APPLIANCE RECYCLING CENTERS OF AMERICA INC /MN
BALLOON PROMISSORY NOTE
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>4
<FILENAME>arca025393_ex10-1.txt
<DESCRIPTION>BALLOON PROMISSORY NOTE
<TEXT>
General Electric Capital Business                                   EXHIBIT 10.1
Asset Funding Corporation
Loan No. 001-0009840-001


                             BALLOON PROMISSORY NOTE
     (7400 Excelsior Boulevard, St. Louis Park, Hennepin County, Minnesota)


$3,470,000.00                                                 September 19, 2002


         FOR VALUE RECEIVED, APPLIANCE RECYCLING CENTERS OF AMERICA,
INC., a Minnesota corporation ("Borrower"), promises to pay to the order of
GENERAL ELECTRIC CAPITAL BUSINESS ASSET FUNDING CORPORATION ("Payee"; Payee and
any subsequent holder of this Note being referred to herein as "Holder") at
Payee's office at 10900 NE 4th Street, Suite 500, Bellevue, Washington 98004,
attention: Real Estate Department, or at such other address as Holder may from
time to time designate in writing, the principal sum of Three Million Four
Hundred Seventy Thousand and no hundredths Dollars ($3,470,000.00) together with
interest from the date the proceeds of the loan (the "Loan") evidenced by this
Promissory Note (this "Note") are initially disbursed (including, without
limitation, disbursement into an escrow for the benefit of Borrower) until
maturity on the principal balance from time to time remaining unpaid hereon at a
floating or variable rate as set forth below.

         From and after the date hereof until maturity or the occurrence of an
Event of Default (as hereinafter defined), interest shall accrue each month on
the principal balance outstanding hereunder from time to time at a floating or
variable rate (the "Variable Rate") equal to two hundred seventy (270) basis
points in excess of the average weekly yield of thirty (30)-day London Interbank
Offered Rate for one month dollar deposits as published by the British Bankers
Association from time to time and determined by Holder (the "Index"); provided,
however, that if the Index is no longer published by the British Bankers
Association, or if the method for compiling the Index is, as determined in
Holder's sole discretion, materially altered, then Holder shall select such
replacement index as Holder in its sole discretion determines most closely
approximates the Index. As of the date hereof, the Variable Rate is 4.5191 % per
annum (the "Initial Rate"). Interest shall be computed on the basis of a 360-day
year composed of twelve (12) months of thirty (30) days.

         A single payment of interest only, representing interest through
September 30, 2002 at the Initial Rate shall be due on the date that funds are
advanced hereunder. Thereafter, principal and interest shall be payable, in
arrears, in monthly installments as follows (i) one hundred nineteen (119)
monthly installments, beginning on November 1, 2002, and continuing on the first
day of each calendar month thereafter through and including September 1, 2012,
and (ii) on October 1, 2012 ("Maturity"), all then unpaid principal together
with all accrued but unpaid interest, shall be due and payable. A substantial
payment will be due at Maturity, as the monthly payment of principal and
interest set forth herein represents an amount which would amortize the
principal face amount of this Note in full at the interest rate set forth herein
over a period of 240 months. Commencing with the installment due on November 1,
2002 and continuing for the next eleven (11) monthly installments, the monthly
installments of this Note shall be based upon


<PAGE>


the Initial Rate, which installments are calculated to fully amortize the amount
of the Loan based upon a 20-year amortization schedule with payments commencing
on November 1, 2002 (the "Amortization Term") by reference to the amount of
equal monthly installments necessary to pay this Note in its entirety. On and as
of each October 1 commencing October 1, 2003 (each a "Recalculation Date" and
collectively the "Recalculation Dates"), the then outstanding principal balance
of this Note resulting from such payments (with each payment being applied first
to accrued interest calculated at the Variable Rate in effect from time to time
and then to principal) (the "Actual Balance") will be compared with the
principal balance that would exist had the payments over the immediately
preceding period (i.e., from October 1, 2002 or the immediately preceding
Recalculation Date, as the case may be, to such current Recalculation Date) been
applied using the Assumed Amortization Rate (defined below) or, for the 12-month
period ending October 1, 2003, the Initial Rate (the "Assumed Amortization
Balance"). If the Actual Balance exceeds the Assumed Amortization Balance,
Borrower shall immediately pay the amount of such difference to Holder,
including accrued and unpaid interest. If the Actual Balance is less than the
Assumed Amortization Balance, such overpayment shall be applied by Holder to
reduce the Actual Balance. On each Recalculation Date, the payments relating to
this Note shall be re-amortized through the next twelve payments in equal
monthly installments in amounts which would be sufficient to discharge the then
remaining principal and interest thereon over the then remaining portion of the
Amortization Term, as calculated at the Variable Rate in effect immediately
preceding such Recalculation Date (the "Assumed Amortization Rate").

         Notwithstanding anything to the contrary contained herein and upon
Borrower's prior written notice to Holder at the above listed address, Borrower
shall have the one-time option to fix, effective on the date that such written
notice is received by Holder if received by 2:00 p.m. Eastern Standard Time or
on the next succeeding business day if received by Holder after 2:00 Eastern
Standard Time (the "Fixed Rate Commencement"), the interest rate (the "Fixed
Rate Option") for the remaining term at the then current daily average yield of
ten (10)- Year U.S. Dollar Interest Rate Swaps (as published in Federal Reserve
Statistical Release H.15 [519]) plus 2.50% (the "Fixed Rate"). Borrower
acknowledges that the Interest Rate Swap in effect for the Fixed Rate
Commencement will generally be published by the Federal Reserve Statistical
Release H. 15 [519] two (2) business days after such date. Commencing on the
Fixed Rate Commencement, interest will accrue at the Fixed Rate and the monthly
payments of principal and interest relating to this Note shall be re-amortized
in equal monthly installments commencing on the first day of the first month
succeeding the Fixed Rate Commencement (the "Fixed Rate Monthly Payment") in
amounts which would be sufficient to discharge the then remaining principal and
interest thereon over the then remaining portion of the Amortization Term, as
calculated at the Fixed Rate. On the first day of the month immediately
following the Fixed Rate Commencement and continuing on the first day of each
month throughout the remainder of the term of the Loan, the Fixed Rate Monthly
Payment will be due and on September 1, 2012, all then unpaid principal together
with all accrued but unpaid interest, shall be due and payable. If Borrower
elects to exercise its Fixed Rate Option, the payments relating to this Note
shall no longer be re-amortized on each Recalculation Date; provided, however,
that the Fixed Rate Commencement shall be deemed to be a Recalculation Date for
purposed of making any payment or adjustment of the principal balance hereunder
in accordance with the fifth or sixth sentences, respectively, of the
immediately preceding paragraph.


                                       2
<PAGE>


         If any payment shall not be received by Holder within ten (10) days
after its due date, Borrower shall pay an additional charge equal to five
percent (5.00%) of the delinquent payment or the highest additional charge
permitted by law, whichever is less.

         In the event Borrower elects to fix the Variable Rate, upon not less
than fifteen (15) days' advance written notice to Holder and upon payment of a
prepayment premium as set forth below (the "Prepayment Premium"), Borrower shall
have the right to prepay all, but not less than all, of the outstanding balance
of this Note on any regularly scheduled principal and interest payment date. The
"Prepayment Premium" shall be equal to the sum of the Base Premium (defined
below) and the Variable Premium (defined below).

         The "Base Premium" shall be determined by multiplying the following
described applicable base premium factor (the "Base Premium Factor") by the
principal balance to be prepaid. The "Variable Premium" shall be determined by
(i) calculating the decrease (expressed in basis points) in the current weekly
average yield of ten (10)-year U.S. Treasury Constant Maturities (as published
in Federal Reserve Statistical Release H.15 [519]) from the current average in
effect immediately preceding the date on which the Variable Rate is fixed to
Friday immediately preceding the week in which the prepayment is made, (ii)
dividing the decrease by 100, (iii) multiplying the result by the following
described applicable variable premium factor (the "Variable Premium Factor"),
and (iv) multiplying the product by the principal balance to be prepaid. If the
Index is unchanged or has increased from the current average in effect
immediately preceding the date on which the Variable Rate is fixed to the Friday
immediately preceding the prepayment date, the Variable Premium Factor shall be
equal to Zero Dollars ($0.00). The Base Premium Factor and the Variable Premium
Factor shall be the amounts shown on the following chart for the month in which
prepayment occurs:

 No. Mos.        Years             Base              Variable
Remaining      Remaining      Premium Factor      Premium Factor
---------      ---------      --------------      --------------
120 - 109         10                .05                .070
108 - 97           9                .04                .065
 96 - 85           8                .03                .060
 84 - 73           7                .02                .054
 72 - 61           6                .01                .048
 60 - 49           5                  0                .042
 48 - 37           4                  0                .036
 36 - 25           3                  0                .029
 24 - 13           2                  0                .022
 12 - 1            1                  0                .013

If the Federal Reserve Board ceases to publish Statistical Release H.15 [519],
then the decrease in the weekly average yield of ten (10)-year U.S. Treasury
Constant Maturities will be determined from another source designated by Holder.

         If Holder at any time accelerates this Note after an Event of Default
(defined below), then Borrower shall be obligated to pay the Prepayment Premium
in accordance with the foregoing


                                       3
<PAGE>


schedule. The Prepayment Premium shall not be payable in the case of an
assumption of the Loan (if permitted by Holder pursuant to the terms of the
Security Instrument (as hereinafter defined)), nor with respect to condemnation
awards or insurance proceeds from fife or other casualty which Holder applies to
prepayment, nor with respect to Borrower's prepayment of the Note in full during
the last three (3) months of the term of this Note unless an Event of Default
has occurred and is continuing. Borrower expressly acknowledges that such
Prepayment Premium is not a penalty but is intended solely to compensate Holder
for the loss of its bargain and the reimbursement of internal expenses and
administrative fees and expenses incurred by Holder.

         Holder shall have full recourse against Borrower for all sums due under
this Note and for all the representations, warranties, indemnities and covenants
in the Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture
Filing ("Security Instrument") covering The property (the "Property") securing
this Note and all other documents executed or delivered in connection herewith
(the "Loan Documents").

         Each of the following shall constitute an Event of Default ("Event of
Default") hereunder and under the Security Instrument:

                  (a) Failure of Holder to receive any payment of principal,
         interest, or Prepayment Premium upon this Note when due, and such
         failure shall continue for ten (10) days after written notice is given
         by Holder to Borrower of the same; or

                  (b) Failure of Borrower to observe or perform any other
         obligation under any Loan Document (other than this Note) when such
         observance or performance is due, and such failure shall continue
         beyond the applicable cure period set forth in such Loan Document, or
         if the default cannot be cured within such applicable cure period,
         Borrower fails within such time to commence and pursue curative action
         with reasonable diligence or fails at any time after expiration of such
         applicable cure period to continue with reasonable diligence all
         necessary curative actions.

         Upon the occurrence of any Event of Default, Holder shall have the
option to declare the entire amount of principal and interest due under this
Note immediately due and payable without notice or demand, and Holder may
exercise any of its rights under this Note and any document executed or
delivered herewith. After acceleration or maturity, Borrower shall pay interest
on the outstanding principal balance of this Note at the rate of five percent
(5.00%) per annum above Chase Manhattan Bank's prime interest rate in effect
from time to time, or fifteen percent (15.00%) per annum, whichever is higher,
provided that such interest rate shall not exceed the maximum interest rate
permitted by law (the "Default Rate").

         All payments of the principal and interest on this Note shall be made
in coin or currency of the United States of America which at the time shall be
the legal tender for the payment of public and private debts.

         If this Note is placed in the hands of an attorney for collection,
Borrower shall pay reasonable attorneys' fees and costs incurred by Holder in
connection therewith, and in the event


                                       4
<PAGE>


suit or action is instituted to enforce or interpret this Note (including
without limitation efforts to modify or vacate any automatic stay or
injunction), the prevailing party shall be entitled to recover all expenses
reasonably incurred at, before or after trial and on appeal, whether or not
taxable as costs, or in any bankruptcy proceeding, or in connection with
post-judgment collection efforts, including, without limitation, reasonable
attorneys' fees, witness fees (expert and otherwise), deposition costs, copying
charges and other expenses.

