Their hands wrapped in plastic bags for protection, Rosie Lee and two of her sons gripped snow shovels and grimaced as they scooped sewage-soaked debris from the basement of their foreclosed rental duplex in north Minneapolis. The smelly waste came from a plumbing leak that went unrepaired for four months until city inspectors took steps to condemn the bank-owned house on Bryant Avenue N. last week.

"I just hope my babies don't get sick," said Lee, a single mother who lives in the five-bedroom unit with seven children ages 1 to 15.

The Lees' home is one of more than 50 Minneapolis rental houses formerly owned by Pamiko Properties LLC, whose recent financial collapse highlights a concern of housing activists: The city issues rental licenses to landlords without doing background checks.

If one had been done on Pamiko, it could have revealed that owner Paul Koenig filed for bankruptcy in 2000, hadn't paid tens of thousands of dollars in taxes and had been involved in an earlier failed real estate venture on the North Side. Now, many Pamiko properties are abandoned, boarded up or condemned for lack of upkeep or unpaid property taxes.

"The Pamiko case is a poster child for why our rental licensing system needs reform," said Don Samuels, a City Council member from north Minneapolis.

It's also another painful blow to the North Side of Minneapolis, which suffered some of the worst excesses of the real estate boom, including predatory lending, mortgage fraud and, now, widespread foreclosures.

Koenig denied that he mismanaged the rentals and said they went downhill only after banks took them over. He suggested his critics don't like him because he often rented to black families on public assistance. Neighborhood activists and the banks' property manager dispute Koenig's claims.

Yet the city inspections manager doesn't dispute that its system of monitoring properties needs improvement.

"We've seen this happen way too many times, where someone buys up way too many properties and it all goes belly-up," said Janine Atchison, who oversees the city's 27 inspectors. "Neighborhoods are besieged by this."

She said the city will launch a new computerized system to track problem landlords next year. In 2009, the city moved to revoke a record 102 rental licenses, up from 73 a year earlier, primarily for shoddy upkeep and unpaid property taxes.

Even so, the city does not have the legal authority -- or staff -- to conduct a background check on each license applicant, Atchison said. Rental licenses are denied in rare cases, such as when a landlord already has had two or more licenses revoked or has not paid the property's taxes.

By contrast, many landlords make background checks on prospective tenants, screening for judgments, bankruptcies and criminal charges, and rejecting those considered risky.

'Not up to snuff'

Koenig began buying and renting dozens of North Side houses in 2005, not long after the failure of his previous neighborhood venture, Dream Home Development LLC, which erected and rented new manufactured houses. Neighborhood groups complained about the shoddy workmanship in the Dream homes, and some contractors sued the firm to get paid.

In 2000, Koenig had filed for Chapter 7 bankruptcy, listing $32,553 in unpaid federal, state and county taxes among his $107,142 in debts.

"Paul [Koenig] would show up at community events and people would confront him and say, 'Hey, you're not gonna pull the same stuff that you did with Dream Homes, are you?'" said David Haddy, who lives next to a former Pamiko house on Hillside Avenue N.

Koenig said he responded to each property complaint "within a couple of hours." He said he was treated "like an outsider" by the community and offered few details about his financial problems. He said one lender, Minnwest Bank Metro of Eagan, raised his interest rate 10 percentage points, to 16.5 percent, causing a cash crunch. The bank had no comment.

Koenig said that since the lenders took over the properties, they've had more problems, including broken windows and an increase in police calls.

That got a laugh from Jeffrey Larson, president of JBL Cos., a court-appointed receiver now managing 33 of Pamiko's properties. He said Koenig left the houses in bad shape, and JBL has spent about $100,000 on repairs, including new plumbing in one, a furnace in another. "They were not up to snuff," Larson said.

Samuels, the council member, says he called 911 and the city about a dozen times about former Pamiko and Dream Home rental houses on Hillside Avenue N., where he lives. Samuels said he witnessed drug handoffs and tenants throwing cooking waste out a window. Once he asked "10 inebriated guys" on a sidewalk to quiet down and stop littering the area with beer cans.

Samuels said Koenig responded by offering to move problem tenants to other properties.

City inspectors recently found problems with all of Pamiko's 14 remaining holdings. Seven houses are vacant or condemned, the others have delinquent property taxes or unpaid citations, according to city records. Earlier this month, the city moved to revoke Pamiko's rental licenses for seven properties. Koenig appealed, saying he no longer owns them.

The crackdown happened only after some Pamiko houses deteriorated and were left vacant, boarded up or condemned, said Jeff Skrenes, housing director for the Hawthorne Neighborhood Council. "Property ownership is a right, but renting is a privilege," Skrenes said. "You should be required to show that you deserve that [privilege]."

Atchison, the inspection manager, said checking every landlord's track record before issuing a license would bottle up the system and punish the "90 percent of landlords" who don't cause problems. "I don't think that's a reasonable expectation," she said.

A nasty cleanup

Lee and two sons, Bobby, 15, and Alex, 11, spent much of President's Day scraping brown-gray muck from their basement floor.

Despite a makeshift repair, wastewater poured into their basement every time the family used the kitchen sink or flushed the toilet, she said. It eventually covered about half the floor, mixing with dust and submerging children's toys.

The stench got so bad that Lee placed tape over air vents and stopped using the basement washing machine. Lee said her 17-month-old daughter, Lamaya, suffered diarrhea and a 104-degree fever last month, which Lee suspects is related to the wastewater. "This house is a health hazard," Lee said, as she shoveled up piles of waste.

After city inspectors condemned the property last week, the court-appointed receiver repaired the leaky drain pipes. The city has lifted the condemnation order. Larson, president of JBL, said the wastewater came from the kitchen, not the toilet. "We fixed it as soon as we learned about it," he said.

Lee said other problems surfaced soon after she moved in last April. Several electrical outlets didn't work, a door broke off its hinges and mice keep crawling through a hole in a daughter's bedroom, she said. Koenig said he invested $125,000 in the house in 2008 and had no record that Lee complained in writing, as required under the lease.

Lee said she's looking for a new house but wants back some of the $1,200-a-month rent she paid while the plumbing was broken. Larson said JBL is considering a temporary reduction.

"You shouldn't have to pay rent if your house isn't fit to live in," Lee said. "I'll be happy when I'm out of this place."

Chris Serres • 612-673-4308