Defaulted Sweet Water Organics loan could be renegotiated
April 1, 2013
By Katherine Keller
There is much that attracts public attention to Bay View. The rebirth of a vital business district is a significant component of its draw but arguably no Bay View business has drawn more notice—local and national—than Sweet Water Organics.
In 2008 its owners established an aquaponics system in an abandoned industrial building, promising its innovations were the foundation of a forthcoming urban-agriculture revolution that would enhance food security and make cities more resilient and sustainable.
Sweet Water’s message was enthralling.
Sweet Water Organics engendered great local pride and goodwill that translated into tremendous support—from ordinary citizens fascinated by the ingenuity of the technology and the promise of good local food to municipal officials who see the emerging urban-agriculture technology as a means to create jobs.
Three years after Sweet Water’s founders launched their aquaponics operation, unable to attract capital investment, they found themselves perilously under water. Supported by Alderman Tony Zielinski, they appealed to the city, and they received a $250,000 forgivable loan from the Economic Development Fund.
The basis of the forgivable loan and indeed the city’s incentive to approve Sweet Water’s loan, was job creation. Instead of repaying the loan in the conventional manner, Sweet Water would repay the city by creating 45 new jobs over the four-year life of the loan. These terms, referred to as its metrics, required Sweet Water to have 10 employees at year-end 2011; 21 at year-end 2012; 35 at year-end 2013; and 45 at year-end 2014.
Sweet Water satisfied the 2011 requirement, and the city forgave $62, 500, one-quarter of the loan. With the new jobs they were to create in 2012, Sweet Water would have created 25 new jobs in Milwaukee, a little more than halfway toward the 45-job goal.
But the report of their 2012 achievement, prepared for the Department of City Development (DCD) was startling. Instead of the required 25 jobs, they finished the year with only 2.35 jobs, having lost 7.65 of the jobs created in 2011.
Martha Brown, DCD’s deputy commissioner reported that those 2.35 jobs allowed $8,928 of the loan to be forgiven in 2012. That left Sweet Water owing the city $53,571 in principal, plus $9,500 in interest (5% rate), or a total of $144,199. The date for payment of the loan was mid-March.
Sweet Water, unable to repay the loan, defaulted. But there was even worse news.
In early March, Sweet Water Organics’ co-founder and an owner, Jim Godsil, in reply to its inquiries about the business, told the Compass that the fish and greens aquaponics program inside 2151 S. Robinson St. had “not been operational since early January.” In other words, their food production business was defunct.
Representatives of Sweet Water Organics met with the Common Council’s Community and Economic Development Committee February 18 to discuss how they might resolve the issue of their $144,200 debt to the city.
Committee Chair Alderman Joe Davis said he set up the meeting to discover why Sweet Water failed to meet its job goals, he said, and to find out why it defaulted “so that we don’t make that mistake again.”
He asked Sweet Water’s representatives if they thought the job numbers they presented when they applied for the loan were unrealistic.
Joe Recchie, an attorney and owner of the Columbus, Ohio-based Community Building Partners, Inc., and a trustee of Sweet Water Foundation, told Davis it was his belief that Sweet Water Organics’ “stated projections were good faith projections, but they were optimistic and ambitious ones, based on the ability to attract additional capital.”
That didn’t happen at the projected pace, he said.
His recommendation for resolving the for-profit’s debt was for the foundation side to absorb “the responsibilities and the activities of Sweet Water Organics.”
Sweet Water Organics, the for-profit company, is paired with Sweet Water Foundation, the nonprofit education arm whose mission is to “educate community members through sustainable urban agricultural practices to create economic development and resilient communities.”
In stark contrast to the for-profit Sweet Water Organics, the nonprofit foundation has readily attracted generous funding.
Jesse Blom, Sweet Water Foundation’s city director outlined the foundation’s growth since its start in 2010.
The foundation’s 2010 budget was $8,000. It had no employees, he said, “but tons of volunteers and interns.” Its 2011 budget was $40,000, but still no employees.
