Hershey school's purchase of golf course helped investors

The Milton S. Hershey School, the nation's largest residential school for impoverished children, purchased a money-losing golf course at the inflated price of $12 million in 2006, saying it needed the course as "buffer land" for student safety.

The price for the Wren Dale Golf Club, which had opened in 2003, was two to three times Hershey's own appraisal and the fair-market value calculated by the Dauphin County tax office. One club investor acknowledged the deal helped "bail us out."

After acquiring the private course, the board members who administer the charitable school spent an additional $5 million to build a clubhouse, billed as Scottish-themed, with a restaurant and bar, and opened it to the public.

The deal tossed a financial lifeline to 40 to 50 local businessmen and doctors who had invested in Wren Dale and faced substantial losses. One of them was Richard H. Lenny, then-chief executive officer of the Hershey Co. and a member of the charity board that approved the purchase.

Notwithstanding the seeming conflict of interest, the Wren Dale purchase and construction of a well-appointed clubhouse appear to violate the strictly worded directives of Milton S. Hershey for spending his $7.5 billion fortune on behalf of the school and its poor students:

"All revenues must be spent directly on the care and education of the children. No monies are allowed to be or are spent for any other purpose; there are no grants to other organizations or non-MHS related spending."

Using the golf course as a buffer property between new student homes and the community falls under Milton Hershey's mission regarding care of children, Hershey School officials said. They said they feared a developer's purchasing the course, rezoning the land, and building high-density housing.

The school, for prekindergarten through the 12th grade, is free to students who qualify.

The Wren Dale purchase was supported by LeRoy S. Zimmerman, a former two-term Pennsylvania attorney general who was the designated chairman of the Hershey Trust board in 2005. An avid golfer, he now holds the chairman title.

Neither Lenny nor Zimmerman would comment, despite repeated attempts to seek their accounts.

As CEO of the candy company, Lenny had close ties to the school. He sat on the board of the Hershey Trust, which administers Milton Hershey's philanthropic legacy. The board's role is to act on behalf of the students at the Hershey School.

After reviewing trust board minutes and other documents, the charity told The Inquirer in a statement Sept. 17 that Lenny had not informed the trust board of a financial interest in Wren Dale on a disclosure form, "nor was any potential conflict raised by any board member in any discussions involving the Wren Dale project."

Lenny did not specifically vote on the Wren Dale deal, said Connie McNamara, a spokeswoman for the Hershey School and Hershey Trust. A three-person executive committee of the board approved the deal. The members were Zimmerman, former Hershey Trust chairman Anthony J. Colistra, and Harrisburg-area lawyer Velma Redmond, McNamara said.

Lenny was informed before the committee vote and afterward and "had ample opportunity to raise any concerns to potential conflicts," McNamara said.

How Lenny's ownership in the club was unknown to the trust board's executive committee is not explained. According to mortgage records, he was one of 25 members who lent Wren Dale $50,000 each in 2002. With the sale, Wren Dale members recouped their $25,000 equity investments and loans, and earned profits ranging from $15,000 to more than $100,000 per member, according to two sources familiar with the deal.

Lenny now lives in the Chicago area and did not respond to two certified letters sent to his home seeking comment. He retired from the Hershey Co. in 2007 and no longer sits on the Hershey Trust board. The Inquirer also tried to reach him through the Hershey Co.

The purchase of the money-losing golf club by the Hershey empire's most powerful board members turned Lenny's investment from a potential $75,000 loss to a minimum $15,000 profit. This came when his total compensation in 2006 was $11.3 million, according to Hershey Co.'s proxy statement.

Zimmerman declined numerous requests for interviews. Instead, he responded through McNamara, and Colistra responded in a written statement. He said the executive committee had unanimously "authorized Trust management to pay more than the appraised value for this strategically essential property."

Colistra said: "I thought it was the right decision then. And I know it was the right decision now."

Wren Dale is the latest eye-catching expenditure made by the stewards of the Hershey School. The Inquirer reported in May that the school had quietly paid $3 million to compensate five former students, or their families, who said an adult pedophile molested them in the 1980s and 1990s. The molester was the son of a part-time house parent who accompanied his mother to campus.

In June, the Hershey School closed the Springboard Academy, a dorm and teaching complex. Opened in 2007 to improve student retention, the project cost about $40 million.

The Inquirer reported in July that four prominent Republicans, including Zimmerman and former Gov. Tom Ridge, earned more than a combined $1 million a year in director fees on Hershey School-related boards. Those boards are for the for-profit Hershey Trust Co., the Hershey candy company, and Hershey Entertainment & Resort Co. The Hershey School owns or controls the companies.

Milton Hershey created the tangled complex of boards to ensure that the for-profit Hershey entities existed to fund and sustain the school. The Wren Dale purchase and the cost of its enhancements, amounting to $17 million, sit on the books of the school, which directly or indirectly owns four golf courses but doesn't have a golf team.

George Groves, a banker and Wren Dale member, said the school's decision to buy the course had pleased him.

"There was no obligation for the Hershey Trust to bail us out," he said in a phone interview. "We were delighted when it came about and there was a rationale. The Hershey School and trust make decisions that are very qualitative, and this was not inconsistent with decisions they've made in the past."

Buying Wren Dale began with a decision in 2004 to expand the Hershey School's enrollment with a new campus. The area targeted for development contained more than 1,000 acres of school-owned property along Swatara Creek and would, according to the plan, eventually house 900 students.