         This Note shall be governed and construed in accordance with the laws
of the State of Minnesota applicable to contracts made and to be performed
therein (excluding choice-of-law principles). Borrower hereby irrevocably
submits to the jurisdiction of any state or federal court sitting in Minnesota
in any action or proceeding brought to enforce or otherwise arising out of or
relating to this Note, and hereby waives any objection to venue in any such
court and any claim that such forum is an inconvenient forum.

         This Note is given in a commercial transaction for business purposes.

         This Note may be declared due prior to its expressed maturity date, all
in the events, on the terms, and in the manner provided for in the Security
Instrument.

         Borrower and all sureties, endorsers, guarantors and other parties now
or hereafter liable for the payment of this Note, in whole or in part, hereby
severally (i) waive demand, notice of demand, presentment for payment, notice of
nonpayment, notice of default, protest, notice of protest, notice of intent to
accelerate, notice of acceleration and all other notices except those for which
the Loan Documents expressly provide, and further waive diligence in collecting
this Note or in enforcing any of the security for this Note; (ii) agree to any
substitution, subordination, exchange or release of any security for this Note
or the release of any party primarily or secondarily liable for the payment of
this Note; (iii) agree that Holder shall not be required to first institute suit
or exhaust its remedies hereon against Borrower or others liable or to become
liable for the payment of this Note or to enforce its rights against any
security for the payment of this Note; and (iv) consent to any extension of time
for the payment of this Note, or any installment hereof, made by agreement by
Holder with any person now or hereafter liable for the payment of this Note,
even if Borrower is not a party to such agreement.

         Borrower authorizes Holder or its agent to insert in the spaces
provided herein the appropriate interest rate and the payment amounts as of the
date of the initial advance hereunder.

         All agreements between Borrower and Holder, whether now existing or
hereafter arising and whether written or oral, are hereby limited so that in no
contingency, whether by reason of demand or acceleration of the final maturity
of this Note or otherwise, shall the interest contracted for, charged, received,
paid or agreed to be paid to Holder exceed the maximum amount permissible under
the applicable law. If, from any circumstance whatsoever, interest would
otherwise be payable to Holder in excess of the maximum amount permissible under
applicable law, the interest payable to Holder shall be reduced to the maximum
amount permissible under applicable law; and if from any circumstance Holder
shall ever receive anything of value deemed interest by applicable law in excess
of the maximum amount permissible under applicable law, an amount equal to the
excessive interest shall be applied to


                                       5
<PAGE>


the outstanding principal balance hereof, or if such excessive amount of
interest exceeds the unpaid balance of principal hereof, such excess shall be
refunded to Borrower. All interest paid or agreed to be paid to Holder shall, to
the extent permitted by applicable law, be amortized, prorated, allocated, and
spread throughout the full period (including any renewal or extension) until
payment in full of the principal so that the interest hereon for such full
period shall not exceed the maximum amount permissible under applicable law.
Holder expressly disavows any intent to contract for, charge or receive interest
in an amount which exceeds the maximum amount permissible under applicable law.
This paragraph shall control all agreements between Borrower and Holder.

         WAIVER OF JURY TRIAL. BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND
INTELLIGENTLY WAIVES ANY AND ALL RIGHTS THAT EACH PARTY TO THIS NOTE MAY NOW OR
HEREAFTER HAVE UNDER THE LAWS OF THE UNITED STATES OF AMERICA OR THE STATE OF
MINNESOTA, TO A TRIAL BY JURY OF ANY AND ALL ISSUES ARISING DIRECTLY OR
INDIRECTLY IN ANY ACTION OR PROCEEDING RELATING TO THIS NOTE, THE LOAN DOCUMENTS
OR ANY TRANSACTIONS CONTEMPLATED THEREBY OR RELATED THERETO. IT IS INTENDED THAT
THIS WAIVER SHALL APPLY TO ANY AND ALL DEFENSES, RIGHTS, CLAIMS AND/OR
COUNTERCLAIMS IN ANY SUCH ACTION OR PROCEEDING.

         BORROWER UNDERSTANDS THAT THIS WAIVER IS A WAIVER OF A CONSTITUTIONAL
SAFEGUARD, AND EACH PARTY INDIVIDUALLY BELIEVES THAT THERE ARE SUFFICIENT
ALTERNATE PROCEDURAL AND SUBSTANTIVE SAFEGUARDS, INCLUDING, A TRIAL BY AN
IMPARTIAL JUDGE, THAT ADEQUATELY OFFSET THE WAIVER CONTAINED HEREIN.

                     [REMAINDER OF PAGE INTENTIONALLY BLANK;
                             EXECUTION PAGE FOLLOWS]





                                       6
<PAGE>


         IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE
READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER
TERMS OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY
ENFORCED. YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN
AGREEMENT.


                         TIME IS OF THE ESSENCE HEREOF.


         IN WITNESS WHEREOF, Borrower has executed or caused this Note to be
executed by its duly authorized representative as of the year and day first
written above.


                                          BORROWER:


                                          APPLIANCE RECYCLING CENTERS OF
                                          AMERICA, INC., a Minnesota corporation

                                          By:  /s/ Edward R. Cameron
                                               ---------------------------------
                                          Print:  /s/ Edward R. Cameron
                                                  ------------------------------
                                          Its:  President
                                                --------------------------------


                       [EXECUTION PAGE OF PROMISSORY NOTE]





                                       7


<PAGE>


General Electric Capital Business
Asset Funding Corporation Loan
No.: 001-0009840-001

                          MORTGAGE, SECURITY AGREEMENT,
                         ASSIGNMENT OF LEASES AND RENTS
                               AND FIXTURE FILING

     (7400 Excelsior Boulevard, St. Louis Park, Hennepin County, Minnesota)

         THIS MORTGAGE (herein "Instrument"), made as of September .fl, 2002, by
the Mortgagor, APPLIANCE RECYCLING CENTERS OF AMERICA, INC., a Minnesota
corporation, whose address is 7400 Excelsior Boulevard, St. Louis Park,
Minnesota 55426 (herein "Borrower"), in favor of the GE Capital, GENERAL
ELECTRIC CAPITAL BUSINESS ASSET FUNDING CORPORATION, a Delaware corporation,
whose address is Real Estate Department, 10900 NE 4th Street, Suite 500,
Bellevue, Washington 98004 (herein "GE Capital"),

                                   WITNESSETH:

         THAT, WHEREAS, Borrower is justly indebted to GE Capital in the
principal sum of $3,470,000.00, pursuant to a certain Balloon Promissory Note of
even date herewith, having a maturity more particularly described below,

         NOW, THEREFORE, in consideration of the indebtedness herein recited,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Borrower irrevocably gives, grants, sells,
conveys, warrants, assigns, sets over, and mortgages unto GE Capital all of
Borrower's right, title and interest, now owned or hereafter acquired, including
any reversion or remainder interest, in the real property located in the City of
St. Louis Park, County of Hennepin, State of Minnesota, commonly known as 7400
Excelsior Boulevard and more particularly described on Exhibit A attached hereto
and incorporated herein including all heretofore or hereafter vacated alleys and
streets abutting the property, and all easements, rights, appurtenances,
tenements, hereditaments, rents, royalties, mineral, oil and gas rights and
profits, water, water rights, and water stock appurtenant to the property
(collectively "Premises");

         TOGETHER with all of Borrower's estate, right, title and interest, now
owned or hereafter acquired, in, under and to:

                  (a) all buildings, structures, improvements, parking areas,
         landscaping, equipment, fixtures and articles of property now or
         hereafter erected on, attached to, or used or adapted for use in the
         operation of the Premises; including but without being limited to, all
         heating, air conditioning and incinerating apparatus and equipment; all
         boilers, engines, motors, dynamos, generating equipment, piping and
         plumbing fixtures, water heaters, ranges, cooking apparatus and
         mechanical kitchen equipment, refrigerators, freezers, cooling,
         ventilating, sprinkling and vacuum cleaning systems, fire




                                       1
<PAGE>


         extinguishing apparatus, gas and electric fixtures, carpeting, floor
         coverings, underpadding, elevators, escalators, partitions, mantels,
         built-in mirrors, window shades, blinds, draperies, screens, storm
         sash, awnings, signs, furnishings of public spaces, halls and lobbies,
         and shrubbery and plants, and including also all interest of any owner
         of the Premises in any of such items hereafter at any time acquired
         under conditional sale contract, chattel mortgage or other title
         retaining or security instrument, all of which property mentioned in
         this clause (a) shall be deemed part of the realty covered by this
         Instrument and not severable wholly or in part without material injury
         to the freehold of the Premises (all of the foregoing together with
         replacements and additions thereto are referred to herein as
         "Improvements"); and

                  (b) all compensation, awards, damages, rights of action and
         proceeds, including interest thereon and/or the proceeds of any
         policies of insurance therefor, arising out of or relating to a (i)
         taking or damaging of the Premises or Improvements thereon by reason of
         any public or private improvement, condemnation proceeding (including
         change of grade), sale or transfer in lieu of condemnation, or fire,
         earthquake or other casualty, or (ii) any injury to or decrease in the
         value of the Premises or the Improvements for any reason whatsoever;

                  (c) return premiums or other payments upon any insurance any
         time provided with respect to the Premises, Improvements, and other
         collateral described herein for the benefit of or naming GE Capital,
         and refunds or rebates of taxes or assessments on the Premises;

                  (d) all written and oral leases and rental agreements
         (including extensions, renewals and subleases; all of the foregoing
         shall be referred to collectively herein as the "Leases") now or
         hereafter affecting the Premises including, without limitation, all
         rents, issues, income, profits and other revenues and income therefrom
         and from the renting, leasing or bailment of Improvements and equipment
         ("Rents"), all guaranties of tenants' performance under the Leases, and
         all rights and claims of any kind that Borrower may have against any
         tenant under the Leases or in connection with the termination or
         rejection of the Leases in a bankruptcy or insolvency proceeding;

                  (e) plans, specifications, contracts and agreements relating
         to the design or construction of the Improvements; Borrower's rights
         under any payment, performance, or other bond in connection with the
         design or construction of the Improvements; all landscaping and
         construction materials, supplies, and equipment used or to be used or
         consumed in connection with construction of the Improvements, whether
         stored on the Premises or at some other location; and contracts,
         agreements, and purchase orders with contractors, subcontractors,
         suppliers, and materialmen incidental to the design or construction of
         the Improvements;

                  (f) all contracts, accounts, rights, claims or causes of
         action pertaining to or affecting the Premises or the Improvements,
         including, without limitation, all options or contracts to acquire
         other property for use in connection with operation or development of
         the Premises or Improvements, management contracts, service or supply
         contracts,





                                       2
<PAGE>


         deposits, bank accounts, general intangibles (including without
         limitation trademarks, trade names and symbols), permits, licenses,
         franchises and certificates, and all commitments or agreements, now or
         hereafter in existence, intended by the obligor thereof to provide
         Borrower with proceeds to satisfy the loan evidenced hereby or improve
         the Premises or improvements, and the right to receive all proceeds due
         under such commitments or agreements including refundable deposits and
         fees;

                  (g) all books, records, surveys, reports and other documents
         related to the Premises, the improvements, the Leases, or other items
         of collateral described herein; and

                  (h) all additions, accessions, replacements, substitutions,
         proceeds and products of the real and personal property, tangible and
         intangible, described herein.

         All of the foregoing described collateral is exclusive of any
equipment, inventory, furniture, furnishings or trade fixtures owned and
supplied by tenants of the Premises. The Premises, the improvements, the Leases
and all of the rest of the foregoing property are herein referred to as the
"Property."

