Sunday, January 08, 2012

AvCraft decision puts economic development incentives in spotlight

Some members of the Horry County Council say they might rescind their votes to give AvCraft Technical Services a $100,000 incentive package to expand its business at Myrtle Beach International Airport, even as council members consider another tax break for an unnamed business – known only as Project AF – that promises new jobs for the area.

County Councilman Carl Schwartzkopf, District 8, said he’s “had conversations with several council members who have expressed their displeasure with the lack of information they were given ahead of the vote [for AvCraft].”

Most council members did not know AvCraft – an aircraft maintenance and repair business that has fallen short of employment goals in the past – was the company getting the incentives until after a vote was taken to approve them during a Dec. 13 meeting in Conway.

Now, council members are learning that AvCraft laid off about 20 employees over the last month, even as it sought financial incentives for a promised 150-job expansion over the next five years.

Mike Hill – AvCraft’s chief executive – said he doesn’t understand why some area politicians continue to criticize his business, which he says has no financial or ownership relation to the one that failed to live up to job promises years ago.

“Essentially, AvCraft is a new company,” Hill said. “But I can’t seem to get that into some people’s minds.”

Brad Lofton – chief executive of the Myrtle Beach Regional Economic Development Corp., which brought the AvCraft incentives package to the council – said the layoffs were due to restructuring and a dip in the company’s business cycle.

“They’ve already hired back three people and they have four or five job postings on their site now,” Lofton said, adding that AvCraft “has some major contracts on the horizon” that will lead to more jobs in the future. The layoffs left AvCraft with about 60 workers, Lofton said, which is about the company’s average work force since it moved to Myrtle Beach in 2003.

Hill said the layoffs were part of a restructuring that was necessary to get AvCraft positioned for the type of growth he expects to see in coming years. Before that growth can occur, he said, AvCraft must refurbish a pair of hangars to handle aircraft repairs. “They’re not going to be able to ramp up as quickly during the first year [of incentives]” because of needed facility upgrades, Lofton told The Sun News last week. “By year three, they will have created a large percentage of the jobs.”

That schedule contradicts what Lofton told council members during the Dec. 13 meeting, when he stated that “most of these [jobs] are going to be right away.”

Schwartzkopf said he wants to ensure that the incentives are for new AvCraft jobs, not simply replacing jobs that have been eliminated through layoffs.

Councilman Marion Foxworth, District 3, said the deal has created “quite a bit of concern among council members.”

“I’m not sure that we’re completely done with it at this point,” he said.

For council to reconsider giving AvCraft the money, a majority would have to vote to revisit the matter before the Dec. 13 meeting minutes are approved – thereby finalizing the incentives package – at Tuesday’s council meeting. Schwartzkopf said he “would not have a problem voting for reconsideration,” but isn’t sure a seven-person majority feels the same way.

“I have not been able to count to seven yet,” Schwartzkopf said, adding that he thinks a vote to reconsider the incentives would be close. “Right now I can tell you that half a dozen council members have called me to say they are irritated and annoyed.”

Councilman Harold Worley, District 1, said he would not vote to reopen the matter.

“That’s probably not a good idea,” he said. “While I’m not particularly crazy about the way this thing was handled, it’s done and we need to move on.”

City, county OKs needed

Meanwhile, Lofton’s economic development group plans to ask council members to approve a $600,000 tax break for another unnamed company that already exists in Myrtle Beach and promises to expand by 80 new jobs.

The proposal is expected to go before the council for the first time on Jan. 24.

The company – identified only as Project AF – pays wages that are below the county average, Lofton said during a Nov. 29 meeting of the county’s Economic Development Committee. Project AF promises to pay the new workers about $25,000 per year – or $12 an hour for a full-time employee.

Lofton said the committee is charged with finding new jobs with above-average wages, but is recommending incentives for Project AF because “80 new jobs slightly below the average are important when you have 10.5 percent unemployment.”