Adjoining the school-owned property was the Wren Dale Golf Club, which Hershey School officials said would help create a safe, open space between the community and new student homes.

Said Colistra in the statement: "There was a very real possibility that the adjacent Wren Dale site would be sold and converted into a housing development - immediately adjacent to our campus."

McNamara wrote in an e-mail: "This transaction was one of 17 property purchases - amounting to about 700 acres - we made on the North Campus to ensure we could achieve our targeted growth. This purchase, along with all the other purchases, was made so that we could grow the school. Period. Our goal continues to be to build additional student homes so that our middle-division students can have their own campus."

IRS documents show Wren Dale was in terrible financial shape. It lost more than $900,000 in 16 months and had $7.9 million in debt and other liabilities. Still, the school agreed to pay $9 million for the course's real estate and $3 million for the Wren Dale name, golf carts, and other physical property.

Though struggling financially, the Wren Dale Club had converted to a for-profit company from a nonprofit organization several months before it reached an agreement with the school, according to records with the Pennsylvania Department of State.

The additional $3 million that included the Wren Dale name was required for the investors to walk away with a profit, based on how the venture was capitalized with debt and equity. Despite paying for it, the school discarded the name, and the course became Hershey Links.

Ray Brace, a special consultant in the real estate department in the Hershey Trust Co., said in an interview that the philanthropy had not appraised the golf course in 2005 and instead had valued it as farmland.

When asked several days later, McNamara acknowledged that an appraisal had been done but had not been in the files. Weinstein Realty Advisors of York valued Wren Dale at $4 million as a golf course and cautioned its client on the golf business.

"Since the brief economic recession in 2001, the golf course market in south-central Pennsylvania has been relatively weak," the August 2005 report stated. "There is essentially an oversupply of golf courses in the region as evidenced by the decline in rounds played compared with the late 1990s at public facilities. Furthermore, there are virtually no waiting lists at the private clubs for memberships."

Weinstein Realty Advisors listed a separate value of $6.2 million as a potential site for housing. At the time, land prices were booming with the housing market.

Wren Dale's fair-market value was about $4.5 million, according to the Pennsylvania Department of Revenue's realty transfer document when the course changed hands in June 2006. This value was based on county assessments.

Robert C. Vowler, a former president of the Hershey Trust Co. who was closely involved with the Wren Dale negotiations, said in a brief phone interview Sept. 13 that because of the passage of time, he had "no clue" how the trust company had arrived at the $12 million price. "We did a lot of land deals," he said.

The clubhouse and Highlands restaurant opened on the property in 2009. The Hershey School built the clubhouse to enhance its investment in the golf course, McNamara said.

The Hershey School released a September 2005 letter from former school president John "Johnny" O'Brien praising the Wren Dale acquisition. The letter was addressed to Vowler when he was president of the Hershey Trust Co.

When contacted, O'Brien said a trust company official had asked him to write the letter. He said he had supported adding buffer land near new student homes but thought the school could buy the golf course for a discount, create a buffer, and then resell the remaining land. O'Brien said trust company officials has assured him that buying Wren Dale would "require few, if any, additional trust dollars."

Added O'Brien: "None of us at the school wanted a fourth golf course instead of serving more children."

F. Frederic Fouad, president of the nonprofit watchdog group Protect the Hershey's Children Inc. and a recent visiting scholar at Harvard Law School focusing on child-welfare and charitable-trust issues, said: "Creating a buffer between the children and the community is a preposterous excuse for buying a golf course."

He said the Hershey School's "obsession with using child-care money on leisure-activity development is so pronounced that nothing they do surprises me."

Michael Hussey, an associate professor with Widener Law School in Harrisburg, said that according to Pennsylvania law, trustees of a charity have a "fiduciary duty of care" over trust assets.

The legal standard, he said, boils down to whether "a reasonably prudent person would take the same position with regard to trust assets" - the purchase of the course for $12 million and the construction of a $5 million clubhouse.

The state agency responsible for overseeing the Hershey School and determining whether there has been a breach of fiduciary duty is the Office of the Attorney General, Hussey said.

Launched around 2000, the Wren Dale Golf Club filed paperwork in Harrisburg incorporating as a nonprofit organization in August 2001 and bought three parcels of land for $1.7 million in May 2002 for the course, according to real estate records.

Doctors, business owners and executives formed its core membership. To join, one had to pay $25,000. Hoping for 300 members, Wren Dale opened in August 2003 with only about 50.

"We all went out on a limb," said one member, William Hicks. "We wanted a golf-only equity club that didn't exist in central Pennsylvania. So we stretched to get it done."

In March and April 2005, Wren Dale converted to a for-profit company. That August, the Hershey Trust agreed to a deal.

Larry Hirsh, a Wren Dale member and a professional golf-course appraiser, said that "as a partner in Wren Dale, the sale price was a pleasant surprise."

The Hershey School's first phase of its expansion consisted of 32 family-style student homes near the golf course.

Sixteen of those homes, with a capacity of about 190 students, were built and are now open. The school, with an enrollment of about 1,800 to 1,900, halted construction of homes near the golf course in the last year because of the bad economy, but has said it will resume.

The elite par-72 course is open to the public and costs $85 for 18 holes for residents of 13 counties in central Pennsylvania, and $120 for Philadelphia-area residents and others. As the renamed Hershey Links, it's included on the website of the Hershey Golf Collection. Students don't play there.

Map of Hershey golf and other properties, A6.

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