Can a Minnesota education district buy a shopping mall and use most of it for special-education programs while keeping the existing commercial leases on the remaining 10 percent of the space?

Plain-English summary

The Hiawatha Valley Education District (HVED) wanted to consolidate operations from five sites into a single mall property of about 83,000 square feet. Around 90 percent of the building would be used for HVED's special education and alternative education programs. The other 10 percent was already leased to commercial tenants under varying agreements, including one that ran until 2032 but allowed either side to terminate on six months' notice.

HVED's counsel, Christian Shafer, asked the Minnesota AG two questions. First, can an education district even purchase a property that already has private leases attached? Second, does the purchase qualify as a "valid public purpose" given that some of the building will house private commercial tenants?

Attorney General Keith Ellison said yes to both, with conditions.

On the authority question, the AG started with the structural rule that an education district under Minn. Stat. § 123A.15 is governed by the laws applicable to independent school districts unless something specifically says otherwise (Minn. Stat. § 123A.17, subd. 4). Independent school districts have both express powers and implied powers under Minn. Stat. § 123B.02, subd. 1.

The express powers in Minn. Stat. § 123B.51 cover two things relevant here: subdivision 1 authorizes purchase of property "necessary for school purposes," and subdivision 4(a) authorizes the district to lease out property that is not needed for school purposes if the board determines that leasing part of the property does not interfere with educational programs taking place there. Subdivision 4(a) also lets the board "charge and collect reasonable consideration for the lease" and "determine the terms and conditions of the lease."

The in-between question, can the district buy a building that already has leases on it, is not expressly answered. The AG read the authority to purchase subject to existing leases as fairly implied from subdivisions 1 and 4 together. The reasoning followed the implied-powers cases: In re Hubbard (Minn. 2010) and In re N. States Power Co. (Minn. 1987) say implied authority must be "fairly drawn and fairly evident" from express objectives. Welsh v. City of Orono (Minn. 1984) requires implied municipal powers to be "in aid of those powers expressly conferred." The AG also cited an earlier 1969 AG opinion that recognized a school district could take title subject to a reversionary interest.

The AG attached a condition: to effectuate the legislative intent that the board "may determine terms and conditions" of leases (subd. 4(a)), the school district has to examine the existing leases before purchase. The leases must not conflict with educational use, must be on reasonable terms, and assuming them must be in the district's best interests. After purchase, the district should be prepared to not renew leases when school needs the space, and to exercise termination rights when termination is in the district's best interest.

On the public purpose question, the AG drew on City of Pipestone v. Madsen (Minn. 1970), which defines public purpose as activity that benefits the community as a body and is directly related to government functions. Visina v. Freeman (Minn. 1958) holds that an "incidental" private benefit does not disqualify a transaction. The AG concluded that the benefit accruing to private commercial lessees occupying about 10 percent of the building does not negate the public purpose of housing the educational programs.

The AG drew a useful analogy to a 1978 AG opinion (Op. Atty. Gen 218-R) on municipal liquor stores extending credit. The legislature determined that operating municipal liquor stores serves the public good, and credit sales could serve a public purpose as long as business practices comply with statute and credit is not extended indiscriminately. Same idea here: the legislature decided in § 123B.51, subd. 4 that leasing out school property serves the public good, but each lease must be evaluated carefully. Only if the terms are in the district's best interests will the lease "serve as a benefit to the community."

What this means for you

For school boards considering a building purchase that comes with existing leases: this opinion gives you a clear path. Identify the educational versus commercial split, document that the educational use is substantial (the AG was working with a 90/10 split), and confirm by board resolution that the commercial leases don't interfere with educational programs. Then do due diligence on the existing lease terms before closing. The resolution that HVED was preparing, which stated that the tenant areas are not currently needed for school purposes, tenant operations will not interfere with educational programs, and renewals would only happen if the same conditions hold, is a useful template.

For education districts specifically: the opinion confirms that § 123B.51 applies through the § 123A.17, subd. 4 channel. You are not stuck with a narrower lease and purchase authority than independent districts have.

For school district attorneys structuring a purchase: the lease-review piece is not optional. The AG's reading of subd. 4(a)'s "terms and conditions" language is that the board must actually evaluate the terms (duration, rent, allocation of risk, use of the property, etc.) and conclude the leases are reasonable and assuming them is in the district's best interests. A purchase that adopts the existing leases without that review would not have the legal cover the opinion provides.