The average wage in Horry County is $14.84 per hour or $30,870 per year, according to the most recent U.S. Bureau of Labor Statistics annual survey.

In exchange for the jobs, Project AF wants the county to give it a property tax break worth about $600,000 over the next 20 years.

Such an incentive would require three votes of the council before it is approved because the tax break would require creating a multi-county business park for the company. Under such a structure, the county would share 1 percent of the post-incentive tax revenue it receives with another, as-yet-undetermined county. The proposal also needs approval from the Myrtle Beach City Council, because Project AF is located within the city limits.

Doug Wendel, chairman of the economic development corporation, told the council’s committee on Nov. 29 that “if you give us the nod today, we could proceed with the city” on the incentives negotiations. The committee gave unanimous approval to Project AF moving forward to the full council.

Myrtle Beach spokesman Mark Kruea said Lofton and City Manager Tom Leath have discussed the project in general but there have been no formal presentations.

“As to whether the city would sign off on the business park, it depends on the details and we haven’t heard any of the details at this point,” Kruea said. “It’s too premature to say.”

‘Claw-back’ protection

Even if the votes are not there on Tuesday to reconsider the AvCraft incentives, council members say they want to make sure they add stipulations that will protect the public’s investment before any check is written.

“The county is going to create some benchmarks for job production during that five-year period,” Foxworth said.

AvCraft received a $100,000 grant last year from the state’s Commerce Department to help upgrade two hangar facilities the company leases from the county’s Department of Airports. The state then asked the economic development corporation to match that $100,000 payment to help with the hangar upgrades.

The incentives would go toward $1 million in upgrades AvCraft plans at the hangars.

The state’s grant simply requires that AvCraft create 150 jobs within five years. Schwartzkopf said he wants to require AvCraft to create a certain number of jobs at various points during the five-year life of the incentives package.

“I’m not going to wait five years,” Schwartzkopf said. “I’d like to see a certain number of those [150 planned] jobs within two years.”

Councilman Jody Prince, District 10, said he agrees with setting job goals along the way for AvCraft.

“We’ve talked at the county level about them having a certain number of jobs within 16 months, and then another number of jobs at the next 16-month mark,” Prince said.

Lofton said the county also is working on a “claw back provision” – a contractual agreement that would force AvCraft to repay the incentive money if it does not meet the specified job goals. Lofton said such a provision will be finalized before any money is transferred to AvCraft.

Schwartzkopf said he’s not sure how much protection a “claw back provision” would provide if AvCraft again finds itself in financial trouble.

“What if they’re out of business or in bankruptcy in five years?” he said. “How would we get our money back?”

And Prince, a proponent of the “claw back provision,” also questions “what would happen if they don’t have the money to pay it back?”

“I want this to work more than anyone,” Prince said. “I don’t know if this was a mistake, but if it was let’s fix it and not let it happen again.”

Past haunting AvCraft future

Some council members say at least a “claw back provision” is necessary because of AvCraft’s history.

The company moved to Myrtle Beach in 2003 after the Myrtle Beach Air Force Base Redevelopment Authority agreed to reimburse the company up to $750,000 for upgrades at three hangars at the airport. The county also agreed to cut its hangar rent from $5 per square foot to $2 per square foot and S.C. officials chipped in tax credits and job creation credits worth up to $281,600 annually if AvCraft created 80 jobs within its first year.

When it moved to Myrtle Beach from Tyler, Texas, AvCraft said it planned to create 280 jobs here within five years.

After one year, however, AvCraft had failed to meet its job creation goals – hiring 65 workers instead of the 80 required under the incentives package. In response, the county canceled the initial deadline and gave AvCraft another six months to reach the goal. When that new deadline rolled around, AvCraft’s employee count had dropped to 53, and the company’s German production plant had filed for bankruptcy protection.

The company didn’t receive the full $750,000 local reimbursement and wound up losing the state incentives because it didn’t create the number of jobs it had promised.

