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The Green Institute faces possible foreclosure after 15 years

Annie Young led the fight against a proposed garbage transfer station using a Legos model that later became a 64,000-square-foot reality when the Green Institute broke ground for the Phillips Eco Enterprise Center.
Amber Procaccini

ANNIE YOUNG WENT to bed exhausted. For more than 12 years, the large, outspoken woman had been rallying the troops in Minneapolis's poorest neighborhood, fighting a proposed county garbage-transfer station. Residents didn't need more heavy truck traffic, toxic fumes, and pollution. Phillips was already a "dumping ground," and the neighborhood didn't want anybody else's trash.

It was environmental racism at its worst, remembers Young, now a park commissioner. The early 1990s had brought a flood of new blood to Phillips. African Americans, Hmong, Somalis, and Latinos crowded the streets that already housed the city's main Native American population. The median income was around $12,000 a year. More than 60 percent of women and 40 percent of men were unemployed.

People were sick, Young says, her voice reverberating like a preacher's in the nearly empty conference room where she sits. There was lead. There was diabetes. There was cancer. Parts of the neighborhood were called "Arsenic Triangle," and years later the Environmental Protection Agency sanctioned the nickname, confirming high levels of poison in the soil at the east end.

"We were surrounded by pollution," she says. "We had so much pollution and so many sick people that a garbage-transfer station wasn't what we needed."

Then, in 1993, Young had a dream about windmills, a glass building, and a pond. It was clear to her that it was a vision representing neighborhood sustainability. A self-sustainable office building could be built, creating jobs and alternative energy while promoting the green lifestyle. In a way, she thought, the building would be just what the people of Phillips needed. If successful, it could stand on its own.

For the months that followed, Young carried around a display of the edifice built from Legos. She started preaching "green" and "sustainability" to anyone who would listen. People thought she was crazy.

"Sustainability was just a little, tiny seed then," she says. "It was not an overused word like it is now. Then, when you said 'green,' people would say, 'What are you talking about?' They didn't know."

In December 1993, the people triumphed; the county commissioners voted down the transfer station, and Young, who that year formed the Green Institute, realized her Lego model would become a reality. With $415,000 in start-up funds from the city, the Institute would work to create jobs, improve the quality of life, and enhance the urban environment.

Its first major project would be a ReUse Center. As part of its commitment to reducing solid waste, the Institute would open a store of reusable building materials and household items available for resale.

"We were able to say to the county, 'We know what we are going to do with that land, and we are offering something better,'" Young says.

At the ReUse Center's 1995 grand opening, Sen. Paul Wellstone joined the hundreds of community members to celebrate. "If it can be done in Phillips, it can be done anywhere," the congressman told the crowd.

The Institute's success reverberated throughout the streets. "Every politician was there, every community person. There had been stories in the paper; it was sort of the first of its kind," says Joyce Wisdom, who became the ReUse Center's manager in 1995. "We were the national experts. I went to Pittsburg and helped set up a Construction Junction there; I talked to people in France about setting up re-stores."

At a neighborhood meeting when someone suggested a Home Depot for a vacant lot, the audience booed. "They said, 'We don't need a Home Depot, we got the ReUse Center,'" recalls Wisdom. "My jaw dropped. If you told me two years earlier that people would be comparing the ReUse Center to Home Depot, I would have told you you were out of your mind, but how proud was I?"

In November 1997, Young's glass building became a reality when the Green Institute broke ground for the Phillips Eco-Enterprise Center, a 64,000-square-foot commercial industrial facility on the site originally intended for the garbage transfer station. Local and national experts flocked to visit the estimated $5.2 million project.

"We believe it was probably the first speculative green industrial building in the world," says Corey Brinkema, who supervised the design, financing, and construction of the building as the Institute's business development director from 1996 to 1999. "It was a big deal. Green buildings to that point, and even to this day, were largely being built by owner-occupants. To build something speculative was quite extraordinary because you had to then sell those green-building attributes to the tenants and hope that they would, in fact, pay for them."