In 2012 the budget (revenue) was $180,000 and it had five employees. “We’re looking at $350,000 in 2013,” he said.
Funding was provided by grants from the Bill and Melinda Gates Foundation, the MacArthur Foundation, the University of California-Irvine, the Veteran’s Administration, and Newman’s Own Foundation.
Blom said that one of the roles of the foundation is “to work with families to grow their own food in small, home-based aquaponics systems” that can be built for “a minimum of $250.” “The foundation is also working with schools and universities to make food production a central part of education. They will learn at the foundation and then do it in school, and it will be reinforced by universities,” he said.
The foundation’s goals and practices are obviously attractive to foundations like Newman’s Own, Gates, and MacArthur.
Pondering the proposal that Sweet Water Foundation could take on the debt of its for-profit side, Alderman Davis asked trustee Recchie if Sweet Water Organics would “exist” if absorbed by the foundation.
Recchie said Sweet Water Organics would continue to exist but that all the growth would be with the foundation and its focus on education and community development. “So Sweet Water will continue to exist as an entity, but no new activities will take place with it,” he said.
He said Sweet Water Foundation’s proposal was for the city to allow the foundation to take over the loan but with modified metrics—in other words, to change the terms. The foundation did not want the metrics to be job formation.
Emmanuel Pratt, Sweet Water Foundation’s executive director, said that his foundation was asking to renegotiate the loan agreement with new metrics that “look at some of the work we do for the outreach, the education…and vocation and career aspects.” He told the committee that a lot of the work the foundation does in education is based on the multidisciplinary STEM (Science, Technology, Engineering, Mathematics) and STEAM (Science, Technology, Engineering, Arts, Mathematics) programs.“
Alderman Willie Wade expressed concern about the legality of the proposed loan transfer and new metrics that would no longer require job creation. Martha Brown replied that the city had some options. One, she said, was that the city declare the loan in default for failure to pay. Another option would be to renegotiate the terms of the loan to extend the loan an extra year—thus changing the metrics by which the loan forgiveness is calculated.
Brown asked Jeremy McKenzie, an assistant city attorney, if he agreed.
McKenzie said that he had not looked into “what is allowable or legal within the parameters of the operation of the Development Fund” and could not comment without further research, on Sweet Water Foundation’s proposal.
Committee members continued to explore and consider how they might renegotiate the loan’s terms, if they agreed to transfer it.
Recchie and Pratt pointed out that job creation was not an option because education, not job creation, is the foundation’s mission.
Alderman Zielinski pushed Sweet Water Foundation’s representatives to define their metrics, questioning whether their education efforts created jobs.
And like Davis and Wade, he asked about the legality of the foundation’s proposal. “Do we have the legal authority to transfer the requirements from job creation to education that results in job creation?” he asked. “Do we have that sort of latitude?”
Zielinski, who seemed to have dismissed Recchie’s and Pratt’s advice that the foundation’s mission is education, not job creation, pressed the foundation representatives to prepare documentation to show the committee how it would create jobs. He said, “I think it would behoove your organization to find some way where you can be as successful as you believe you can be successful with Sweet Water Foundation, and leverage those dollars into job creation, so that way, when you come before this committee again, …say, ‘Hey, we’re going to be able to provide education that results in job creation and we’re going to quantify that into X amount of jobs, and in addition to that, we believe with the contacts and leverage we have around the world, we’ll be able to attract the necessary outside capital so that this will also be a job creation component and you can achieve the job-creation component and absorb that within the foundation as long as it isn’t a for-profit entity.’ Do you foresee any, any problems that would preclude you from achieving those goals or approaching this problem with that mindset?”
Recchie reiterated that the foundation’s mission was not job creation. “If you’re saying, could Sweet Water Foundation just adopt the job creation goals of Sweet Water Organics, there is a problem because Sweet Water Foundation has a broader charge,” he advised Zielinski.
Alderman Davis returned to the issue of the legal implications of the proposed loan transfer.