For school facilities planners scouting non-traditional space (malls, office buildings, warehouses): the implied-powers reasoning is portable. If a building you want comes with leases, you can probably still buy it; the constraint is on the leases themselves, not on the purchase mechanism.

For municipal-finance attorneys looking at public-purpose challenges: the AG's framing tracks Pipestone v. Madsen and Visina v. Freeman. The "incidental private benefit" doctrine is alive and well, and a 10 percent commercial footprint within a building used substantially for public purposes does not break the public-purpose test, at least where the lease terms are independently reasonable.

For taxpayers or watchdog groups skeptical of the purchase: the opinion identifies the levers that matter. If the lease terms are not in the district's best interests, the public-purpose justification weakens. Review the board's resolution and the underlying lease analysis, not just the purchase price.

Common questions

Q: How much of the building has to be educational? Is 90/10 a magic ratio?
A: The AG was working with the specific 90/10 split HVED presented and did not announce a general threshold. The opinion uses the word "substantially" and emphasizes that the leased portion was for "commercial uses that do not interfere with educational programs." A district with a much smaller educational share would face a harder public-purpose argument.

Q: What kinds of lease terms might fail the board's "best interests" review?
A: The AG flags duration, rent, allocation of risk, and the nature of the lessee's use. A long lease at below-market rent, or a lease that restricts the school's ability to expand into the leased space when needed, would be problematic. The HVED lease that ran until 2032 but allowed termination on six months' notice was workable because the termination clause preserved the district's flexibility.

Q: Can the district renew the existing leases after the purchase?
A: Yes, but only under the same conditions: the leased space cannot be needed for school purposes, and the lease cannot interfere with educational programs. The HVED resolution included an explicit renewal condition that tracked these requirements.

Q: What if a commercial tenant refuses to leave when the school needs the space?
A: The existing lease terms govern. The district has to follow whatever termination provisions exist. If the lease has no termination clause favoring the landlord, the district may be locked in until the lease expires. That is a reason to value short or terminable leases over long fixed-term ones during due diligence.

Q: Does this opinion apply to traditional independent school districts buying property with leases?
A: Yes. The structural argument goes through § 123A.17, subd. 4 for education districts, but the underlying analysis of § 123B.51, subd. 1 and subd. 4(a) applies equally to independent districts under their direct authority.

Q: How does this interact with bond financing for the purchase?
A: The opinion does not address bond authority. A district financing the purchase through bonds will need to satisfy the relevant bonding statutes and procedures independently. The public-purpose conclusion here helps with the threshold question of whether the purchase is for an authorized purpose, but it does not substitute for compliance with bonding requirements.

Q: What about charter schools that are part of an education district?
A: HVED includes twelve member school districts and two charter schools. The opinion treats HVED as the contracting entity, not the individual member districts or charter schools. The same logic should apply to other education districts that include charter members, but specific charter-school constraints (separate organizational forms, MDE oversight) may apply when the charters use the space.

Background and statutory framework

Minnesota school districts have a layered authority structure. Independent school districts hold both express statutory powers and implied powers under Minn. Stat. § 123B.02, subd. 1. Education districts, formed under Minn. Stat. § 123A.15, are governed by laws applicable to independent districts unless specifically provided otherwise (§ 123A.17, subd. 4).

Minn. Stat. § 123B.51 is the property-management statute for school districts. Subdivision 1 authorizes purchase of "school sites" and property "necessary for school purposes," together with the buildings and improvements on the property. Subdivision 4(a) authorizes leasing out:

The school board may lease to any person, business, or organization real property that is not needed for school purposes... if the board determines that leasing part of the property does not interfere with the educational programs taking place on the property. The board may charge and collect reasonable consideration for the lease and may determine the terms and conditions of the lease.

The 1990 amendment to this provision added "business" to the list of permissible lessees, expanding it from the earlier "persons or organizations" language. So the legislature has been deliberately incrementally expanding school districts' authority to lease out non-school space to commercial tenants.

The implied-powers framework comes from a line of Minnesota Supreme Court cases. In re Hubbard (Minn. 2010) holds that an administrative agency's authority need not be given a "cramped reading," and enlargement by implication must be "fairly drawn and fairly evident" from the agency's objectives and expressly conferred powers. In re Northern States Power Co. (Minn. 1987) and Peoples Natural Gas v. Minn. Pub. Utils. Comm'n (Minn. 1985) lay down the same fair-implication test. Welsh v. City of Orono (Minn. 1984) extends the analysis to municipal corporations: implied powers must be "in aid of those powers expressly conferred."

