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More than $2M of debt has been erased for Michael Kelly. Can the city reign in the property owner?

City officials defend deals with controversial landlord
Posted: 1:58 PM, Dec 05, 2019
Updated: 2019-12-06 07:20:58-05

DETROIT (WXYZ) — The City of Detroit is considering litigation against landlord Michael Kelly, officials say, after the self-described speculator ignored a deadline last month to send over a list of properties he — and his various LLCs — oversee. The city request, a response to 7 Action News’ November investigation into Kelly’s properties, was the first step in an effort to bring the property owner into compliance.

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But it's a last resort. After Kelly missed a Nov. 22 deadline to turn over a list of all properties in his inventory, the city met with him Thursday and is hopeful that they can achieve compliance sans litigation.

"Attorneys from the City of Detroit’s Law Department met with Michael Kelly and his attorney today. Our staff emphasized that all Detroit rental properties must be up to code," Corporation Counsel Lawrence Garcia wrote in a text message Thursday. "We had a productive meeting and are hopeful that we will be able to achieve the goal of compliance through cooperation as opposed to litigation."

The stance is noticeably softer than the hard line Garcia took last week when he said: "I don’t think there’s any need for further attempts to communicate out of court."

At the time, Garcia was detailing how on November 14, Kelly’s attorney William Semaan met with city officials to discuss code enforcement. The property owner was then given until Nov. 22 to turn over a catalog of all the properties within his inventory, including a breakdown of which were rentals and which were land contracts.

"I think we’ve provided him ample opportunity to work with him and he’s demonstrated that he’s not interested in doing that," Garcia told 7 Action News at the time.

While the property owner still hasn’t turned over the requested parcel list, Garcia is hopeful that meetings like today can avoid litigation and rather ensure compliance “through diplomacy."

In a statement to 7 Action News Semaan reiterated Garcia's sentiment that today's meeting was "successful."

"We are working on a plan with the City to bring our properties into compliance with City ordinances," Semaan wrote in an email Thursday evening. "At the meeting, we were able to show City officials how we have already started that process. We plan to provide the City with a list of properties and other requested information shortly. While there are a few issues and complexities to iron out, we are confident we will be able to put a plan into action and bring our properties up to code."

As 7 Action News reported last month, Kelly is one of the most prolific landlords in the city of Detroit: A property owner who obtains cheap, often dilapidated, parcels at the Wayne County Tax Auction and then cycles people in for profit — often with little regard for the properties, the law, or the individuals inside.

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

Notably, oversight or an attempt to reign in the property owner has, historically, been scant. This is due to the wide number of LLCs Kelly owns property under, as well as contracts he uses when placing people in homes (properties under land contract, for example, are not subject to the city’s rental ordinance). It’s also due to land deals.

While the city has made public declarations of holding Kelly accountable, they have privately backtracked. In the last two years, Kelly and associated LLCs have been released from over $2 million in unpaid property taxes and blight fines because Kelly agreed to sell the city property for development.

Kelly's recent flouting of city requests, the city's history of forgiving suits and blight tickets in order to get land, and a lawsuit Kelly filed last month against the City for not adhering to the promised debt dismissals has some spectators and land experts skeptical of the city's real ability to reign in the property owner.

"The city has to negotiate every parcel needed, which makes it almost impossible without paying exorbitant prices," said John Mogk, a Wayne State University Law professor, who believes that without eminent domain — which is currently outlawed in Michigan — municipalities are placed at a disadvantage when attempting to wrangle property for a development. A fact that means speculators can name any price, including release from lawsuits — the very teeth that any accountability efforts require.

"The city is in a straitjacket," said Mogk.

Patterns

This pattern is best understood by looking at past litigation aimed at bringing Kelly into compliance.

Starting in 2017, the City of Detroit began suing hundreds of property owners for purchasing large swaths of land at the tax auction but then failing to pay taxes themselves. Kelly, and entities associated with him, were sued in 2017, 2018 and 2019 — all three years, the complaints were dismissed.

In 2017, the suit was dismissed because of a noticing issue, according to someone familiar with the case. But in 2018 and 2019, the complaints were dismissed because Kelly agreed to sell the city property for development.