         TO HAVE AND TO HOLD the Property and all parts, rights, members and
appurtenances thereof to the use, benefit and behoof of GE Capital and its
successors and assigns in fee simple forever.

         TO SECURE TO GE Capital (a) the repayment of the indebtedness evidenced
by Borrower's Balloon Promissory Note dated of even date herewith in the
principal sum of Three Million Four Hundred Seventy Thousand and no/100 Dollars
($3,470,000.00), with interest thereon at a floating or variable rate as set
forth therein, and having a final scheduled maturity date of October 1,2012, and
all renewals, extensions and modifications thereof (herein "Note")
(Notwithstanding anything to the contrary herein, the maximum principal
indebtedness secured by this Instrument for the purpose of calculating mortgage
tax is $3,470,000.00); (b) the repayment of any future advances, with interest
thereon, made by GE Capital to Borrower pursuant to Section 28 hereof (herein
"Future Advances"); ( c) the payment of all other sums, with interest thereon,
advanced in accordance herewith to protect the security of this Instrument or to
fulfill any of Borrower's obligations hereunder or under the other Loan
Documents (as defined below); (d) the performance of the covenants and
agreements of Borrower contained herein or in the other Loan Documents; and (e)
the repayment of all sums now or hereafter owing to GE Capital by Borrower
pursuant to any instrument which recites that it is secured hereby. The
indebtedness and obligations described in clauses (a)-(e) above are collectively
referred to herein as the "Indebtedness." The Note, this Instrument, and all
other documents evidencing, securing or guaranteeing the Indebtedness (except
the Environmental Indemnity Agreement), as the same may be modified or amended
from time to time, are referred to herein as the "Loan Documents." The terms of
the Note secured hereby may provide that the interest rate or payment terms or
balance due may be indexed, adjusted, renewed, or renegotiated from time to
time, and this Instrument shall continue to secure the Note notwithstanding any
such indexing, adjustment, renewal or renegotiation.






                                       3
<PAGE>


         PROVIDED, ALWAYS, that if Borrower shall pay unto GE Capital the
Indebtedness and if Borrower shall duly, promptly and fully perform, discharge,
execute, effect, complete and comply with and abide by each and every of the
stipulations, agreements, conditions and covenants of the Note and this
Instrument, then this Instrument and all assignments contained herein and liens
created hereby shall cease and be null and void; otherwise to remain in full
force and effect.

         Borrower represents and warrants that Borrower has good, marketable and
insurable title to, and has the right to mortgage an indefeasible fee simple
estate in, the Premises, Improvements, Rents, and Leases, and the right to
convey the other Property, that the Property is unencumbered except as disclosed
in writing to and approved by GE Capital prior to the date hereof, and that
Borrower will warrant and forever defend the title to the Property against all
claims and demands, subject only to the permitted exceptions set forth in
Schedule 1 attached hereto.

         Borrower represents, warrants, covenants and agrees for the benefit of
GE Capital as follows:

         SECTION 1. PAYMENT OF PRINCIPAL AND INTEREST. Borrower shall promptly
pay when due the principal of and interest on the Indebtedness, any prepayment
and other charges provided in the Loan Documents and all other sums secured by
this Instrument.

         SECTION 2. FUNDS FOR TAXES, INSURANCE AND OTHER CHARGES. Except as is
hereinafter provided with respect to the impounding of such payments by GE
Capital following the occurrence of an Event of Default, Borrower shall payor
cause to be paid when due, prior to delinquency, all annual real estate taxes,
insurance premiums, assessments, water and sewer rates, ground rents and other
charges (herein "Impositions") payable with respect to the Property. Upon the
occurrence of an Event of Default (hereinafter defined), and at GE Capital's
sole option at any time thereafter, Borrower shall pay in addition to each
monthly payment on the Note, one-twelfth of the annual Impositions (as estimated
by GE Capital in its sole discretion), to be held by GE Capital without interest
to Borrower, for the payment of such Impositions (such payments being referred
to herein as "Impounds").

         Annually during the term of this Instrument, GE Capital shall compare
the Impounds collected to the Impositions paid or to be paid. If the amount of
such Impounds held by GE Capital at such time shall exceed the amount deemed
necessary by GE Capital to provide for the payment of Impositions as they fall
due, if no Event of Default shall have occurred and be continuing, such excess
shall be at Borrower's option, either repaid to Borrower or credited to Borrower
on the next monthly installment or installments of Impounds due. If at any time
the amount of the Impounds held by GE Capital shall be less than the amount
deemed necessary by GE Capital to pay Impositions as they fall due, Borrower
shall pay to GE Capital any amount necessary to make up the deficiency within
thirty (30) days after notice from GE Capital to Borrower requesting payment
thereof. Upon the occurrence of an Event of Default hereunder, GE Capital may
apply, in any amount and in any order as GE Capital shall determine in GE
Capital's sole discretion, any Impounds held by GE Capital at the time of
application (i) to pay Impositions which are now or will hereafter become due,
or (ii) as a credit against sums secured





                                       4
<PAGE>


by this Instrument. Upon payment in full of all sums secured by this Instrument,
GE Capital shall refund to Borrower any Impounds then held by GE Capital.

         SECTION 3. APPLICATION OF PAYMENTS. Unless applicable law provides
otherwise, each complete installment payment received by GE Capital from
Borrower under the Note or this Instrument shall be applied by GE Capital first
in payment of amounts payable to GE Capital by Borrower under Section 2 hereof,
then to interest payable on the Note, then to principal of the Note, and then to
interest and principal on any Future Advances in such order as GE Capital, at GE
Capital's sole discretion, shall determine. Upon the occurrence of an Event of
Default, GE Capital may apply, in any amount and in any order as GE Capital
shall determine in GE Capital's sole discretion, any payments received by GE
Capital under the Note or this Instrument. Any partial payment received by GE
Capital shall, at GE Capital's option, be held in a non-interest bearing account
until GE Capital receives funds sufficient to equal a complete installment
payment.

         If requested by GE Capital, Borrower shall promptly furnish to GE
Capital all notices of Impositions which become due, and in the event Borrower
shall make payment directly, Borrower shall promptly furnish to GE Capital
receipts evidencing such payments.

         SECTION 4. CHARGES, LIENS. Borrower shall promptly discharge or bond
off any lien which has, or may have, priority over or equality with, the lien of
this Instrument, and Borrower shall pay, when due, the claims of all persons
supplying labor or materials to or in connection with the Property. Without GE
Capital's prior written permission, Borrower shall not allow any lien inferior
to this Instrument to be perfected against the Property. If any lien inferior to
this Instrument is filed against the Property without GE Capital's prior written
permission and without the consent of Borrower, Borrower shall, within thirty
(30) days after receiving notice of the filing of such lien, cause such lien to
be released of record or bonded off and deliver evidence of such release or
bonding to GE Capital. Borrower may contest any such lien by appropriate
proceedings in good faith, timely filed, provided that enforcement of the lien
is stayed pending such contest. Mortgage may require that Borrower post security
for payment of such lien.

         SECTION 5. INSURANCE. Borrower shall obtain and maintain the following
types of insurance upon and relating to the Property:

                  (a) "All Risk" property and fire insurance (with extended
         coverage endorsement including malicious mischief and vandalism) in an
         amount not less than the full replacement value of the Property (with a
         deductible not to exceed $10,000), naming GE Capital under a lender's
         loss payable endorsement (form 438BFU or equivalent) naming GE Capital
         as mortgagee and loss payee and including agreed amount, inflation
         guard, replacement cost and waiver of subrogation endorsements;

                  (b) Commercial general liability insurance in an amount not
         less than $2,000,000 per occurrence and on an occurrence basis,
         insuring against personal injury, death and property damage and naming
         GE Capital as additional insured;





                                       5
<PAGE>


                  (c) Business interruption insurance or rent-loss insurance, as
         applicable, covering loss of rental or other income (including all
         expenses payable by tenants) for up to twelve (12) months;

                  (d) Boiler and machinery coverage for mechanical and
         electrical failure;

                  (e) Flood hazard insurance if the Property is located in an
         area designated by the Federal Emergency Management Act if and to the
         extent that the Property is located within an area that has been or is
         hereafter designated or identified as an area having special flood
         hazards by the Department of Housing and Urban Development or such
         other official as shall from time to time be authorized by federal or
         state law to make such designation pursuant to any national or state
         program of flood insurance, Borrower shall carry flood insurance with
         respect to the Property in amounts not less than the maximum limit of
         coverage then available with respect to the Property or the amount of
         the Indebtedness, whichever is less; and

                  (f) Such other types of insurance or endorsements to existing
         insurance as may be required from time to time by GE Capital in
         accordance with its standard commercial lending practices.

         Upon the request of GE Capital, Borrower shall increase the coverages
under any of the insurance policies required to be maintained hereunder or
otherwise modify such policies in accordance with GE Capital's standard
commercial lending practices. All of the insurance policies required hereunder
shall be issued by corporate insurers licensed to do business in the state in
which the Property is located and rated A:X or better by A.M. Best Company, and
shall be in form acceptable to GE Capital. Certificates of all insurance
required to be maintained hereunder shall be delivered to GE Capital, along with
evidence of payment in full of all premiums required thereunder,
contemporaneously with Borrower's execution of this Instrument. All such
certificates shall be in form acceptable to GE Capital and shall require the
insurance company to give to GE Capital at least thirty (30) days' prior written
notice before canceling the policy for any reason or materially amending it.
Certificates evidencing all renewal and substitute policies of insurance shall
be delivered to GE Capital, along with evidence of the payment in full of all
premiums required thereunder, at least fifteen (15) days before termination of
the policies being renewed or substituted. If any loss shall occur at any time
when Borrower shall be in default hereunder, GE Capital shall be entitled to the
benefit of all insurance policies held or maintained by Borrower, to the same
extent as if same had been made payable to GE Capital, and upon foreclosure
hereunder, GE Capital shall become the owner thereof. GE Capital shall have the
right, but not the obligation, to make premium payments, at Borrower's expense,
to prevent any cancellation, endorsement, alteration or reissuance of any policy
of insurance maintained by Borrower, and such payments shall be accepted by the
insurer to prevent same.

         If any act or occurrence of any kind or nature (including any casualty
for which insurance was not obtained or obtainable) shall result in damage to or
destruction of the Property (such event being called a "Loss"), Borrower will
give prompt written notice thereof to GE Capital. All insurance proceeds paid or
payable in connection with any Loss shall be paid to GE Capital.