A vanguard of the green movement, the building was made from reused and recycled materials. The Center incorporated energy conservation equipment and geothermal heating and cooling into its utilities. Eventually it installed the largest solar array in the Midwest and later became the prototype for the LEED certification movement that is present in nearly every modern architecture project in the United States today.

 

Now, a decade after its opening, the building is up for sale and the Green Institute is facing possible foreclosure, having accrued millions of dollars in debt that it admits it currently cannot pay.

At a time when Gov. Tim Pawlenty is touting the green movement as the solution to Minnesota's unemployment woes, the Green Institute is struggling to stay afloat.

"We wanted something that was finally going to last, and stay, and be a ray of hope for the people," says Young. "At one time, the Green Institute was that, this idea that you can rise up. Now, I just don't know."

 

SOON AFTER the glass build- ing went up, it became obvious that the Green Institute had outgrown its home. They would need to leave behind the cluttered, hole-in-the-wall office on Franklin Avenue where card tables were used as desks. They had become a research and environmental institution on an international level. The Green Institute was now an investor in real estate with all the duties of a landlord. It had a retail store to manage and a host of programs to run.

When the Institute's executive director, George Garnett, left in 1995, former board president Michael Krause had the unenviable task of taking the reigns.

"We gave Michael a lot of authority and trust because he was such a visionary; he had so many great ideas," says board member Lisa McDonald. "We trusted him implicitly and we thought he was good for the organization."

A former editor and publisher and onetime chair of the Minneapolis DFL, Krause had big plans for the Institute. As the treasurer and later board chair of the Minneapolis Consortium of Community Developers, Krause was well respected among the city's nonprofit executives. He is often referred to as a "networking genius," and even his detractors admire the superb communicator, admitting that he has an uncanny ability to motivate.

"I call him a wizard, a master of words," Young says of her old boss. "He is one of these people that could sell sand like it is ice to the Saudi Arabians in the desert. He can mix words in a way that can get everybody excited. He's handsome; he can get a rise out of you."

Initially, Krause lived up to his lofty talk. He got 696 solar panels for the roof donated after bumping into someone at a meeting in Washington, D.C. He was a mastermind at getting federal grants. Under Krause's leadership, the Green Institute acquired millions of dollars. He made the organization the talk of the town, and when people in Andhra Pradesh, India, wanted to create a Green Business Center modeled after the Green Institute, he flew overseas twice for the project as a contractor for the U.S. Agency for International Development.

"I put my heart and soul into the Green Institute," says Krause. "Every waking moment, practically, I spent thinking about the Green Institute and how to build it. I took it very seriously. We had tremendous success."

In 1997 the Minnesota Environmental Initiative named the Green Institute the Community Environmental Organization of the Year. Two years later, Krause and Young were invited to Detroit to accept a national award for sustainable development from the Clinton administration. In 2000 the company was one of 21 businesses to win the Energy Star for Small Business Award given by the EPA. The Green Institute was at the top of its field internationally, yet Krause says he never lost interest in the people of Phillips.

In 2001, Krause learned that the city had a request for proposals out regarding an area one block away from the Institute. Garbage haulers had made a big bid for the land.

Krause sounded the alarm. He knew the proposed two-acre South Transfer Station was the last thing the neighborhood would want, and under his leadership the community rose up again. Dissent was so large that the City Council didn't even take a vote on the proposal.

"That was a big victory for us," Krause says.

Afterward, Krause kept staring at the empty boiler stacks visible from his office window. He wondered about the open site and if there was a new type of energy that the Green Institute could develop. He wanted to explore the possibilities of biomass—living and newly dead biological material that can be used as fuel or for industrial production, most commonly burned wood and plant matter for energy.

In 2003 Krause managed to secure a $1.9 million grant from the Department of Energy for feasibility studies for a Phillips-based biomass plant.

