacted the company’s lawyer threatening legal action, and was connected with Klapmeier. In May WEDC entered a forbearance agreement delaying payments again until Aug. 31 based on an assurance the company would be able to obtain more than $50 million in venture capital.

“Due to Kestrel’s inability to show measurable progress towards obtaining financing, WEDC is moving forward with legal action against the company,” WEDC spokesman Mark Maley said in a statement. “At this point, WEDC has not gone to court to recoup the funds, but we will pursue any and all remedies available to us to protect the state’s investment.”

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Matthew DeFour covers state government and politics for the Wisconsin State Journal.