For the public-purpose question, City of Pipestone v. Madsen (Minn. 1970) is the definitional case. Public purpose is "such an activity as will serve as a benefit to the community as a body and which, at the same time, is directly related to the functions of government." Visina v. Freeman (Minn. 1958) adds that an "incidental" private benefit does not disqualify a transaction from being for a valid public purpose.

The AG cites two earlier AG opinions as background: Op. Atty. Gen. 469-a-15 (Nov. 20, 1969) found a school district could take title subject to a reversionary interest, and Op. Atty. Gen. 622a6 (Sept. 25, 1946) recognized a district could lease property to a private corporation on terms the board reasonably deemed to be in the district's best interests. Op. Atty. Gen. 218-R (Sept. 26, 1978) used the implied-powers framework to find that municipal liquor stores could extend credit.

The November 2023 opinion was issued as a correction of citations in an October 25, 2023 opinion (Op. Atty. Gen. 161B-11). The substantive analysis is the same; the November issuance fixed citation errors.

Citations and references

Statutes:
- Minn. Stat. § 8.07
- Minn. Stat. § 123A.15 (education district formation)
- Minn. Stat. § 123A.17, subd. 4 (education district governance)
- Minn. Stat. § 123B.02, subd. 1 (general powers)
- Minn. Stat. § 123B.51, subd. 1 (purchase authority)
- Minn. Stat. § 123B.51, subd. 4(a) (lease-out authority)
- Minn. Stat. § 645.17(1) and (2) (statutory construction canons)

Cases:
- In re Hubbard, 778 N.W.2d 313 (Minn. 2010)
- In re N. States Power Co., 414 N.W.2d 383 (Minn. 1987)
- Peoples Natural Gas v. Minn. Pub. Utils. Comm'n, 369 N.W.2d 530 (Minn. 1985)
- Welsh v. City of Orono, 355 N.W.2d 117 (Minn. 1984)
- City of Pipestone v. Madsen, 178 N.W.2d 594 (Minn. 1970)
- Visina v. Freeman, 89 N.W.2d 635 (Minn. 1958)

Prior AG opinions referenced:
- Op. Atty. Gen. 469-a-15 (Nov. 20, 1969)
- Op. Atty. Gen. 622a6 (Sept. 25, 1946)
- Op. Atty. Gen. 218-R (Sept. 26, 1978)

Source

• Landing page: https://www.ag.state.mn.us/Office/Opinions/
• Original PDF: https://www.ag.state.mn.us/Office/Opinions/622a6-20231113.pdf

Original opinion text

EDUCATION-SCHOOL PROPERTY-LEASES: Where education district will use ninety percent of property for educational programs and leases for remaining ten percent are for commercial uses that do not interfere with educational programs, existing leases do not disqualify the purchase of the property by the district. Under these facts, purchasing the property subject to existing leases is a purchase for a valid public purpose if the education district board determines lease terms are in the best interests of the district. Minn. Stat. § 123B.51.

(correcting citations in Op. Atty Gen. 622a6; cr. 161B-11 (Oct. 25, 2023))

622a6; cr 161b-11
November 13, 2023

Christian R. Shafer
Ratwik, Roszak & Maloney, P.A.
444 Cedar Street, Suite 2100
St. Paul, MN 55101

Re: Request for Opinion

Dear Mr. Shafer:

Thank you for your letter of September 21, 2023, which requests an opinion from this Office on whether an education district may purchase a property subject to private commercial leases. You represent the Hiawatha Valley Education District (HVED), an education district created under Minn. Stat. § 123A.15, and request this opinion pursuant to Minn. Stat. § 8.07.

BACKGROUND

The facts as you present them are that HVED is comprised of twelve-member school districts and two charter schools. HVED provides special education, out-of-school placement options, alternative education programs, and other education-related programs and services to children, particularly children with disabilities.

HVED currently houses its operations at five sites and seeks to consolidate its facilities. The district is in discussion with a mall property at a central location that would be substantially renovated to meet the district's needs. Your letter indicates the mall has sufficient space (approximately 83,000 square feet) and flexibility for current programming and anticipated future expansion opportunities.

