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City of Detroit files suits, declaring Michael Kelly's properties a 'public nuisance'

The suits, which target four notorious landlords, allege the property owners ignored city codes, renting homes with high levels of lead.
Posted: 4:01 PM, Feb 06, 2020
Updated: 2022-02-01 07:11:17-05
Freddie McClary knew his home had lead in it. Over the summer, his landlord, Detroit Property Exchange, hired an inspector to assess the house. And before he had even submitted samples to a lab for testing, the analyst was able to tell McClary that the front door, coated in a thick glaze, was toxic.

The observation was disconcerting. Especially since McClary’s seven-year-old nephew also lived in the southwest Detroit bungalow. But the 28-year-old chose not to overthink it. Detroit Property Exchange, owned by controversial landlord Michael Kelly, had commissioned the inspection after getting a ticket from the city of Detroit — a ticket specifically for renting a property without a certificate of compliance confirming it was lead free, as required under the city’s rental ordinance. Surely, with the city breathing down its back, the company would make changes — or at least inform McClary and his family — if the problem went beyond the front door. They had heard nothing since the inspection on July 22. The Detroiter reasoned the silence was a confirmation of safety.

He shouldn’t have.

Forwarded to the 7 Action Investigators by a former Detroit Property Exchange employee, the inspector's report detailed remarkable and vast traces of lead; surfaces that in some cases had lead levels 66,000 times higher than today’s legal limit.

"I had some of the highest readings I had ever seen in any inspection that I’d ever done," Bryant Piotrowski, the inspector who completed the assessment, said in a phone interview with 7 Action News last week. "There was lead all over the place."

Despite the striking numbers, Kelly’s company did nothing. It made no mention of the report, according to McClary. It didn't attempt any of Piotrowski's abatement recommendations. And notably, when the city of Detroit ultimately issued a judgment against the company — totaling over $2,000 — for failing to register the rental and get a certificate of compliance, the company ignored both the fine and mandate for a correction.

Related: More than $2M of debt has been erased for Michael Kelly. Can the city reign in the property owner?
Related: Council fumes over deal to forgive landlord's $1M tax bill, blight violations
Related: A Detroit landlord is being sued for 'predatory contracts.' The city forgave $1M in unpaid property taxes

Today, six months later, the house still lacks a lead clearance or a certificate of compliance, it is still not registered as a rental, and McClary, who was informed of the inspection results by 7 Action News in January, has continued to make his monthly rent payments of $500.

This disconnect — the renting of an unregistered home that violates safety codes, coupled with the flagrant disregard of city accountability measures — is the basis of three lawsuits the city of Detroit filed Thursday against Kelly, as well as three other large-scale property owners: Salameh Jaser, and father-son duo Stephen and Steve Hagerman.

Filed in Wayne County Circuit Court, and coming on the heels of 7 Action News’ November investigation into Kelly's rentals, the suits allege the landlords have ignored compliance standards, putting Detroiters in homes that are "unsafe and unsanitary" including homes, like the one on Sharon St., where lead levels are alarmingly high. The suit signifies a shift in the city’s approach to Kelly, who has seen over $2 million in property tax debt and blight fines forgiven in exchange for land the city was interested in procuring for development. The city maintains that this time the suit will stick.

"It’s not going to be advantageous in this instance, for him or us, to shut down a lawsuit over the way he’s doing business, just to enable a development," city attorney Lawrence Garcia, said in an interview with 7 Action News Tuesday, prior to the filing. "It would be missing the point."

Seeking "equitable relief," the suit is asking Judge Timothy Kenny to issue a court order requiring the four defendants to bring their buildings into compliance with city law. If the owners fail to come into compliance within a "reasonable time" the city is asking the court to appoint a receiver to take over the properties and bring them up to code — a move which housing experts say is both aggressive and necessary.

Joint Statement by Allie Gross on Scribd

"This kind of commitment from the city, at least in the last decade, is unprecedented," said Joshua Akers, an assistant professor of Geography and Urban Region Studies at the University of Michigan-Dearborn, who is the co-author on a forthcoming paperfrom University of Michigan’s Poverty Solutions, which found that children living in homes purchased by investors at the Wayne County tax auction were 1.6 times more likely to exhibit lead poisoning than children living in other types of housing.

The suit, according to Akers, is one of the most forceful steps the city has taken to bring problematic landlords up to code. It also underscore gaps within the rental ordinance and ways in which those, like Kelly, have defied the law.