                                       6
<PAGE>


If (i) no Event of Default has occurred and is continuing hereunder, (ii)
Borrower provides evidence satisfactory to GE Capital of (A) its ability to pay
all amounts becoming due under the Note during the pendency of any restoration
or repairs to or replacement of the Property (which evidence may include
reference to rent-loss or business-interruption insurance), and (B) its ability
under applicable zoning requirements (including applicable variances and non-
conforming use permits) fully and completely to restore, repair, or replace the
Property to its value, condition, and character prior to such loss (iii) the
available insurance proceeds (together with any deposit posted by Borrower to
augment any deficiency in such proceeds) are, in GE Capital's judgment,
sufficient fully and completely to restore, repair or replace the Property, and
(iv) Borrower provides evidence satisfactory to GE Capital that none of the
tenants of the Property will terminate its Lease as a result of either the Loss
or the repairs to or replacement of the Property, Borrower shall have the right
to apply all insurance proceeds received in connection with such Loss either (a)
to restore, repair, replace and rebuild the Property as nearly as possible to
its value, condition and character immediately prior to such Loss, or (b) to the
payment of the Indebtedness in such order as GE Capital may elect. If an Event
of Default has occurred and is continuing hereunder at the time of such Loss, if
GE Capital determines that Borrower will be unable to pay all amounts becoming
due under the Note during the pendency of any restoration or repairs to or
replacement of the Property, if the available insurance proceeds (together with
any deposit posted by Borrower in order to augment any deficiency in such
proceeds) are insufficient, in GE Capital's judgment, to fully and completely
restore, repair or replace the Property or if GE Capital has reason to believe
that one or more tenants of the Property will terminate its Lease as a result of
either the Loss or the repairs to or replacement of the Property, or if less
than six (6) months remain until the maturity of the Note, then all of the
insurance proceeds payable with respect to such Loss will be applied to the
payment of the Indebtedness, or at the option of GE Capital, such insurance
proceeds shall be made available to Borrower and Borrower shall promptly, at
Borrower's sole cost and expense and regardless of whether the insurance
proceeds shall be sufficient, commence to restore, repair, replace and rebuild
the Property as nearly as possible to its value, condition, character
immediately prior to such Loss. Borrower shall diligently prosecute any
restoration, repairs or replacement of the Property undertaken by or on behalf
of Borrower pursuant to this Section 5. All such work shall be conducted
pursuant to written contracts approved by GE Capital in writing, which approval
shall not be unreasonably withheld. Notwithstanding anything contained herein to
the contrary, in the event the insurance proceeds received by GE Capital
following any Loss are insufficient in GE Capital's judgment to fully and
completely restore, repair or replace the Property, and if Borrower has complied
with all of the other conditions described in this Section 5, Borrower may elect
to restore, repair or replace the Property if it first deposits with GE Capital
such additional sums as GE Capital determines are necessary in order to fully
and completely restore, repair or replace the Property. In the event any
insurance proceeds remain following the restoration, repair or replacement of
the Property, such proceeds shall be disbursed to Borrower, to the extent that
no Event of Default shall have occurred and be continuing and to the extent any
deposit was required to augment a shortfall in proceeds, and thereafter applied
to the Indebtedness in such order as GE Capital may elect.

         In the event that insurance proceeds shall be made available for the
repair, replacement, and/or reconstruction of the Property, GE Capital may
require that such proceeds be disbursed through an escrow with a title insurance
company acceptable to GE Capital, against Borrower's





                                       7
<PAGE>


furnishing to GE Capital such construction contracts, plans, building permits,
lien waivers, contractor's affidavits, endorsements to GE Capital's policy of
title insurance, builder's risk insurance, and other documents, instruments, and
information as GE Capital may reasonably require in accordance with standard
construction-lending practices.

         Borrower waives any and all right to claim or recover against GE
Capital or its officers, employees, agents and representatives, for loss of or
damage to Borrower, the Property, Borrower's property or the property of others
under Borrower's control from any cause insured against or required to be
insured against under this Section 5.

         SECTION 6. PRESERVATION AND MAINTENANCE OF PROPERTY; LEASEHOLDS.
Borrower (a) shall not commit waste or permit impairment or deterioration of the
Property, (b) shall not abandon the Property, (c) shall restore or repair
promptly and in a good and workmanlike manner all or any part of the Property to
the equivalent of its original condition, or such other condition as GE Capital
may approve in writing, in the event of any damage, injury or loss thereto,
whether or not insurance proceeds are available to cover in whole or in part the
costs of such restoration or repair, (d) shall keep the Property, including all
Improvements thereon, in good repair and shall replace fixtures, equipment,
machinery and appliances on the Property when necessary to keep such items in
good repair, (e) shall comply with all laws, ordinances, regulations and
requirements of any governmental body applicable to the Property, (f) if all or
part of the Property is for rent or lease, then GE Capital, at its option after
the occurrence of an Event of Default, may require Borrower to provide for
professional management of the Property by a property manager satisfactory to GE
Capital pursuant to a contract approved by GE Capital in writing, unless such
requirement shall be waived by GE Capital in writing, and (g) shall give notice
in writing to GE Capital of and, unless otherwise directed in writing by GE
Capital, appear in and defend any action or proceeding purporting to affect the
Property, the security of this Instrument or the rights or powers of GE Capital
hereunder. Neither Borrower nor any tenant or other person, without the written
approval of GE Capital, shall remove, demolish or alter any Improvement now
existing or hereafter erected on the Premises or any Property, except when
incident to the replacement of fixtures, equipment, machinery and appliances
with items of like kind.

         Borrower represents, warrants and covenants that the Property is and
shall be in substantial compliance with the Americans with Disabilities Act of
1990 and all of the regulations promulgated thereunder, as the same may be
amended from time to time.

         SECTION 7. USE OF PROPERTY. Unless required by applicable law or unless
GE Capital has otherwise agreed in writing, Borrower shall not allow changes in
the use for which all or any part of the Property was intended at the time this
Instrument was executed. Borrower shall not, without GE Capital's prior written
consent, (i) initiate or acquiesce in a change in the zoning classification
(including any variance under any existing zoning ordinance applicable to the
Property), (ii) permit the use of the Property to become a non-conforming use
under applicable zoning ordinances, (iii) file any subdivision or parcel map
affecting the Property, or (iv) amend, modify or consent to any easement or
covenants, conditions and restrictions pertaining to the Property.





                                       8
<PAGE>


         SECTION 8. PROTECTION OF GE CAPITAL'S SECURITY. If Borrower fails to
perform any of the covenants and agreements contained in this Instrument, or if
any action or proceeding is commenced which affects the Property or title
thereto or the interest of GE Capital therein, including, but not limited to,
eminent domain, insolvency, code enforcement, or arrangements or proceedings
involving a bankrupt or decedent, then GE Capital at GE Capital's option may
make such appearances, disburse such sums and take such action as GE Capital
deems necessary, in its sole discretion, to protect GE Capital's interest,
including, but not limited to, (i) disbursement of attorneys' fees, (ii) entry
upon the Property to make repairs, (iii) procurement of satisfactory insurance
as provided in Section 5 hereof, and (iv) if this Instrument is on a leasehold,
exercise of any option to renew or extend the Ground Lease on behalf of Borrower
and the curing of any default of Borrower in the terms and conditions of the
Ground Lease.

         Any amounts disbursed by GE Capital pursuant to this Section 8, with
interest thereon, shall become additional Indebtedness of Borrower secured by
this Instrument. Unless Borrower and GE Capital agree to other terms of payment,
such amounts shall be immediately due and payable and shall bear interest from
the date of disbursement at the Default Rate (as defined in the Note). Borrower
hereby covenants and agrees that GE Capital shall be subrogated to the lien of
any mortgage or other lien discharged, in whole or in part, by the Indebtedness.
Nothing contained in this Section 8 shall require GE Capital to incur any
expense or take any action hereunder.

         SECTION 9. INSPECTION. GE Capital may make or cause to be made
reasonable entries upon the Property to inspect the interior and exterior
thereof. Except in case of emergency, such inspection shall be with reasonable
prior notice and shall in any case be with due regard to rights of tenants.

         SECTION 10. FINANCIAL DATA. Borrower will furnish to GE Capital, and
will cause any guarantor of the Indebtedness to furnish to GE Capital on
request, within ninety (90) days after the close of its fiscal year (i) annual
balance sheet and profit and loss statements prepared in accordance with
generally accepted accounting principles and practices consistently applied and,
if GE Capital so requires, accompanied by the annual audit report of an
independent certified public accountant reasonably acceptable to GE Capital,
(ii) an annual operating statement, together with a complete rent roll and other
supporting data reflecting all material information with respect to the
operation of the Property and Improvements, and (iii) all other financial
information and reports that GE Capital may from time to time reasonably
request, including, if GE Capital so requires, income tax returns of Borrower
and any guarantor of any portion of the Indebtedness, and financial statements
of any tenants designated by GE Capital.

         SECTION 11. CONDEMNATION. If the Property, or any part thereof, shall
be condemned for any reason, including without limitation fire or earthquake
damage, or otherwise taken for public or quasi-public use under the power of
eminent domain, or be transferred in lieu thereof, all damages or other amounts
awarded for the taking of, or injury to, the Property shall be paid to GE
Capital who shall have the right, in its sole and absolute discretion, to apply
the amounts so received against (a) the costs and expenses of GE Capital,
including attorneys' fees incurred in connection with collection of such
amounts, and (b) the balance against the Indebtedness; provided, however, that
if (i) no Event of Default shall have occurred and be continuing




                                       9
<PAGE>


hereunder, (ii) Borrower provides evidence satisfactory to GE Capital of its
ability to pay all amounts becoming due under the Note during the pendency of
any restoration or repairs to or replacement of the Property, (iii) GE Capital
determines, in its sole discretion, that the proceeds of such award are
sufficient to restore, repair, replace and rebuild the Property as nearly as
possible to its value, condition and character immediately prior to such taking
(or, if the proceeds of such award are insufficient for such purpose, if
Borrower provides additional sums to GE Capital's satisfaction so that the
aggregate of such sums and the proceeds of such award will be sufficient for
such purpose), and (iv) Borrower provides evidence satisfactory to GE Capital
that none of the tenants of the Property will terminate its Lease as a result of
either the condemnation or taking or the repairs to or replacement of the
Property, the proceeds of such award, together with additional sums provided by
Borrower, shall be placed in a separate account for the benefit of GE Capital
and Borrower to be used to restore, repair, replace and rebuild the Property as
nearly as possible to its value, condition and character immediately prior to
such taking. All work to be performed in connection therewith shall be pursuant
to a written contract therefor, which contract shall be subject to the prior
approval of GE Capital, which approval shall not be unreasonably withheld. To
the extent that any funds remain after the Property has been so restored and
repaired, the same shall be applied against the Indebtedness in such order as GE
Capital may elect. To enforce its rights hereunder, GE Capital shall be entitled
to participate in and, if an Event of Default shall have occurred and be
continuing, control any condemnation proceedings and to be represented therein
by counsel of its own choice, and Borrower will deliver, or cause to be
delivered to GE Capital such instruments as may be requested by it from time to
time to permit such participation. In the event GE Capital, as a result of any
such judgment, decree or award, has reason to believe that the payment or
performance of any of the Indebtedness is impaired, GE Capital may declare all
of the Indebtedness immediately due and payable.

         SECTION 12. BORROWER AND LIEN NOT RELEASED. From time to time, GE
Capital may, at GE Capital's option, without giving notice to or obtaining the
consent of Borrower, Borrower's successors or assigns or of any junior
lienholder or guarantors, without liability on GE Capital's part and
notwithstanding the occurrence of an Event of Default, extend the time for
payment of the Indebtedness or any part thereof, reduce the payments thereon,
release anyone liable on any of the Indebtedness, accept an extension or
modification or renewal note or notes therefor, modify the terms and time of
payment of the Indebtedness, release from the lien of this Instrument any part
of the Property, take or release other or additional security, reconvey any part
of the Property, consent to any map or plan of the Property, consent to the
granting of any easement, join in any extension or subordination agreement, and
agree in writing with Borrower to modify the rate of interest or period of
amortization of the Note or change the amount of the monthly installments
payable thereunder. Any actions taken by GE Capital pursuant to the terms of
this Section 12 shall not affect the obligation of Borrower or Borrower's
successors or assigns to pay the sums secured by this Instrument and to observe
the covenants of Borrower contained herein, shall not affect the guaranty of any
person, corporation, partnership or other entity for payment of the
Indebtedness, and shall not affect the lien or priority of the lien hereof on
the Property. Borrower shall pay GE Capital a service charge, together with such
title insurance premiums and attorneys' fees as may be incurred at GE Capital's
option, for any such action if taken at Borrower's request.




                                       10
<PAGE>


         SECTION 13. FORBEARANCE BY GE CAPITAL NOT A WAIVER. Any forbearance by
GE Capital in exercising any right or remedy hereunder, or otherwise afforded by
applicable law, shall not be a waiver of or preclude the exercise of any other
right or remedy. The acceptance by GE Capital of payment of any sum secured by
this Instrument after the due date of such payment shall not be a waiver of GE
Capital's right to either require prompt payment when due of all other sums so
secured or to declare a default for failure to make prompt payment. The
procurement of insurance or the payment of taxes or other liens or charges by GE
Capital shall not be a waiver of GE Capital's right to accelerate the maturity
of the Indebtedness secured by this Instrument, nor shall GE Capital's receipt
of any awards, proceeds or damages under Sections 5 and 11 hereof operate to
cure or waive Borrower's default in payment of sums secured by this Instrument.

