Dear President Hines and members of the Milwaukee Common Council:
Last night, the Milwaukee Public School Board voted to authorize the sale of Malcolm X to 2760 Holdings, LLC. The next step is for the sale to be approved by the Common Council. We are writing to share our concerns regarding the proposed transaction.
While not often invoked, it has long been held that Wisconsin courts can void contracts if they are deemed to be against public policy. See Trumpf v. Shoudy, 164 N.W. 454, 456 (1917). Actions taken by local governments that infringe and frustrate the implementation of state law are considered to violate public policy. Anchor Sav. & Loans Ass’n v. Equal Opportunities Comm’n, 120 Wis. 2d 391, 397 (1984). In addition, taxpayer money, such as the rent payments contemplated here, must be spent for a “public purpose.” See. e.g., Hopper v. City of Madison, 79 Wis. 2d 120, 128, (1977).
With respect, it is hard to see how any rational person would enter into the contemplated transaction – unless motivated by a desire to avoid selling the building to a choice school. JCP Construction, through Holdings, LLC, will buy Malcolm X for $2.1 million. But, starting April 1, 2014 (or earlier), MPS has agreed to lease back one half of the building at an annual rent of one million dollars – essentially one half of the entire purchase price – for the next four years. That’s nearly a 50% annual return on investment! The developer takes on no risk and MPS pays for the upgrades. Yet it can double its money in four years. Even worse, MPS has the option to pay the entire lease upfront, permitting the developer to cash out after closing.
The transaction gets stranger. At the end of the lease, MPS can buy Malcolm X back for an undisclosed price with a credit based on its rent payments. The credit for rent paid raises a question as to whether this is a sham transaction. It is not clear to us that, even if the transaction is closed prior to the passage of legislation, MPS will not continue to control and be the equitable owner of the property.
To call this a “sweet heart” deal is an understatement. Worse, MPS has chosen this in the face of a buyer with 130 years of history in the neighborhood and strong financial backing.
While it is certainly not illegal for elected officials to make bad decisions, this transaction appears to be nothing other than an attempt to dispose of Malcolm X before the enactment of legislation, SB 318, which would require it and other surplus buildings to be made available to choice and non-unionized charter schools. The desire to avoid making space available for other schools is not a valid public purpose.
For example, the Ohio Supreme Court recently held that a contract between Cincinnati Public Schools (“CPS”) and a private entity was void on public policy grounds because it prohibited certain educators from purchasing the buildings. Cincinnati City School v. Conners, 132 Ohio St. 3d 468 (2012). The court held that CPS’ actions violated public policy because the Ohio legislature, through legislation, had clearly indicated a policy preference for advancing school choice. Actions motivated by a desire for self-preservation and avoiding competition are not actions taken for a public purpose and contrary to public policy.
Indeed, the deal with Holdings, LLC will include a restrictive deed on Malcolm X which would prevent choice schools, such as St. Marcus, from ever purchasing it. Such a deed restriction was held unconstitutional as a violation of public policy in Cincinnati because it was not “a public purpose” to inhibit educators from obtaining school buildings.
But more fundamental than the legal issues that the transaction may raise is the question of what is best for the residents and children of Milwaukee. At St. Marcus, although 90% of its students come from low-income families, over 91% of its students graduate from high school in 4 years or less. Yet, the state Department of Public Instruction estimates that only 61% of MPS students graduate in 4 years or less. It is not surprising that recent polling indicates that over 70% of Milwaukee residents believe that empty school buildings should be sold to choice or charter schools. Wisconsin Policy Research Institute, December 2012. By any measure, Milwaukee is in dire need of more high performing schools and St. Marcus is just that.
Instead of Malcolm X going to St. Marcus, MPS negotiated a very generous deal for a private developer. JCP Construction, through Holdings, LLC, will buy Malcolm X for $2.1 million with only half of the empty building being used for educational purposes – the rest would be for apartments and commercial retail use. While more residential and commercial property is a good thing, educating the next generation of Milwaukee citizens is of the utmost importance.
In sum, the proposed transaction is less favorable to the City than other possibilities, such as selling to St. Marcus, and would in fact amount to a gift to a private developer. All of this is being done, not to obtain any public benefit (a community center could be placed in any number of locations for less money) but to violate the public policy of this state and deny poor children and their families an educational choice that many choose to take. This deal is so bad and its real purpose so transparent that it raises serious questions concerning its legal validity.
Sincerely,
Rick Esenberg
President and General Counsel
CJ Szafir
Associate Counsel and Education Policy Director