"It was a very, very ambitious project," he says. "There wasn't another nonprofit in the state of Minnesota, I'd dare say, that would actually go out and build a power plant. Everybody was just mildly crazy about the idea. It was just one more thing that was going to build the reputation of Phillips as this innovative neighborhood for urban sustainability."

 

   

TO THE PUBLIC, the green Institute seemed like the picture of success. It had established its place on the international stage as a leader in the sustainability movement. It constructed a building in a corner of the city that hardly anyone had wanted to invest in, and now the area thrived. Restaurants and retail outlets line the streets near Hiawatha and 21st Avenue South where the Light Rail and the Green Way intersect.

But inside the high-tech building extravaganza, things were falling apart. Morale was down, the staff was fighting, and the $60 million biomass project was turning into a local disaster, according to several people who were there. Between 2002 and 2005, the Green Institute saw successive year-end negative changes in net assets, totaling some $1.1 million in losses.

Tensions remained high as Young, Krause, and others fought over the correct way to steer the Institute's future. Young recalls the time she and Krause traveled to Detroit to receive the national award. When the Green Institute was called to the stage, the two sat on opposite sides of the room.

"I really honestly thought he was not going to acknowledge me at all," recalls Young, her voice fuming. "People applauded when he started across, but when I started walking across it was a standing ovation. People went wild. And at that moment I knew our relationship was not going to last much longer. I really upstaged him and there was no doubt, no question, he couldn't take that."

Soon after, Krause approached Young to talk to her about her vision.

"I said, 'Okay, here is the part of the organization that I need you to run; here is how much money it will take. I will help you, but you are going to have to do some of this on your own.' I told her to raise the money, and it didn't happen," recalls Krause. "My ultimate responsibility was to have the organization be financially sound."

Young was fired in 2003 as part of what was described as a cost-cutting measure. Former board member Robert Albee left the organization soon after. "All of a sudden, Michael came to the board and said we have a financial problem and we have to lay off Annie Young," Albee recalls. "It was a total surprise. We had been advised of the finances and we didn't see anything that created a fiscal problem that would have prompted an almost immediate departure of the associate director."

Young says she was offered a generous severance package, including a year's free office rent at the center, in exchange for the unofficial understanding that she would stay quiet. "He offered me the world to get out of there," she says, shaking her head.

   

WISDOM SAYS she is one of few former Green Institute staffers who didn't sign a gag order upon departure. Currently the executive director at the Lake Street Council, she sees it as her obligation to speak up. How else can an organization learn if mistakes aren't analyzed?

In 2000, Wisdom, former manager of the ReUse Center, was promoted to chief operating officer at the Green Institute, making her Krause's second-in-command. She left five years later, after nearly a decade with the organization. At the time, it was agreed that if asked she would issue a public statement. She would say that for 10 years she had worked together with Krause to address the financial challenges of the Green Institute. For the majority of that time she had believed that the Green Institute needed to budget with constraint, while Krause felt it could grow its way out of its massive debt.

"Most folks, when I repeat that statement, say, 'For 10 years!' They can't believe it," says Wisdom. "I, too, believe an organization should grow their way out of financial difficulties, but you're talking about a 12- to 24-month plan. And if it doesn't succeed, you start making those changes. We never did that. I was working for an organization whose foundation was sustainability and yet we were anything but."

Krause was so focused on the Green Institute's expansion that he couldn't see the finances clearly, she says. He relied on grants and loans for growth with little focus on revenue and sustainability. In 2005, the Institute brought in $3.2 million of revenue, but spending had also increased, rising from $1.6 million in 2001 to $3.4 million in 2005. "At one point we began to take on debts as if they were grants, with no plan to pay it back," says Wisdom.

 

She remembers Krause as the kind of leader who threw everything at the wall to see what stuck. Oftentimes that meant the Institute was draining off every penny on projects that it never finished. "We never took the time to analyze what went wrong," she says. "We repeated mistakes. We let things get very bad before anybody took a look at them."