"If you have a property owner that’s willing to flout the law, is not interested in trying to provide safe, affordable rental housing and is looking for any advantage that they can find, you’re not going to be able to regulate that kind of activity out of existence," he said, explaining that instead new strategies — like the lawsuit — must come into play.

7 Actions News is still waiting on responses from the defendants. Reached by phone this morning, an attorney for Kelly said he hadn't been served yet and therefore could not comment. An employee at the Hagermans' Brick Home Management declined to comment when asked to reach the landlords about the suit. Attempts to find contact information for Jaser have been unsuccessful.

As 7 Action News reported last fall, Kelly is one of the most prolific landlords in the city of Detroit. Currently in possession of nearly 500 properties, Kelly is known for purchasing cheap, often dilapidated, parcels at the Wayne County tax auction and then cycling people in for profit.

“I had some of the highest readings I had ever seen in any inspection that I’d ever done." – Bryant Piotrowski

In emails obtained by 7 Action News, staffers working for Kelly's property management company discussed homes within their portfolio that were being rented with mold, lead, asbestos, broken hot water heaters and lead. Discussions of repairs often stressed finding the cheapest possible option.

This behavior is what Garcia, and the suit, categorize as "invest-and-neglect."

"This is an instance where a pattern of behavior demonstrates they don’t care what the rules are. And it makes more money for them if they don’t obey the rules and they don’t worry about the conditions of the property," said Garcia, adding that the suits are an attempt to "attack the folks that are adopting this slumlord system of doing business."

To underscore how this behavior affects Detroiters the suit includes, as an exhibit, a joint declaration from Mayor Mike Duggan and the city of Detroit’s Chief Public Health Officer, in which they declare the "invest-and-neglect" business model a public nuisance.

"By choosing to disregard these laws in pursuit of profits, they are significantly interfering with the public’s health, safety, peace, comfort, and convenience," the suit states, noting that individual violation notices and tickets have proven "inadequate" to get compliance with the law.

"Without legal intervention," the suit states, "slumlords and speculators will continue to harm Detroit’s residents."

Ignoring Rental Codes

Following 7 Action News’ November investigation, the city of Detroit promised to get a better handle on Kelly and requested that the landlord handover a list of all his properties. 7 Action News was able to obtain the document via the Freedom of Information Act. The list — and what is missing from it — underscores practices that have been employed to shirk responsibility.

How to use the map: Click on the icon in the top left corner to get the map's legend. Highlighted zip codes are zip codes that as of Jan. 2020 were under enforcement with the city's rental ordinance. Yellow = properties within the enforced zip code that Kelly categorized as "land contracts" / Purple = properties within the enforced zip code that Kelly categorized as "land contract - lease with option to purchase" / Green = properties within the enforced zip code that Kelly categorize as "traditional leases" / Pink = properties within the enforced zip code that Kelly categorized as "Section 8 rentals" / Orange = properties within the enforced zip code that Kelly categorized as "inventory" / Black = all of Kelly's remaining properties outside of the enforced zip codes.

According to the information Kelly was ordered to turn over, 180 — or nearly 40% — of his properties are in zip codes that as of January 2020 were being "enforced" under the city’s new rental ordinance (rental ordinance enforcement is being deployed in new zip codes each month).

More specifically, he claims that nearly 85% of the occupied properties in these zip codes are land contracts — a home-buying tool popular in communities, like Detroit, where mortgages are hard to come by. While Kelly is currently the subject of a separate class-action lawsuit, alleging that his land contracts are predatory and initiated with no intention of an actual sale, in the interim the classification has acted as a shield from regulation. Land contracts are exempt from the city's rental ordinance.

This reality is something Garcia is aware of and hopes the lawsuit, specifically the discovery phase, will help to rectify.

"We’re gonna flush out what is the truth, the actual facts of how each property is held, and then we’re going to reveal the 'real truth' not the 'apparent truth' about it," he said, explaining that if a property is in fact a rental the city will seek to have the rental ordinance applied.

The need for litigation to reveal what Garcia is calling "real truth" can be understood through 9330 Manor, a rental property 7 Action News zeroed in on last November. The property’s tenant, Dorothy King, lost the home to tax foreclosure in 2015, and an LLC associated with Kelly purchased it at the Wayne County tax auction for $1,001 that fall.

While King showed 7 Action News her rental contract — and explained that she, in fact, declined an offer to buy back the home for $24,000 — Kelly categorized the property as a "land contract - lease with option to purchase" in its list to the city.