         SECTION 14. UNIFORM COMMERCIAL CODE SECURITY AGREEMENT. This Instrument
is intended to be a security agreement pursuant to the Uniform Commercial Code
for any of the items specified above as part of the Property which, under
applicable law, may be subject to a security interest pursuant to the Uniform
Commercial Code, as enacted in the State of Minnesota, and Borrower hereby
grants and conveys to GE Capital a first and prior security interest in all of
the Property that constitutes personalty ("Collateral", for purposes of this
Section 14), whether now owned or hereafter acquired. Borrower agrees that GE
Capital may file this Instrument, or a reproduction thereof, in the real estate
records or other appropriate index, as a financing statement for any of the
items specified above as part of the Collateral. Any reproduction of this
Instrument or of any other security agreement or financing statement shall be
sufficient as a financing statement. Borrower hereby authorizes Mortgagee to
file this Instrument, or a reproduction thereof, as a financing statement for
any of the items specified above as part of the Collateral, and any financing
statements, extensions, renewals, amendments and other records in connection
therewith, in the real estate records and/or other appropriate index or record.
Borrower hereby waives any and all rights Borrower may have to file in the real
estate records or any other index or record any financing statement, amendment,
termination statement or other record pertaining to the Collateral and/or
Mortgagee's interest therein. Borrower shall execute and deliver to GE Capital,
upon GE Capital's request, any financing statements, extensions, renewals,
amendments and other records, and reproductions of this Instrument, in such form
as GE Capital may require to perfect a security interest with respect to the
foregoing items. Borrower shall pay all costs of filing such financing
statements and any extensions, renewals, amendments and releases thereof, and
shall pay all costs and expenses of any record searches for financing statements
GE Capital may require.

         Borrower expressly warrants and covenants:

                  (a) Except for the security interest granted hereby, Borrower
         is the owner of the Collateral free from any lien, security interest or
         encumbrance. Borrower understands that any further encumbrance of the
         Collateral is prohibited. Borrower shall defend the Collateral against
         all claims and demands of all persons at any time claiming the same or
         any interest therein.

                  (b) The Collateral is used or bought primarily for use in the
         business of Borrower and not for consumer purposes.




                                       11
<PAGE>


                  (c) Borrower's business address is as stated above. The
         Collateral is located at or on or is used or owned for or in connection
         with the Premises and other Property.

                  (d) Borrower shall promptly notify GE Capital of any change in
         the location of the Collateral or any change in Borrower's principal
         place of business.

                  (e) Borrower shall pay when due, prior to delinquency, all
         taxes and assessments of every nature which may be levied or assessed
         against the Collateral.

                  (f) Except for liens in favor of GE Capital, without GE
         Capital's prior written consent, Borrower shall not permit or allow any
         lien, security interest or encumbrance whatsoever upon the Collateral
         and shall not permit the Collateral to be attached or replevied. GE
         Capital's consent to a junior lien by an entity owned by, or under
         common control with, GE Capital shall not be unreasonably withheld.

                  (g) The Collateral is in good condition and Borrower shall
         keep the Collateral in good condition (reasonable wear and tear
         excepted) and from time to time, forthwith, replace and repair all such
         parts of the Collateral as may be broken, worn out, or damaged without
         allowing any lien to be created upon the Collateral on account of such
         replacement or repairs. GE Capital may examine and inspect the
         Collateral at any time, wherever located, subject to reasonable prior
         notice.

                  (h) Borrower will not use the Collateral in violation of any
         applicable statutes, regulations or ordinances.

                  (i) Notwithstanding anything else contained herein to the
         contrary, if any personal property for use on the Property will be
         leased to Borrower, GE Capital's interest therein shall be subordinate
         to lessor's interest therein.

         Until the occurrence of an Event of Default, Borrower may have
possession of the Collateral and use it in any lawful manner, and upon the
occurrence of an Event of Default GE Capital shall have the immediate right to
the possession of the Collateral.

         Upon the occurrence of an Event of Default, GE Capital shall have the
remedies of a secured party under the Uniform Commercial Code, and GE Capital
may also invoke the remedies provided in Section 26 of this Instrument as to
such items. In exercising any of said remedies GE Capital may proceed against
the items of real property and any items of Collateral specified above
separately or together and in any order whatsoever, without in any way affecting
the availability of GE Capital's remedies under the Uniform Commercial Code or
of the remedies provided in Section 26 of this Instrument. Within ten (10) days
following any request therefor by GE Capital, Borrower shall prepare and deliver
to GE Capital a written inventory specifically listing all of the Collateral
covered by the security interest herein granted, which inventory shall be
certified by Borrower as being true, correct, and complete.




                                       12
<PAGE>


         Addresses and Other Information for Fixture Filing. This Instrument
covers goods which are or are to become fixtures. The following information is
provided in order that this Mortgage shall comply with the requirements of the
Uniform Commercial Code for instruments to be filed as financing statements and
with other requirements of applicable law:

    (a) Name of Borrower (Debtor):          APPLIANCE RECYCLING
                                            CENTERS OF AMERICA, INC.
        Address of Borrower:                7400 Excelsior Boulevard
                                            St. Louis Park, Minnesota 55426

    (b) Name of Mortgagee (Secured Party):  GENERAL ELECTRIC CAPITAL
                                            BUSINESS ASSET FUNDING
                                            CORPORATION

        Address of Mortgagee:               10900 NE 4th Street, Suite 500
                                            Bellevue, Washington 98004
                                            Attention: Real Estate Department

    (c) Record Owner of Real Estate
        Described on Exhibit A hereto:      BORROWER

         SECTION 15. LEASES OF THE PROPERTY. Borrower shall comply with and
observe Borrower's obligations as landlord under all Leases of the Property or
any part thereof. All Leases now or hereafter entered into will be in form and
substance subject to the approval of GE Capital. Borrower shall pay all
attorneys' fees incurred by GE Capital in reviewing any Lease or proposed Lease.
All Leases of the Property shall specifically provide that such Leases are
subordinate to this Instrument; that the tenant attorns to GE Capital, such
attornment to be effective upon GE Capital's acquisition of title to the
Property; that the tenant agrees to execute such further evidences of attornment
as GE Capital may from time to time request; that the attornment of the tenant
shall not be terminated by foreclosure; and that GE Capital may, at GE Capital's
option, accept or reject such attornments (except as to third-party credit
tenants unrelated to Borrower, as to which GE Capital shall grant a
non-disturbance provision). Borrower shall not, without GE Capital's written
consent, request or consent to the subordination of any Lease of all or any part
of the Property to any lien subordinate to this Instrument. If Borrower becomes
aware that any tenant proposes to do, or is doing, any act or thing which may
give rise to any right of set-off against rent, Borrower shall (i) take such
steps as shall be reasonably calculated to prevent the accrual of any right to a
set-off against rent, (ii) immediately notify GE Capital thereof in writing and
of the amount of said set-offs, and (iii) within ten (10) days after such
accrual, reimburse the tenant who shall have acquired such right to set-off or
take such other steps as shall effectively discharge such setoff and as shall
assure that Rents thereafter due shall continue to be payable without set-off or
deduction. Upon GE Capital's receipt of notice of the occurrence of any default
or violation by Borrower of any of its obligations under the Leases, GE Capital
shall have the immediate right, but not the duty or obligation, without prior
written notice to Borrower or to any third party, to enter upon the Property and
to take such actions as GE Capital may deem necessary to cure the default or
violation by Borrower under the




                                       13
<PAGE>


Leases. The costs incurred by GE Capital in taking any such actions pursuant to
this paragraph shall become part of the Indebtedness, shall bear interest at the
rate provided in the Note, and shall be payable by Borrower to GE Capital on
demand. GE Capital shall have no liability to Borrower or to any third party for
any actions taken by GE Capital or not taken pursuant to this paragraph.

         SECTION 16. REMEDIES CUMULATIVE. Each remedy provided in this
Instrument is distinct and cumulative to all other rights or remedies under this
Instrument or afforded by law or equity, and may be exercised concurrently,
independently, or successively, in any order whatsoever.

         SECTION 17. TRANSFERS OF THE PROPERTY OR BENEFICIAL INTERESTS IN
BORROWER; SUBORDINATE FINANCING PROHIBITED; ASSUMPTION. GE Capital may, at its
option, declare all sums secured by this Instrument to be immediately due and
payable, and GE Capital may invoke any remedies permitted by Section 26 of this
Instrument, if title to the Property is changed without the prior written
consent of GE Capital, which consent shall be at GE Capital's sole discretion.
Any transfer of any interest in the Property or in the income therefrom, by
sale, lease (except for Leases to tenants in the ordinary course of managing
income property which are approved by GE Capital pursuant to Section 15 of this
Instrument), contract, mortgage, deed of trust, further encumbrance or otherwise
(including any such transfers as security for additional financing of the
Property). Leasehold mortgages and collateral assignments of any Lease of the
Property given by tenants of the Property are prohibited without the prior
written consent of GE Capital, which consent may be withheld in GE Capital's
sole discretion. Notwithstanding the foregoing, additional but subordinate deeds
of trust may be granted to GE Capital and, subject to the prior written consent
of GE Capital, which consent may be withheld in GE Capital's sole discretion,
may be granted to entities owned by or under common control with GE Capital.

         GE Capital shall have the right to condition its consent to any
proposed sale or transfer described in this Section 17 upon, among other things,
GE Capital's approval of the transferee's creditworthiness and management
ability and the transferee's execution, prior to the sale or transfer, of a
written assumption agreement containing such terms as GE Capital may require,
including, if required by GE Capital, the imposition of an assumption fee of one
percent (1 %) of the then outstanding balance of the Indebtedness. Consent by GE
Capital to one transfer of the Property shall not constitute consent to
subsequent transfers or waiver of the provisions of this Section 17. No transfer
by Borrower shall relieve Borrower of liability for payment of the Indebtedness,
unless GE Capital shall otherwise agree in writing at the time of such transfer.
Borrower shall pay any recording tax, recording cost, title insurance premium,
attorneys' fees, or other third-party expenses incurred by GE Capital in
connection with any transfer, whether or not consent is required.

         The transfer to and assumption by an approved transferee of the
Borrower's obligations under the Loan shall not constitute a "prepayment" of the
Loan requiring payment of a "Prepayment Premium" (as defined in the Note).

         SECTION 18. NOTICE. Except for any notice required under applicable law
to be given in another manner, any and all notices, elections, demands, or
requests permitted or required to be




                                       14
<PAGE>


made under this Instrument or under the Note shall be in writing, signed by the
party giving such notice, election, demand or request, and shall be delivered
personally, or sent by registered, certified, or Express United States mail,
postage prepaid, or by Federal Express or similar service requiring a receipt,
to the other party at the address stated above, or to such other party and at
such other address within the United States of America as any party may
designate in writing as provided herein. The date of receipt of such notice,
election, demand or request shall be the earliest of (i) the date of actual
receipt, (ii) three (3) business days after the date of mailing by registered or
certified mail, (iii) one (1) business day after the date of mailing by Express
Mail or the delivery (for redelivery) to Federal Express or another similar
service requiring a receipt, or (iv) the date of personal delivery (or refusal
upon presentation for delivery).

         SECTION 19. SUCCESSORS AND ASSIGNS BOUND; JOINT AND SEVERAL LIABILITY;
AGENTS; CAPTIONS. The covenants and agreements herein contained shall bind, and
the rights hereunder shall inure to, the respective heirs, successors and
assigns of GE Capital and Borrower, subject to the provisions of Section 17
hereof. If Borrower is comprised of more than one person or entity, whether as
individuals, partners, partnerships, limited liability companies, or
corporations, each such person or entity shall be jointly and severally liable
for Borrower's obligations hereunder. In exercising any rights hereunder or
taking any actions provided for herein, GE Capital may act through its
employees, agents or independent contractors as authorized by GE Capital. The
captions and headings of the sections of this Instrument are for convenience
only and are not to be used to interpret or define the provisions hereof.