Then, Ben Bartel – AvCraft’s former chief executive – was arrested in Germany in 2005 on charges of tax evasion. The charges were later dropped and Bartel was never convicted of any crime.

AvCraft announced another job expansion – this one for 50 new jobs – in 2009, but the promise didn’t pan out and the company came back to Horry County Council the following year asking for a reduction in its hangar rent as the company was on the verge of going out of business.

In 2010, KNH Aviation Services Inc., a group of investors led by Hill, bought all of the company’s assets. The company does business as AvCraft Technical Services, keeping the AvCraft name because it was already recognized in the industry, said Hill, who joined the old AvCraft company in 2005.

Hill said that AvCraft was in dire financial shape shortly after he arrived, but he worked with creditors who wanted to shut down the company and was able to revive the business with a new investment group.

“The original AvCraft is a totally different company,” he said. “It has nothing to do with today’s AvCraft.”

Hill said he is frustrated by continuing criticism over AvCraft’s past failure to create jobs as promised.

“Certainly, there is no doubt that the original business plan didn’t work out,” he said. “But we have consistently provided between 50 and 60 high-paying jobs that aren’t service-industry jobs since we’ve been here.”

He also bristles at the notion that the county lost money on past AvCraft deals.

“We were reimbursed $500,000 for $1 million worth of work we did on a hangar that is owned by the county and was in very bad disrepair,” Hill said. “If anything, the county made $2 for every $1 they spent.”

Greasing the skids

Lofton also said comparisons to AvCraft’s past are unfair because the company now has new, financially sound investors – even though Hill was with the company through some of its history in Horry County.

Despite the past problems, Lofton said, “these are some of the highest-paying jobs in Horry County,” with wages ranging from $15 per hour to $26 per hour for skilled positions such as aviation mechanics.

“We have a company that is committing to create 150 jobs and is willing to sign a performance agreement,” Lofton said.

AvCraft is the first company to take advantage of an economic development incentives program the County Council approved last year that gives Lofton’s group $600,000 initially to close deals with companies that promise, among other things, to invest at least $2.5 million in facilities and create at least 35 jobs paying the average wage or higher in Horry County.

Neither of the projects – AvCraft and Project AF – that Lofton’s group has brought to the county so far have met the program’s minimum requirements.

AvCraft did not qualify because its investment is less than $2.5 million. It was able to get assistance because the council approved a variance on Dec. 13 for the project – before most council members knew the name of the company receiving the benefits.

Project AF does not qualify because it pays wages that are lower than the county average. It also would need a variance for incentives.

The incentives program gave the economic development corporation free rein – as long as it gets county administrator approval – to negotiate and close deals with businesses that meet the minimum requirements.

County Council Chairman Tom Rice said during a meeting last month that the program was created “so we can grease the skids and get these things approved fast.”

Worley said that approach might be a mistake, and that County Council should now require that all economic development proposals come before council members for discussion in executive session before they can be approved.

“This AvCraft deal was so secretive that nobody knew who the players were,” Worley said. “The EDC needs to be working for us, and the council needs to be involved in all of the decisions. After all, we’re the ones who are elected to represent the county’s residents, not the EDC.”

Worley said he also does not approve of giving incentives to companies that don’t meet the minimum requirements.

“If they can’t meet the minimum requirements, I don’t see them getting earmarks from the County Council,” he said.

Schwartzkopf said he has been underwhelmed by the only economic development announcement to date.

“AvCraft’s 150 jobs over five years works out to 30 jobs per year or 2 1/2 each month,” he said. “From an economic development standpoint, that’s not a big deal. McDonald’s and Burger King hire more people than that each month.”

Hill said he doesn’t understand the animosity toward his company and “the fallout from what we’re trying to accomplish here.”

“I guess my biggest mistake with what is essentially a new company,” he said, “was keeping the AvCraft name.

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