HVED will be using at least ninety percent of the property under consideration to house its educational programs. The remaining ten percent of the property is subject to commercial tenant leases of varying duration and terms. At least one lease extends to 2032 but allows either the tenant or landlord to terminate for any reason based on six-months' notice. The HVED Board of Directors is prepared to adopt a resolution stating the areas of the mall occupied by tenants are not currently needed for school purposes, and tenant operations will not interfere with the district's educational programs.

QUESTIONS PRESENTED

1. Is an education district authorized to purchase a mall property subject to private tenant leases if the primary purpose of the purchase is to house educational programs, and if the leased spaces are not necessary for, and the lease does not interfere with, the educational programs taking place on the mall property?

2. Would the purchase of a property subject to existing leases qualify as a purchase for a valid public purpose?

SUMMARY OF CONCLUSION

Where the education district will use ninety percent of the purchased property for its current and anticipated educational programs and leases for the remaining ten percent are for commercial operations that do not interfere with district educational programs, the existing leases do not disqualify the purchase of the property. Under these facts, purchasing the property subject to existing commercial leases is a purchase for a valid public purpose if the terms of the leases are determined to be in the best interests of the district.

ANALYSIS

Authority to Purchase Property Subject to Leases. The board of an education district formed under section 123A.15 is governed by laws applicable to independent school districts unless specifically provided otherwise. Minn. Stat. § 123A.17, subd. 4. General powers of independent school districts include both specific powers granted by the Legislature and implied powers. Minn. Stat. § 123B.02, subd. 1.

School boards of independent school districts are authorized to purchase property necessary for school purposes. Minn. Stat. § 123B.51, subd. 1. Recognizing that there may not be an exact match of purchased and necessary space, the Legislature also authorized school districts to:

lease to any person, business, or organization real property that is not needed for school purposes... if the board determines that leasing part of the property does not interfere with the educational programs taking place on the property. The board may charge and collect reasonable consideration for the lease and may determine the terms and conditions of the lease.

Minn. Stat. § 123B.51, subd. 4(a).

We agree that the authority to purchase subject to an existing lease may be fairly implied from subdivisions 1 and 4 of Minn. Stat. § 123B.51. The Legislature clearly authorizes a purchase of property by a school district and separately authorizes the district to lease to a business. The power to purchase subject to a lease is fairly implied from those two express authorizations. Cf. In re Hubbard, 778 N.W.2d 313, 321 (Minn. 2010). Consistent with a finding of implied authority here, we previously determined that a school district could take title to property subject to a reversionary interest in favor of a prior grantee. Op. Atty. Gen. 469-a-15 (Nov. 20, 1969).

To effectuate the legislative intent in subdivision 4 that the board "may determine terms and conditions of the lease," the school district must examine the terms of the existing leases to ensure not only the absence of a conflict with the district's educational uses of the building, but that the terms of the leases are reasonable and that assuming them is in the district's best interests. This should be part of the district's due diligence in examining any encumbrance on title before the purchase. After the purchase, in addition to not renewing any lease if the space is needed for educational purposes, HVED should also be prepared to exercise rights of termination in the existing leases if doing so is in the best interest of the district.

Public Purpose. The Minnesota Supreme Court has construed "public purpose" to mean "such an activity as will serve as a benefit to the community as a body and which, at the same time, is directly related to the functions of government." City of Pipestone v. Madsen, 178 N.W.2d 594, 599 (1970). The applicable caselaw holds that an "incidental" private benefit does not disqualify a transaction as being fundamentally for a valid public purpose. See Visina v. Freeman, 89 N.W.2d 635, 643 (Minn. 1958).

We agree that the benefit accruing to private commercial lessees who occupy approximately ten percent of school property that is not necessary to the district does not necessarily negate the public purpose. Similarly, the Legislature has determined that leasing out property not needed by school districts is a valid function of a district and serves the public good. See Minn. Stat. § 123B.51, subd. 4. Also similar to the extension of credit, leases must not be entered into indiscriminately. The terms of each lease must be evaluated carefully to ensure the terms (including duration, rent, allocation of risk, nature of the lessee's use of the property, etc.) are in the district's best interests. Only if that is the case will the leases "serve as a benefit to the community." Madsen, 178 N.W.2d at 599. That question is for the district to decide.

Thank you again for your inquiry, and we hope this opinion is helpful to you.

Sincerely,

KEITH ELLISON
Attorney General