That is tough. I'm glad they finally explained to you the issue - but I also think that they could have told you this before.
I know that although dd's gym competes levels 1-3, most people feel that "team" officially starts at level 4. The reason is that the same coaches coach levels 1-3, and levels 1-3 are sort of separate. I think the head coach probably very loosely oversees levels 1-3, but much more tightly oversees levels 4 and up, and these levels warm up and condition together, so there is more of a team type feeling, even among different levels. Your gym might be similar between level 2 and level 3. So poor coaching at level 1 and 2 may not be reflective of the rest of the coaches or even the gym philosophy.
I also think that for some younger kids, it's easier to give your 100% if you're interested and challenged. I would imagine it is hard for *any* young level 2 who is bored in level 2 to give it 100% effort 100% of the time. I personally don't like how they said she needs to give 100% effort in level 2 first for 2 weeks before a 2 week trial of level 3. Why not just see what her effort is like during the 2 week trial of level 3? Is that something you would feel comfortable proposing to them?
It sounds like the other 2 gyms are out for other reasons.