7 Action News was able to catch a misrepresentation like this because we were familiar with this property. We had seen the lease. We had also been forwarded internal emails where Detroit Property Exchange employees discussed the various problems they, as the landlord, needed to fix. Problems like the fact that over the summer the home’s hot water tank was out for two months. While an issue like this would be addressed by the rental ordinance, it is nearly impossible for the city to know about it if a landlord doesn’t register the rental.

It’s even harder if the landlord denies it is even a rental, as Kelly has done. And currently, according to Garcia, there would be no way for the city to catch a discrepancy like this. Which is why, he says, the suit is so necessary.

"The principal here is not to recover money," he said. "The principal here is not to get land or to make it possible to do a development. The principal here, the objective is to stop this business model that depends upon having non-compliant properties in the marketplace for rent."

Traditional Rental

But the issue of accountability is not just limited to disputes over the veracity of a land-contract.

Even with his traditional rentals, Kelly has ignored the rental ordinance requirements. Of the 12 residential rentals that Kelly's list noted were in the enforced zip codes, not a single one is currently registered, or compliant, according to the city.

Without Kelly registering these properties, it is up to tenants, neighbors or savvy inspectors to realize an illegal rental exists.

In the case of Sharon St., for example, the city ticketed the property in June — a month after enforcement began — because, according to Garcia, the city’s Buildings, Safety Engineering and Environmental Department noticed the home was owned by an LLC.

This, however, does not always happen.

Only half of Kelly’s 12 enforceable residential rentals have been ticketed by the city so far. And even this has produced mixed results.

Tickets at two properties are still pending a hearing. Tickets at another two resulted in dismissals (7 Action News sat in for one of these; the dismissal occurred because the inspector failed to show up). Tickets at the final two rentals, which includes Sharon St, ended in judgments against Kelly’s LLCs. The landlord, however, has yet to pay the fines.

The other six enforceable residential rentals are just operating in a gray zone. They exist under the radar, neither registered nor ticketed. And the while a tenant can flag a rental to the city, finding someone willing to exercise this agency is rare, according to Akers, whose research has found many tenants, specifically low-income tenants, are willing to overlook problems because they are "seemingly the least-worst option."

"The impacts of that foreclosure crisis has meant that low-income residents are left with a series of bad choices. They’re often looking for housing that is held by people who are intentionally withholding repairs that are intentionally just trying to extract rents and milk properties," Akers said in an interview in the fall, explaining that many bulk owners will intentionally rent properties just below market-rate so that people will accept the subpar conditions of the property.

"People who have experienced instability in a chronic fashion try to remain in a stable place and try to forgo particular repairs," he continued.

This series of bad choices, and the decision to withstand a bad situation can be seen at 12608 Santa Rosa, a Kelly rental in an enforced zip-code that is neither registered, nor ticketed.

Internal emails forwarded to 7 Action News this past fall indicated that the property had a dilapidated porch, a problem which the tenant had been reaching out about since at least April 2015. Despite this, nothing was ever fixed.

When 7 Action News happened to pull up to the house to inquire about an interview last month, years of neglect had finally taken their toll. The night prior, on Jan. 15, the property’s upper porch had crumbled. Bricks and wood lay splayed across the bottom porch, blocking the front door.

When asked to speak on camera with the 7 Investigators, the tenant declined. She was angry and frustrated with the situation, she was also terrified that speaking out against Detroit Property Exchange would lead to an eviction — something she had been threatened with anytime she withheld rent over the porch in the past.

Instead, she explained, she wanted to see what Detroit Property Exchange would do.

That afternoon, someone was dispatched to clean up the debris. It was the first time, in nearly five years of complaining, that any actual “work” had been done on the "porch."

It is scenarios like this that Garcia says the city hopes to get a handle on via the suit.

"This is the first step in a new mission, a new campaign to try to bring rental properties in the city into compliance with our regulation, to make them lead-safe, to make them safe generally speaking," he said, adding that the three-suits are just the beginning of what they hope will be a changing of the tide.

"Right now," he continued, "we’ve got to start somewhere and so we’re picking the big fish that we think are the worst offenders and trying to establish a way of changing their business model. And it’s a rational approach to a big problem."

This mindset — and optimism of what can come from this — was reiterated by Akers.

"The actual act of filing that suit, and if they win, puts all other owners that are operating in the same manner on notice," said the researcher.

"It’s one, targeting some of these larger actors, whose practices we know about," he continued. "But two, it’s signaling to others that are operating in a similar manner that they can be next."