At the beginning of the meeting Martha Brown told the committee that the city had a lien on two pieces of equipment purchased by Sweet Water Organics with the loan. Davis warned, “Then there’s also an issue of assets because there are assets that are out there and we need to be very clear about who assumes those assets and where those assets would be from because it’s the city’s investment and it has to be not just as a good faith effort, but those assets are going to have to be shifted just like [they would be in] any other merger and acquisition…There are assets that are available and those assets have to move. Either the city [would] actually assume those assets, sell those assets off, or those assets will be actually be assigned to a legal entity the proper way.”
When Jim Godsil asked permission to address the committee, he talked about the national and international acclaim Milwaukee has received because of its emerging urban agriculture endeavors and opined that “Milwaukee has a very, very good chance of first winning the Stockholm Water Prize and then a Nobel Prize by virtue of the advances we’re going to be making with high-production, water-conserving food production methodologies.”
Davis, impatient, interrupted, “This is where I get kind of agitated. Milwaukee has an unemployment rate that is skyrocketing and when people come to us and say they’re going to create jobs, we give them the benefit of the doubt to create jobs. At this particular time, I struggle on people not fulfilling that obligation because as all of us in the community in which we represent, when we see a young kid that is out there and they want to learn about aquaponics but now they didn’t get an opportunity because an organization failed to create those jobs, then we do have to ask the tough questions. And it’s not about a Nobel Peace Prize… What it’s all about is giving somebody the opportunity to go to work so they can provide for their family. …I don’t want to pooh-pooh away 35 jobs…brought to this particular…that you were going to create. …So at the end of the day, that’s what is before this committee is that it was a contract. The contract has been breached, and how do we move forward? That’s all I’m interested in,” he said.
Before the committee adjourned, Alderman Davis reiterated his motivation for calling the meeting. He said his intent was when the issue of the loan went before the full Common Council, proposed legislation would be based on the recommendations of the Department of City Development and the Community and Economic Development Committee members.
Is it legal?
Wisconsin law includes a Uniform Fraudulent Transfer Act that appears to be relevant to the loan transfer Sweet Water Foundation proposed to the city. When the Compass attempted to field an opinion from city attorney Jeremy McKenzie concerning the legality of the proposal in light of this statute, he refused to comment, referring the question to DCD’s spokesperson, Jeff Fleming.
Fleming said the city would not comment on pending legislative action.
The Compass consulted attorney Zach S. Whitney, of Kohner, Mann & Kailas, S.C. for an opinion about the proposed loan transfer.
Whitney said he would not advise going foward with it.
“[The city] could open themselves to fraud—interfering with sales contracts, with contracts with creditors. It would be smart for the city to not do this. They could open up a crazy can of worms,” he said and added, “Only with a great deal of reluctance should the city get involved in this transfer.”
In 2011 when Sweet Water approached the city for the economic development loan, DCD officials expressed their concern that the department had very little time to consider the proposal. DCD’s real estate analyst Yves LaPierre asked the Community & Economic Development committee to postpone its vote. He asked for a business plan from Sweet Water and requested more information about construction costs, construction plans, and its potential to create jobs.
When the Compass requested LaPierre’s comment about the quality or depth of the city’s due diligence before voting to approve the loan, he referred it to Jeff Fleming.
“DCD was directed by policymakers to enter into a loan with Sweet Water Organics. The due diligence took place in hearings before the Council. If the question is, was there sufficient due diligence, that is a question to be directed to Council members,” said Fleming.
The Compass made repeated requests for comment from Alderman Davis and Alderman Wade about their decision to support the loan, as well as the current proposed loan transfer. Neither alderman nor staff from either office returned phone calls or email about these matters.
When Alderman Zielinski was asked for his comment, he said, “We are working to identify the best way to address the $160,000 that is at stake. But again, this is a forgivable loan and not a grant. There is strong interest in Sweet Water’s equipment and infrastructure that will translate into significant benefits that could include paying the city back.”
Zielinski speculated that the matter of Sweet Water Organic’s defaulted loan and its proposal to transfer the loan to its foundation would come before the full Common Council in April.
This material may not be published, broadcast, rewritten or redistributed.