The Green Institute went through a handful of bookkeepers during that era, Wisdom says. Krause held the grant documents close and didn't even allow the administration staff to see the books. One time he refused to let even the CFO see a grant, she adds.

"All of the accountants left for the same reason I did," Wisdom says. "Michael was ignoring their warnings about what was happening. He was the executive director and the final decision-maker. That was the bottom line: It was Michael's decision. If you wanted to take him on, you needed to be prepared to quit."

The organization was broke, and sometimes his travel expenses were turned in and paid as reimbursement by the Green Institute, she says. "The last several years that I was there, we were playing the lotto. The rest of the management staff was worried about making payroll and Michael was traveling in India."

Krause claims not to remember the terse disagreements Wisdom says he had with accountants and staff, saying that people left because they found new jobs or because their positions were eliminated due to cost-cutting. He says the Green Institute never reimbursed him for any travel, not even domestic. "If I had to go over to the Legislature for something, and I had to go in my own car, I was never reimbursed. I either paid for it out of my own pocket or there was another source."

When asked if any of the accountants resigned or were forced to leave because of a direct conflict with him, Krause refused to comment. "I never made these decisions unilaterally. They were done as a team." Every month Krause would present detailed financial information to the board of directors.

"Look," says McDonald, exhaling deeply. "We had a lot of faith in this person. A board is only as knowledgeable as the information they get from their executive director. They can ask a lot of questions. They can be very proactive, but certainly you rely on your E.D. for the day-to-day happenings."

The board made an agreement with Krause not to publicly criticize each other or interfere with each other's business endeavors, and the Institute is letting the numbers speak for themselves, giving copies of its financial audits from 2001 to 2007 to City Pages.

Facing nearly $5.5 million in debt and a negative $453,000 net asset change in 2005, in the summer of that year the board asked Krause to resign. There wasn't enough money to pay the bills. The Institute had been served an eviction notice for unpaid rent at ReUse Center, and its first principal payment on a loan from the city was due in months. In a financial report released after Krause's departure, the auditor expressed ongoing uncertainty.

"It was quite a shock," says Brinkema, who returned to the organization as interim director after Krause left. "The reality was that between 2000 and 2005, the organization lost more than a million dollars. It is those successive losses that caused the financial challenges today."

   

IN AUGUST 2005, a few months after leaving the Green Institute, Krause founded the for-profit energy business Kandiyohi Partners. He had one thing on his mind: biomass. Kandiyohi wanted to jointly develop the project by matching the Green Institute's funding, but after six months of negotiations it became clear the partnership wouldn't happen. When the Green Institute refused the deal, Kandiyohi competed with the nonprofit for the site. Krause's friend and business partner Kim Havey, the former head of the city's Empowerment Zone, lobbied his former colleagues at the Minneapolis City Council on Kandiyohi's behalf.

Nearly one year after its formation, Kandiyohi was awarded the proposal in June 2006. At the time, City Council member Lisa Goodman's allegiance to Krause was called into question. The two are close friends and own property together. While the council was debating who would get the site, it was revealed that Goodman had invested personal finances in the project. While never petitioning her colleagues directly, and recusing herself from all council discussions on the issue, Goodman wrote a form letter on personal stationary to the Minnesota Pollution Control Agency in August 2007, urging it to issue an air permit to Kandiyohi. The letter referred to her post as a council member. (Goodman refused to comment for this story.)

"If there was ever any drama in the organization, it was probably around the biomass plant," says Brinkema. "For Michael, that was his brainchild; he really wanted to continue working on it and he was no longer with the Green Institute."

 

Krause eventually bought the rights to the project from the Institute for $75,000, renaming it Midtown Eco Energy. But by that time, local political support was faltering. "The community turned aggressively against the concept," says council member Gary Schiff. "[People in the] Phillips neighborhood will tell you they never clearly understood it in the first place, that if they had known then what they do now, they would have never endorsed it."