         SECTION 20. WAIVER OF STATUTE OF LIMITATIONS. Borrower hereby waives
the right to assert any statute of limitations as a bar to the enforcement of
the lien of this Instrument or to any action brought to enforce the Note or any
other obligation secured by this Instrument.

         SECTION 21. WAIVER OF MARSHALLING. Notwithstanding the existence of any
other security interests in the Property held by GE Capital or by any other
party, GE Capital shall have the right to determine the order in which any or
all of the Property shall be subjected to the remedies provided herein. GE
Capital shall have the right to determine the order in which any or all portions
of the Indebtedness secured hereby are satisfied from the proceeds realized upon
the exercise of the remedies provided herein. Borrower, any party who consents
to this Instrument and any party who now or hereafter acquires a security
interest in the Property and who has actual or constructive notice hereof hereby
waives any and all right to require the marshalling of assets in connection with
the exercise of any of the remedies permitted by applicable law or provided
herein.

         SECTION 22. HAZARDOUS WASTE. Borrower has furnished to GE Capital a
Phase I Environmental Site Assessment dated August 22, 2002, prepared by Secor
International Incorporated (the "Report"). Except as disclosed to GE Capital in
the Report, Borrower has received no notification of any kind suggesting that
the Property or any adjacent property is or may be contaminated with any
hazardous waste or materials or is or may be required to be cleaned up in
accordance with any applicable law or regulation; and Borrower further
represents and warrants that, except as previously disclosed to GE Capital in
writing, to the best of its knowledge as of the date hereof, there are no
hazardous waste or materials located in, on or under the Property or any
adjacent property, or incorporated in any Improvements, nor has the




                                       15
<PAGE>


Property or any adjacent property ever been used as a landfill or a waste
disposal site, or a manufacturing, handling, storage, distribution or disposal
facility for hazardous waste or materials, except for reasonable quantities of
ordinary office supplies, cleaning supplies, insecticides, pesticides, and paint
used in the normal operation and maintenance of the Real Property, provided that
the same are used, stored, handled, and disposed of in accordance with
applicable laws. As used herein, the term "hazardous waste or materials"
includes any substance or material defined in or designated as hazardous or
toxic wastes, hazardous or toxic material, a hazardous, toxic or radioactive
substance, or other similar term, by any federal, state or local statute,
regulation or ordinance now or hereafter in effect. Borrower shall promptly
comply with all statutes, regulations and ordinances, and with all orders,
decrees or judgments of governmental authorities or courts having jurisdiction,
relating to the use, collection, treatment, disposal, storage, control, removal
or cleanup of hazardous waste or materials in, on or under the Property or any
adjacent property, or incorporated in any Improvements, at Borrower's expense.
Borrower shall notify GE Capital immediately if Borrower becomes aware of (a)
the presence of any hazardous waste or materials on the Real Property or any
other environmental problem or liability with respect to the Real Property, or
(b) any lien, action or notice relating to Borrower and/or the Real Property
resulting from violation of any applicable laws. In such event, at no cost to GE
Capital, Borrower will (i) promptly order and deliver to GE Capital, upon the
request of GE Capital, an environmental audit or survey from an expert
satisfactory to GE Capital with respect to the Real Property and (ii) proceed in
a timely manner to take all actions which are necessary or desirable to clean up
any hazardous waste or substances affecting the Real Property and to comply with
the recommendations of any environmental audit or survey, including removal,
containment or any other remedial action required by applicable governmental
authorities or by any applicable laws. Following the completion of any such
actions, Borrower shall proceed in a timely manner to restore the Real Property
to its former state of productive use. In the event that Borrower fails to
immediately obtain such audit or inspection, GE Capital or its agents may
perform or obtain such audit or inspection at Borrower's sole cost and expense.
GE Capital may, but is not obligated to, enter upon the Property and take such
actions and incur such costs and expenses to effect such compliance as it deems
advisable to protect its interest in the Property; and whether or not Borrower
has actual knowledge of the existence of hazardous waste or materials on the
Property or any adjacent property as of the date hereof, Borrower shall
reimburse GE Capital as provided in Section 23 below for the full amount of all
costs and expenses incurred by GE Capital prior to GE Capital acquiring title to
the Property through foreclosure or acceptance of a deed in lieu of foreclosure,
in connection with such compliance activities. Neither this provision nor any of
the other Loan Documents shall operate to put GE Capital in the position of an
owner of the Property prior to any acquisition of the Property by GE Capital.
The rights granted to GE Capital herein and in the other Loan Documents are
granted solely for the protection of GE Capital's lien and security interest
covering the Property, and do not grant to GE Capital the right to control
Borrower's actions, decisions or policies regarding hazardous waste or
materials.

         SECTION 23. ADVANCES, COSTS AND EXPENSES. Borrower shall pay within ten
(10) days after written demand from GE Capital all sums advanced by GE Capital
and all costs and expenses incurred by GE Capital in taking any actions pursuant
to the Loan Documents including attorneys' fees and disbursements, accountants'
fees, appraisal and inspection fees and the costs for title reports and
guaranties, together with interest thereon at the rate applicable




                                       16
<PAGE>


under the Note after an Event of Default from the date such costs were advanced
or incurred. All such costs and expenses incurred by GE Capital, and advances
made, shall constitute advances under this Instrument to protect the Property
and shall be secured by and have the same priority as the lien of this
Instrument. If Borrower fails to pay any such advances, costs and expenses and
interest thereon, GE Capital may apply any undisbursed loan proceeds to pay the
same, and, without foreclosing the lien of this Instrument, may at its option
commence an independent action against Borrower for the recovery of the costs,
expenses and/or advances, with interest, together with costs of suit, costs of
title reports and guaranty of title, disbursements of counsel and reasonable
attorneys' fees incurred therein or in any appeal therefrom.

         SECTION 24. ASSIGNMENT OF LEASES AND RENTS. Borrower, for good and
valuable consideration, the receipt of which is hereby acknowledged, to secure
the Indebtedness, does hereby absolutely and unconditionally grant, bargain,
sell, transfer, assign, convey, set over and deliver unto GE Capital all right,
title and interest of Borrower in, to and under the Leases of the Property,
whether now in existence or hereafter entered into, and all guaranties,
amendments, extensions and renewals of said Leases and any of them, and all
Rents which may now or hereafter be or become due or owing under the Leases, and
any of them, or on account of the use of the Property.

         Borrower represents, warrants, covenants and agrees with GE Capital as
follows:

                  (a) The sole ownership of the entire lessor's interest in the
         Leases is vested in Borrower, and Borrower has not, and shall not,
         perform any acts or execute any other instruments which might prevent
         GE Capital from fully exercising its rights with respect to the Leases
         under any of the terms, covenants and conditions of this Instrument.

                  (b) The Leases are and shall be valid and enforceable in
         accordance with their terms and have not been and shall not be altered,
         modified, amended, terminated, canceled, renewed or surrendered except
         as approved in writing by GE Capital, which approval shall not be
         unreasonably withheld.. The terms and conditions of the Leases have not
         been and shall not be waived in any manner whatsoever except as
         approved in writing by GE Capital, which approval shall not be
         unreasonably withheld.

                  (c) Borrower shall not decrease the term or the amount of rent
         payable under any Lease without prior written notice to GE Capital and
         GE Capital's consent.

                  (d) There are no defaults now existing under any of the Leases
         and, to the best of Borrower's knowledge, there exists no state of
         facts which, with the giving of notice or lapse of time or both, would
         constitute a default under any of the Leases.

                  (e) Borrower shall give prompt written notice to GE Capital of
         any notice received by Borrower claiming that a default has occurred
         under any of the Leases on the part of Borrower, together with a
         complete copy of any such notice.

                  (f) Each of the Leases shall remain in full force and effect
         irrespective of any merger of the interest of lessor and any lessee
         under any of the Leases.




                                       17
<PAGE>


                  (g) Borrower will not permit any Lease to become subordinate
         to any lien other than the lien of this instrument.

                  (h) Borrower shall not permit or consent to the assignment by
         any tenant of its rights under its Lease without the prior written
         consent of GE Capital. Without limitation of the foregoing, Borrower
         shall not permit or consent to the filing of any encumbrance against
         the tenant's interest under any Lease including, without limitation,
         any leasehold mortgage.

         The assignment made hereunder is an absolute, present assignment from
Borrower to GE Capital, effective immediately, and is not merely an assignment
for security purposes but is irrevocable by Borrower so long as the indebtedness
remains outstanding. Notwithstanding the foregoing, until a notice is sent to
the Borrower in writing that an Event of Default (as defined below) has occurred
under the terms and conditions of the Note or any instrument constituting
security for the Note (which notice is hereafter called a "Notice"), Borrower is
granted a license to receive, collect and enjoy the Rents accruing from the
Property.

         If an Event of Default shall occur, GE Capital may, at its option,
after service of a Notice, receive and collect all such Rents as they become
due, from the Property. GE Capital shall thereafter continue to receive and
collect all such Rents, until GE Capital shall otherwise agree in writing. All
sums received by Borrower after service of such Notice shall be deemed received
in trust and shall be immediately turned over to GE Capital.

         Borrower hereby irrevocably appoints GE Capital its true and lawful
attorney-in-fact with power of substitution and with full power for GE Capital
in its own name and capacity or in the name and capacity of Borrower, from and
after service of Notice, to demand, collect, receive and give complete
acquittances for any and all Rents accruing from the Property, either in its own
name or in the name of Borrower or otherwise, which GE Capital may deem
necessary or desirable in order to collect and enforce the payment of the Rents
and to demand, correct, receive, endorse, and deposit all checks, drafts, money
orders or notes given in payment of such Rents. Such appointment is coupled with
an interest and is irrevocable. GE Capital shall not be liable for or prejudiced
by any loss of any note, checks, drafts, etc., unless such loss shall have been
found by a court of competent jurisdiction to have been due to the gross
negligence or willful misconduct of GE Capital.

         GE Capital shall apply the Rents received from Borrower's lessees, to
accrued interest and principal under the Note. If no Event of Default remains
uncured, amounts received in excess of the aggregate monthly payment due under
the Note shall be remitted to Borrower in a timely manner. Nothing contained
herein shall be construed to constitute GE Capital as a mortgagee-in-possession
in absence of its physically taking possession of the Property.

         Borrower also hereby irrevocably appoints GE Capital as its true and
lawful attorney-in- fact to appear in any state or federal bankruptcy,
insolvency, or reorganization proceeding in any state or federal court involving
any of the tenants of the Leases. Lessees of the Property are hereby expressly
authorized and directed, from and after service of a Notice to pay any and all




                                       18
<PAGE>


amounts due Borrower pursuant to the Leases to GE Capital or such nominee as GE
Capital may designate in writing delivered to and received by such lessees who
are expressly relieved of any and all duty, liability or obligation to Borrower
in respect of all payments so made.

         If an Event of Default shall occur, GE Capital is hereby vested with
full power from and after service of a Notice to use all measures, legal and
equitable, deemed by it necessary or proper to enforce the assignment granted
hereunder and to collect the Rents assigned hereunder, including the right of GE
Capital or its designee, to enter upon the Property, or any part thereof, and
take possession of all or any part of the Property together with all personal
property, fixtures, documents, books, records, papers and accounts of Borrower
relating thereto, and may exclude the Borrower, its agents and servants, wholly
therefrom. Borrower hereby grants full power and authority to GE Capital to
exercise all rights, privileges and powers herein granted at any and all times
after service of a Notice, with full power to use and apply all of the Rents and
other income herein assigned to the payment of the costs of managing and
operating the Property and of any indebtedness or liability of Borrower to GE
Capital, including but not limited to the payment of taxes, special assessments,
insurance premiums, damage claims, the costs of maintaining, repairing,
rebuilding and restoring the Improvements on the Premises or of making the same
rentable, reasonable attorneys' fees incurred in connection with the enforcement
of the assignment granted hereunder, and of principal and interest payments due
from Borrower to GE Capital on the Note and this Instrument, all in such order
as GE Capital may determine. GE Capital shall be under no obligation to exercise
or prosecute any of the rights or claims assigned to it hereunder or to perform
or carry out any of the obligations of the lessor under any of the Leases and
does not assume any of the liabilities in connection with or arising or growing
out of the covenants and agreements of Borrower in the leases. It is further
understood that the assignment granted hereunder shall not operate to place
responsibility for the control, care, management or repair of the Property, or
parts thereof, upon GE Capital, nor shall it operate to make GE Capital liable
for the performance of any of the terms and conditions of any of the Leases, or
for any waste of the Property by any lessee under any of the Leases or any other
person, or for any dangerous or defective condition of the Property or for any
negligence in the management, upkeep, repair or control of the Property
resulting in loss or injury or death to any lessee, licensee, employee or
stranger, unless the same shall have been found by a court of competent
jurisdiction to have been due to the gross negligence or willful misconduct of
GE Capital.