For many, the threat of a trash-burning electricity plant in the city's poorest neighborhood was like going back in time 15 years. "The whole thing with the Midtown Burner, the Kandiyohi, all of that, I find to be incredibly suspicious," says Albee. "What kind of Democrat would set up a thing to pollute to the tune of one million pounds of emissions into the air a year into a community like Phillips?"

Experts argue that it really wasn't the threat of emissions that caused Krause's biomass plant to fail, but rather that his design was flawed. The feasibility studies didn't work, says David Morris, vice president at the Institute for Local Self Reliance. There just was not enough biomass to make it efficient. A plant in Minneapolis would have threatened the survivability of a currently operating biomass plant in St. Paul and it would have wasted energy trucking in wood to burn.

"It's possible that there is a green vision in his head and that's why he wants to pursue this, but it is also possible he wants to make money," Morris says.

After years of negotiations, Kandiyohi pulled its biomass proposal this June. Though reluctant to say goodbye, Krause says he plans to shop the project to other localities. "There would have been enough renewable energy for 18,000 households," he says. "Whole neighborhoods in south Minneapolis would have been powered by 100 percent local renewable energy. It would have saved 225,000 tons a year in greenhouse gas emissions. It was going to be the most effective biomass facility in Minnesota. Now, all of that investment, all of that job creation, all of that renewable energy is not going to be in Minneapolis. It's going to be somewhere else."

    

SPEAKING VERY CAREFULLY in his new office on Marquette Avenue downtown, Krause, wearing a gray suit, leans back in his chair. He says he doesn't want to say anything that will hurt the Green Institute's future. After all, he did spend nine and a half years of his life working there, overseeing the construction of the center and establishing the Institute as a significant research and community resource.

But he doesn't want to take the blame, either.

That's why he left a comment on a story critical of his leadership recently printed by Southside Pride. "If I was so 'controversial,' why did we regularly win grant funding from the sate and federal government.... Why was I elected by my peers to leadership positions?" he wrote. "If you slander me again in your newspaper I am going to sue you."

Later, he adds: "After three and a half years I don't think I should be held responsible for where they are at financially. I don't understand why [the Green Institute] is in that situation, to be honest. Nonprofits always have their financial challenges, but it was in pretty sound shape when I left. Towards the end of the time I was there we had multimillion-dollar budgets and 90 percent of that revenue came from our programs. That, by any measure of a nonprofit, is extraordinary."

Krause maintains that during his tenure, unlike now, the Green Institute was never late on its payments.

But it's important to remember what he was paying on, says Brinkema. In 2002, the Green Institute refinanced with a $3.5 million loan, essentially making operational losses permanent, converting them to mortgagee debt. The Institute was lured into the deal by an extraordinarily low interest rate of only 1 percent. Its quarterly payments at the time were only $10,000, and the principal payments weren't due for a few years. Later, when the Federal Reserve hiked interest rates, the payments skyrocketed. What was a $40,000 yearly payment had become nearly $180,000 by 2007. The principal payments were also due and there was no savings, Brinkema says. Losses at the ReUse Center had made it difficult to escrow sufficient funds.

"The Green Institute didn't do anything different than thousands of businesses and individuals," says Jamie Heipel, who took over as the Institute's executive director this January when Brinkema left. "We used that building like an ATM machine. Every time you could refinance, we refinanced because we needed monies to pay down on some debt or start another program.... We took out some loans that in hindsight weren't the best for the organization. But that being said, there were also people that allowed us to have those loans. They were privy to what our financials were like and they are as much guilty as we are."

 

    

FACED WITH an insurmountable $3.7 million debt, Heipel made his first major decision as the organization's new executive director. He would go to his lenders and tell them the Green Institute couldn't pay. He would ask the city for more time. "I said, 'This is where we are at. I know you think we are going to come up with some magic in August, but we are not going to. We need to let you guys know that we have issues.'"

At an October City Council Community Development Committee meeting, chaired by Goodman, Heipel found himself on the defensive, muttering excuses why the Green Institute was worthy of more time. At the end of September, the Institute had more than $208,000 in missed or late loan payments to the city, on a balance owed of $3.1 million.