         SECTION 25. DEFAULT. The following shall each constitute an event of
default ("Event of Default"):

                  (a) The occurrence of an "Event of Default" under the Note.

                  (b) Failure of Borrower within the time required by this
         Instrument to make any payment for taxes, insurance or for reserves for
         such payments, or any other payment necessary to prevent filing of or
         discharge of any lien, and such failure shall continue for a period of
         ten (10) days after written notice is given to Borrower by GE Capital
         specifying such failure.




                                       19
<PAGE>


                  (c) Failure by Borrower to observe or perform any obligations
         of Borrower to GE Capital on or with respect to any transactions,
         debts, undertakings or agreements other than the transaction evidenced
         by the Note, following the giving of any notice required thereunder
         and/or the expiration of any applicable period of grace provided
         thereby.

                  (d) Failure of Borrower to make any payment or perform any
         obligation under any superior liens or encumbrances on the Property,
         within the time required thereunder, or commencement of any suit or
         other action to foreclose any superior liens or encumbrances.

                  (e) Failure by Borrower to observe or perform any of its
         obligations under any of the Leases, following the giving of any notice
         required thereunder and/or the expiration of any applicable period of
         grace provided thereby.

                  (f) The Property is transferred or any agreement to transfer
         any part or interest in the Property in any manner whatsoever is made
         or entered into without the prior written consent of GE Capital, except
         as specifically allowed under this Instrument, including without
         limitation creating or allowing any subordinate liens on the Property
         or leasing any portion of the Property.

                  (g) Filing by Borrower of a voluntary petition in bankruptcy
         or filing by Borrower of any petition or answer seeking or acquiescing
         in any reorganization, arrangement, composition, readjustment,
         liquidation, or similar relief for itself under any present or future
         federal, state or other statute, law or regulation relating to
         bankruptcy, insolvency or other relief for debtors, or the seeking,
         consenting to, or acquiescing by Borrower in the appointment of any
         trustee, receiver, custodian, conservator or liquidator for Borrower,
         any part of the Property, or any of the Rents of the Property, or the
         making by Borrower of any general assignment for the benefit of
         creditors, or the inability of or failure by Borrower to pay its debts
         generally as they become due, or the insolvency on a balance sheet
         basis or business failure of Borrower, or the making or suffering of a
         preference within the meaning of federal bankruptcy law or the making
         of a fraudulent transfer under applicable federal or state law, or
         concealment by Borrower of any of its property in fraud of creditors,
         or the imposition of a lien upon any of the property of Borrower which
         is not discharged in the manner pennitted by Section 4 of this
         Instrument, or the giving of notice by Borrower to any governmental
         body of insolvency or suspension of operations.

                  (h) Filing of a petition against Borrower seeking any
         reorganization, arrangement, composition, readjustment, liquidation, or
         similar relief under any present or future federal, state or other law
         or regulation relating to bankruptcy, insolvency or other relief for
         debts, or the appointment of any trustee, receiver, custodian,
         conservator or liquidator of Borrower, of any part of the Property or
         of any of the Rents of the Property, unless such petition shall be
         dismissed within sixty (60) days after such filing, but in any event
         prior to the entry of an order, judgment or decree approving such
         petition.




                                       20
<PAGE>


                  (i) The institution of any proceeding for the dissolution or
         termination of Borrower voluntarily, involuntarily, or by operation of
         law, unless such proceeding shall be dismissed within sixty (60) days
         after such filing, but in any event prior to the entry of an order,
         judgment or decree for relief, or the death or incompetence of
         Borrower.

                  (j) A material adverse change occurs in the assets,
         liabilities or net worth of Borrower from the assets, liabilities or
         net worth of Borrower or any of the guarantors of the indebtedness
         evidenced by the Note previously disclosed to GE Capital.

                  (k) Any warranty, representation or statement furnished to GE
         Capital by or on behalf of Borrower under the Note, this Instrument,
         any of the other Loan Documents or the Environmental Indemnity
         Agreement regarding Hazardous Substances, shall prove to have been
         false or misleading in any material respect when made.

                  (1) Failure of Borrower to observe or perform any other
         covenant or condition contained herein and such default shall continue
         for thirty (30) days after notice is given to Borrower specifying the
         nature of the failure, or if the default cannot be cured within such
         applicable cure period, Borrower fails within such time to commence and
         pursue curative action with reasonable diligence or fails at any time
         after expiration of such applicable cure period to continue with
         reasonable diligence all necessary curative actions; provided, however,
         that no notice of default and no opportunity to cure shall be required
         with respect to defaults under Section 17 hereof or if during the prior
         twelve (12) months GE Capital has already sent a notice to Borrower
         concerning default in performance of the same obligation.

                  (m) Failure of Borrower to observe or perform any other
         obligation under any other Loan Document or the Environmental Indemnity
         Agreement regarding Hazardous Substances when such observance or
         performance is due, and such failure shall continue beyond the
         applicable cure period set forth in such Loan Document, or if the
         default cannot be cured within such applicable cure period, Borrower
         fails within such time to commence and pursue curative action with
         reasonable diligence or fails at any time after expiration of such
         applicable cure period to continue with reasonable diligence all
         necessary curative actions. No notice of default and no opportunity to
         cure shall be required if during the prior twelve (12) months GE
         Capital has already sent a notice to Borrower concerning default in
         performance of the same obligation.

                  (n) Borrower's abandonment of the Property.

                  (o) Any of the events specified in (g) - (j) above shall occur
         with respect to any tenant of the Property, with respect to any
         guarantor of any of Borrower's obligations in connection with the
         Indebtedness or with respect to any guarantor of any tenant's
         obligations relating to the Property, or such guarantor dies or becomes
         incompetent.




                                       21
<PAGE>


         SECTION 26. RIGHTS AND REMEDIES ON DEFAULT.

         SECTION 26.1. REMEDIES. Upon the occurrence of any Event of Default and
         at any time thereafter, GE Capital may exercise anyone or more of the
         following rights and remedies:

                  (a) GE Capital may declare all sums secured by this Instrument
         immediately due and payable, including any prepayment premium which
         Borrower would be required to pay.

                  (b) GE Capital shall have the right to foreclose this
         Instrument in accordance with applicable law.

                  (c) In the event of any foreclosure, to the extent permitted
         by applicable law, GE Capital will be entitled to a judgment which will
         provide that if the foreclosure sale proceeds are insufficient to
         satisfy the judgment, execution may issue for any amount by which the
         unpaid balance of the obligations secured by this Instrument exceeds
         the net sale proceeds payable to GE Capital.

                  (d) With respect to all or any part of the Property that
         constitutes personalty, GE Capital shall have all rights and remedies
         of secured party under the Uniform Commercial Code.

                  (e) GE Capital shall have the right to have a receiver
         appointed to take possession of any or all of the Property, with the
         power to protect and preserve the Property, to operate the Property
         preceding foreclosure or sale, to collect all the Rents from the
         Property and apply the proceeds, over and above cost of the
         receivership, against the sums due under this Instrument, and to
         exercise all of the rights with respect to the Property described in
         Section 24 above. The receiver may serve without bond if permitted by
         law. To the extent permitted by law, GE Capital's right to the
         appointment of a receiver shall exist whether or not apparent value of
         the Property exceeds the sums due under this Instrument by a
         substantial amount. Employment by GE Capital shall not disqualify a
         person from serving as a receiver.

                  (f) In the event Borrower remains in possession of the
         Property after the Property is sold as provided above or GE Capital
         otherwise becomes entitled to possession of the Property upon default
         of Borrower, Borrower shall become a tenant at will of GE Capital or
         the purchaser of the Property and shall pay a reasonable rental for use
         of the Property while in Borrower's possession.

                  (g) GE Capital shall have any other right or remedy provided
         in this Instrument, the Note, or any other Loan Document or instrument
         delivered by Borrower in connection therewith, or available at law, in
         equity or otherwise.

                  (h) GE Capital shall have all the rights and remedies set
         forth in Sections 23 and 24.




                                       22
<PAGE>


                  (i) Borrower does hereby grant and confer upon GE Capital the
         fullest rights and remedies available for foreclosure of this
         Instrument by action or by advertisement pursuant to Minn. Stat.
         Chapters 580, 581 and 582, as said statutes may be amended from time to
         time, and pursuant to other applicable Minnesota laws and statutes, as
         amended, governing and authorizing mortgage foreclosures by action and
         by advertisement; and the power of sale granted GE Capital in this
         Instrument shall include, without limitation, the power of sale
         required to permit, at GE Capital's option, lawful foreclosure of this
         Instrument by advertisement in accordance with the statutes then made
         and provided.

         SECTION 26.2. SALE OF THE PROPERTY. In exercising its rights and
remedies, GE Capital may, at GE Capital's sole discretion, cause all or any part
of the Property to be sold as a whole or in parcels, and certain portions of the
Property may be sold without selling other portions. GE Capital may bid at any
public sale on all or any portion of the Property.

         SECTION 26.3. NOTICE OF SALE. GE Capital shall give Borrower reasonable
notice of the time and place of any public sale of any personal property or of
the time after which any private sale or other intended disposition of the
personal property is to be made. Reasonable notice shall mean notice given in
accordance with applicable law, including notices given in the manner and at the
times required for notices in a nonjudicial foreclosure.

         SECTION 26.4. WAIVER; ELECTION OF REMEDIES. A waiver by either party of
a breach of a provision of this Instrument shall not constitute a waiver of or
prejudice the party's right otherwise to demand strict compliance with that
provision or any other provision. Election by GE Capital to pursue any remedy
shall not exclude pursuit of any other remedy, and all remedies of GE Capital
under this Instrument are cumulative and not exclusive. An election to make
expenditures or take action to perform an obligation of Borrower shall not
affect GE Capital's right to declare a default and exercise its remedies under
this Instrument.

         GE Capital's rights and remedies hereunder upon the occurrence of an
Event of Default shall include, without limitation, the fullest range and
benefit of the rights and remedies made available to a mortgagee pursuant to
Minn. Stat. ss. 576.01 and Minn. Stat. ss. 559.17, as said statutes may be
amended from time to time. In the event that GE Capital elects to exercise its
remedies under said statutes, or any of said remedies, the terms and provisions
of said statutes, as amended, governing the exercise of said remedies shall
govern, control and take precedence over any contrary terms contained in this
Instrument. The exercise by GE Capital of the statutory remedies referenced in
this paragraph shall not constitute GE Capital a "mortgagee-in- possession"
under Minnesota law, or give rise to any liability which might otherwise attach
to GE Capital as a mortgagee-in-possession.

         SECTION 27. SATISFACTION OF MORTGAGE. Upon payment of all sums secured
by this Instrument, GE Capital shall execute a satisfaction (or at Borrower's
option, an assignment) of this Instrument and shall surrender this Instrument
and all notes evidencing Indebtedness secured by this Instrument to the person
or persons legally entitled thereto. Such person or persons shall pay GE
Capital's costs incurred in connection with satisfaction or assignment of this
Instrument.