For the first time in years, the Green Institute is making money, Heipel said. "We are just trying to keep our doors open to be able to market ourselves as a retail location. That will enable us to pay our bills as due, and the city is first on our priority list."

Goodman didn't seem convinced. If the Green Institute is doing so well and the building is at full occupancy collecting rents, why isn't the city being paid?

"It's a simple question," she argued. "You do understand that you are collecting rent under the auspices that you are paying off your mortgage, but you are not using the rent that you are collecting to pay off your mortgage.... Basically, [the city] is just paying for the Green Institute to operate."

Councilman Ralph Remington concurred. "There comes a time to fish or cut bait, and I think we have to cut bait. This has gone on far too long. Even though we have not exercised the foreclosure option many times before, times are different."

At the meeting Goodman was blunt about her intentions: "There is clear understanding that either you sell it or we will."

    

THE COUNCIL GAVE the green Institute until December to come up with a plan.

As the deadline looms near, the city's chief financial officer, Pat Born, is pushing against foreclosure. The city holds the second mortgage on the building and a forced sale would require it to pay off the Green Institute's first mortgage—close to a half-million dollars—just to control the property. Then the city would have to try to sell the building at a price that would cover the first mortgage and the Green Institute's outstanding debt to the city.

In what's often called a "distressed sale," Minneapolis is less likely to profit as much from the sale of the building than if the owner sells it, Born says. If the Green Institute is successful with its sale, however, all mortgage holders can expect to get their money back sooner, and the organization will likely be more financially sound.

"The politics of it, the personalities, need to be stripped away," says council member Paul Ostrow. "We need to ask: What is the most responsible thing for the city to do financially? And, in this case, what is in the best interest of the city as a lender is not automatically to foreclose. If we move to foreclosure, and the property is sold, there is no guarantee we'd come out well."

With biomass and Krause behind it, the Green Institute just wants to pay off its debt and move on. "We can spend all the time in the world talking about whose fault was it and who is to blame, but the truth is we're on a good path right now," says former Associate Director Carl Nelson. "There's a lot of politics and everything, but really this is a financial decision for the city. The past is the past. I'm more interested in how our work is going forward."

For the first time in years, the ReUse Center is making the organization money and the rest of the Institute's programs are self-sustainable, says Heipel. In 2007 the Green Institute saw a positive net asset change of nearly $37,500—the first time in five years that column wasn't in the red. The organization and the board are more cognizant of spending and have begun to understand that sometimes a business must say no. The Institute has cut staff, downsized space, and closed the Osseo ReUse store. On November 10, Minneapolis based Kraus-Anderson Inc. put the building on the market. Early appraisals show it is worth nearly $5.5 million, considerably more than the Institute owes.

 

"If we sell the building for a reasonable price, we are going to be able to pay off the city," Heipel says. "We are going to be able to get our payables down and we are going to be able to start fresh and bank money each month. We are making money now, but currently we can't make it fast enough."

Today, the Green Institute is more than just a building. It has been instrumental in creating Garden Works, an organization that maintains over 100 community gardens. Its Clean Energy Resource Teams facilitate citizen-based renewable energy and efficiency throughout the Twin Cities. The Phillips Community Energy Co-op—founded by the Green Institute—works to reduce the energy burden of low-income residents. And the $2 million ReUse Center claims an estimated 4,000 tons a year of reusable building materials from the city's waste stream.

On November 13, the Green Institute held its 15th annual meeting at Patrick's Cabaret to discuss its financial situation with supporters. Its pioneer is positive about the future. At the height of the energy crisis, when sustainability is necessary to human survival, the Green Institute remains ahead of its time. "It's just hitting its stride as far as its impact, its long-term impact of what the vision was," says Young. "The dilemma now is the finances vs. the vision, the finances vs. how do you stay committed to the neighborhood, to the original ideas, to sustainability?"


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