                                       23
<PAGE>


         SECTION 28. FUTURE ADVANCES. Upon request of Borrower, GE Capital, at
GE Capital's option so long as this Instrument secures Indebtedness held by GE
Capital, may make Future Advances to Borrower. Such Future Advances, with
interest thereon, shall be secured by this Instrument when evidenced by
promissory notes stating that said notes are secured hereby.

         SECTION 29. USE OF PROPERTY. The Property is not currently used for
agricultural, farming, timber or grazing purposes. Borrower warrants that this
Instrument is and will at all times constitute a commercial mortgage, as defined
under appropriate state law.

         SECTION 30.  IMPOSITION OF TAX BY STATE.

         SECTION 30.1. STATE TAXES COVERED. The following constitute state taxes
         to which this Section applies:

                  (a) A specific tax upon mortgages or upon all or any part of
         the indebtedness secured by a mortgage.

                  (b) A specific tax on a mortgagor which the taxpayer is
         authorized or required to deduct from payments on the indebtedness
         secured by a mortgage.

                  (c) A tax on a mortgage chargeable against the mortgagee or
         the holder of the note secured.

                  (d) A specific tax on all or any portion of the indebtedness
         or on payments of principal and interest made by a mortgagor.

         SECTION 30.2. REMEDIES. If any state tax to which this Section applies
is enacted subsequent to the date of this Instrument, this shall have the same
effect as an Event of Default, and GE Capital may exercise any or all of the
remedies available to it unless the following conditions are met:

                  (a) Borrower may lawfully pay the tax or charge imposed by
         state tax, and

                  (b) Borrower pays the tax or charge within thirty (30) days
         after notice from GE Capital that the tax has been levied.

         SECTION 31. ATTORNEYS' FEES. In the event suit or action is instituted
to enforce or interpret any of the terms of this Instrument (including without
limitation efforts to modify or vacate any automatic stay or injunction), the
prevailing party shall be entitled to recover all expenses reasonably incurred
at, before and after trial and on appeal whether or not taxable as costs, or in
any bankruptcy proceeding including, without limitation, attorneys' fees,
witness fees (expert and otherwise), deposition costs, copying charges and other
expenses. Whether or not any court action is involved, all reasonable expenses,
including but not limited to the costs of searching records, obtaining title
reports, surveyor reports, and title insurance, incurred by GE Capital that are
necessary at any time in GE Capital's opinion for the protection of its interest
or enforcement of its rights shall become a part of the Indebtedness payable on
demand and shall





                                       24
<PAGE>


bear interest from the date of expenditure until repaid at the interest rate as
provided in the Note. The term "attorneys' fees" as used in the Loan Documents
shall be deemed to mean such fees as are reasonable and are actually incurred.

         SECTION 32. GOVERNING LAW; SEVERABILITY. This Instrument shall be
governed by the law of the State of Minnesota applicable to contracts made and
to be performed therein (excluding choice-of-law principles). In the event that
any provision or clause of this Instrument or the Note conflicts with applicable
law, such conflict shall not affect other provisions of this Instrument or the
Note which can be given effect without the conflicting provision, and to this
end the provisions of this Instrument and the Note are declared to be severable.

         SECTION 33. TIME OF ESSENCE. Time is of the essence of this Instrument.

         SECTION 34. CHANGES IN WRITING. This Instrument and any of its terms
may only be changed, waived, discharged or terminated by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. Any agreement subsequently made by Borrower
or GE Capital relating to this Instrument shall be superior to the rights of the
holder of any intervening lien or encumbrance.

         SECTION 35. NO OFFSET. Borrower's obligation to make payments and
perform all obligations, covenants and warranties under this Instrument and
under the Note shall be absolute and unconditional and shall not be affected by
any circumstance, including without limitation any setoff, counterclaim,
abatement, suspension, recoupment, deduction, defense or other right that
Borrower or any guarantor may have or claim against GE Capital or any entity
participating in making the loan secured hereby. The foregoing provisions of
this Section, however, do not constitute a waiver of any claim or demand which
Borrower or any guarantor may have in damages or otherwise against GE Capital or
any other person, or preclude Borrower from maintaining a separate action
thereon; provided, however, that Borrower waives any right it may have at law or
in equity to consolidate such separate action with any action or proceeding
brought by GE Capital.

         SECTION 36. WAIVER OF JURY TRIAL. BORROWER HEREBY KNOWINGLY,
VOLUNTARILY AND INTELLIGENTLY WAIVES ANY AND ALL RIGHTS THAT EACH PARTY TO THIS
INSTRUMENT MAY NOW OR HEREAFTER HAVE UNDER THE LAWS OF THE UNITED STATES OF
AMERICA OR THE STATE OF MINNESOTA, TO A TRIAL BY JURY OF ANY AND ALL ISSUES
ARISING DIRECTLY OR INDIRECTLY IN ANY ACTION OR PROCEEDING RELATING TO THIS
INSTRUMENT, THE LOAN DOCUMENTS OR ANY TRANSACTIONS CONTEMPLATED THEREBY OR
RELATED THERETO. IT IS INTENDED THAT THIS WAIVER SHALL APPLY TO ANY AND ALL
DEFENSES, RIGHTS, CLAIMS AND/OR COUNTERCLAIMS IN ANY SUCH ACTION OR PROCEEDING.

         BORROWER UNDERSTANDS THAT THIS WAIVER IS A WAIVER OF A CONSTITUTIONAL
SAFEGUARD, AND EACH PARTY INDIVIDUALLY BELIEVES THAT THERE ARE SUFFICIENT
ALTERNATE PROCEDURAL AND SUBSTANTIVE




                                       25
<PAGE>


SAFEGUARDS, INCLUDING, A TRIAL BY AN IMPARTIAL JUDGE, THAT ADEQUATELY OFFSET THE
WAIVER CONTAINED HEREIN.

         SECTION 37. MAXIMUM INTEREST CHARGES. Notwithstanding anything
contained herein or in any of the Loan Documents to the contrary, in no event
shall GE Capital be entitled to receive interest on the loan secured by this
Instrument (the "Loan") in amounts which, when added to all of the other
interest charged, paid to or received by GE Capital on the Loan, causes the rate
of interest on the Loan to exceed the highest lawful rate. Borrower and GE
Capital intend to comply with the applicable law governing the highest lawful
rate and the maximum amount of interest payable on or in connection with the
Loan. If the applicable law is ever judicially interpreted so as to render
usurious any amount called for under the Loan Documents, or contracted for,
charged, taken, reserved or received with respect to the Loan, or if
acceleration of the final maturity date of the Loan or if any prepayment by
Borrower results in Borrower having paid or demand having been made on Borrower
to pay, any interest in excess of the amount permitted by applicable law, then
all excess amounts theretofore collected by GE Capital shall be credited on the
principal balance of the Note (or, if the Note has been or would thereby be paid
in full, such excess amounts shall be refunded to Borrower), and the provisions
of the Note, this Instrument and any demand on Borrower shall immediately be
deemed reformed and the amounts thereafter collectible thereunder and hereunder
shall be reduced, without the necessity of the execution of any new document, so
as to comply with the applicable law, but so as to permit the recovery of the
fullest amount otherwise called for thereunder and hereunder. The right to
accelerate the final maturity date of the Loan does not include the right to
accelerate any interest which has not otherwise accrued on the date of such
acceleration, and GE Capital does not intend to collect any unearned interest in
the event of acceleration. All sums paid or agreed to be paid to GE Capital for
the use, forbearance or detention of the Loan shall, to the extent permitted by
applicable law, be amortized, prorated, allocated and spread through the full
term of the Loan until payment in full so that the rate or amount of interest on
account of the Loan does not exceed the applicable usury ceiling. By execution
of this Instrument, Borrower acknowledges that it believes the Loan to be
nonusurious and agrees that if, at any time, Borrower should have reason to
believe that the Loan is in fact usurious, it will give GE Capital written
notice of its belief and the reasons why Borrower believes the Loan to be
usurious, and Borrower agrees that GE Capital shall have ninety (90) days
following its receipt of such written notice in which to make appropriate refund
or other adjustment in order to correct such condition if it in fact exists.

         SECTION 38. MORTGAGE REGISTRY TAX. Borrower agrees to pay upon demand,
or upon demand to promptly reimburse GE Capital for the payment of, the amount
of the Mortgage Registry Tax payable with respect to and upon the recording of
this Instrument in accordance with Minn. Stat. ss.287.05.




                     [REMAINDER OF PAGE INTENTIONALLY BLANK;
                             EXECUTION PAGE FOLLOWS]




                                       26
<PAGE>


         IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE
READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER
TERMS OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY
ENFORCED. YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN
AGREEMENT.

         IN WITNESS WHEREOF, Borrower has executed this Instrument or has caused
the same to be executed under seal by its duly authorized representative as of
the day and year first written above.

                                     BORROWER:

                                     APPLIANCE RECYCLING CENTERS OF
                                     AMERICA, INC., a Minnesota corporation


                                     By:  /s/ Edward R. Cameron
                                          ------------------------------
                                     Print:  /s/ Edward R. Cameron
                                             ---------------------------
                                     Its:  President
                                           -----------------------------

STATE OF MINNESOTA         )
                           ) ss.
COUNTY OF Hennepin         )


         This instrument was acknowledged before me on September 19, 2002 by /s/
Edward R. Cameron as President of Appliance Recycling Centers of America, Inc.,
a Minnesota corporation, on behalf of said corporation.

                                     /s/ Karen Clare
                                     -------------------------------------------
                                     Notary Public
                                     My commission expires:  1/31/05
                                                             -----------

After recording, return to:          Instrument prepared by:
General Electric Capital Business    Beth M. Ascher, Esq.
Asset Funding Corporation            Kutak Rock LLP
10900 NE 4th Street, Suite 500       1650 Farnam Street
Bellevue, Washington 98004           Omaha, Nebraska 68102-2186
Attention: Real Estate Department    (402) 346-6000
Loan Number: 001-0009840-001

              [EXECUTION/ACKNOWLEDGEMENT PAGE OF MORTGAGE, SECURITY
          AGREEMENT, ASSIGNMENT OF LEASES AND RENTS AND FIXTURE FILING]




                                       27
<PAGE>


General Electric Capital Business
Asset Funding Corporation
Loan No.: 001-0009840-001

                                    EXHIBIT A

     (7400 Excelsior Boulevard, St. Louis Park, Hennepin County, Minnesota)

Legal Description:
------------------

Tract D, Registered Land Survey No. 1674, Files of Registrar of Titles, County
of Hennepin, State of Minnesota.

Being registered land as is evidenced by Certificate of No. 830571.






















                                       28
<PAGE>


General Electric Capital Business
Asset Funding Corporation
Loan No.: 001-0009840-001

                                   SCHEDULE 1

     (7400 Excelsior Boulevard, St. Louis Park, Hennepin County, Minnesota)

Permitted Exceptions:

1. Sewer and water easement as granted to the Village of St. Louis Park by
Document No. 319583.

2. Electric transmission easement as granted to Northern States Power Company by
Document No. 335298.

3. Road and parking easement over the West 33 feet as conveyed to the Village of
St. Louis Park by Document No. 431440.

4. Utility easement as granted to the City of St. Louis Park by Document No.
1658485.

5. Memorandum of Access Agreement dated December 11, 1991, filed April 10, 1992
as Document No. 2251595 granting to the Minnesota Pollution Control Agency the
right to conduct an environmental investigation etal.

6. Declaration of Restrictions and Covenants filed January 22, 1993 as Document
No. 2338916.

7. Affidavit relating to underground storage tank located on land filed as
Document No. 2338917.

8. Easement to install, operate and maintain remedial equipment as contained in
Document No. 2169545.

9. Resolution No. 89-189 from the City of St. Louis Park filed as Document No.
2072590.

10. All minerals and mineral rights and water power rights reserved by the State
of Minnesota in Document No. 429476.



                                       29

</TEXT>
</DOCUMENT>