In October 2018, in anticipation of the FCA deal — but before it was publicly announced — the city struck a deal with Kelly. In exchange for 38 properties around FCA’s east side plant, and 23 properties that the Eastern Market Corporation was interested in for development purposes, Kelly and his associated entities were released from a series of blight tickets and 18 pending lawsuits over unpaid property taxes. 7 Action News tallied up the debts owed on the dismissed 2018 suits — the total was more than $800,000.

Last spring, once the FCA deal had been announced, the city went back to Kelly. The self-described speculator had interest in three parcels — amounting to less than 0.3 acres — that the automaker wanted for an employee parking lot.

In exchange for the parcels — land Kelly bought via tax liens for a total of $130 in 1999 — the city agreed to release him, and his associated entities, from over 800 blight tickets and the 2019 property tax suits totaling $1.3 million.

In short: Over the past two years, Kelly, in exchange for land, has seen over $2 million in penalties, fines and fees disappear.

City Council members, who approved the 2019 deal, expressed anger following the 7 Action News investigation, maintaining they were not given the full picture when they signed off on the Kelly land swap. The total amount that would be forgiven was not mentioned in a May 9 PowerPoint presented to council on the FCA deal. And while it was mentioned in a footnote — estimated to be $1 million — in a May 14 report produced by council’s Legislative Policy Division, some council members such as President Brenda Jones expressed concern that Kelly’s behavior as a landlord was not flagged.

"Dismissing tickets and violations for a slum landlord, and people continuing to live the way they are living, that’s not a good deal for the city," Jones said at the Nov. 12 council meeting that followed the 7 Action News report, adding that she may have voted against the deal had she known then what she knows now.

"To dismiss tickets of properties for people who are living like that, forgiven for an FCA deal, to me, it’s not a good deal for the city," she said.

Kelly, for his part, denies taking advantage of Detroit residents and the city’s tax crisis, and in a brief interview with 7 Action News outside the Midtown offices of his property management company last month, stressed that he’s helped thousands experience the American dream.

"We provide home ownership to a lot of people," Kelly said, adding that his companies put people in "really good homes" for "really good deals."

In a statement to 7 Action News last month, Semaan defended the 2019 deal.

"The FCA land swap deal speaks for itself and Mr. Kelly was happy to be a part of such a monumental development/investment in the City, which should result in hundreds of new jobs for Detroiters," Semaan wrote.

This focus on the workforce is the same stance Mayor Mike Duggan’s administration is taking in defense of the two deals, stressing that the FCA expansion is poised to create 5,000 jobs.

"Even though we wound up in a compromised position relative to Mr. Kelly, it’s a good deal all day long," said Garcia, insisting that accountability will come via future suits.

"It’s unpleasant to think that the deals we have to make today are going to force us into a compromised position tomorrow," he continued later in the interview. "But that’s the risk we have to run in order to get things done, and I don’t think it’s very likely that Mr. Kelly is going to be in another jackpot situation as he was in early 2019."

The Cycle

But ensuring patterns aren’t replicated — or future windfall deals aren’t coming down the pipeline — can be difficult. In the case of the 2019 FCA deal, Kelly wasn’t just released from his debts – he was given 15 new properties. One on Dexter Avenue in Russell Woods and 14 on Ashland Avenue in Jefferson-Chalmers, an east side neighborhood that is part of the city’s Strategic Neighborhood Fund, and has seen increased investment over the years.

With land being a speculator’s greatest asset — and bargaining chip — the new parcels come with risks, according to land experts who warn that land swaps for development deals could jeopardize future deals by creating a cycle. Planning needs down the road could continue to be tied to these landlords.

“The land got swapped in Jefferson Chalmers, which is a redevelopment area in itself, so this just moves the problem to later, when there will have to be further negotiation with Kelly, in order to do something good in Jefferson Chalmers,” said Mogk, reiterating that speculators can demand exorbitant prices of a municipality eager to assemble land for development purposes. And this fee could come in all forms, including freedom from accountability measures.

"Mike Kelly and other investors are in the business of trying to predict successfully where new development in the city will be undertaken. They’ve been very good at that," Mogk continued. "Jefferson Chalmers is a high priority area. I wouldn’t expect that any business person — Mike Kelly or anyone else — would take property that they didn’t feel in the long run was going to be a major payoff."

A Bold Legal Player

The city, for its part, insists that this time around, the lawsuits will stick.

"I understand fears about a pattern that we’re going to be setting, or precedent that we’re going to be setting that lets land speculators feel like they have the upper hand against the city and to that I would just say, just watch us," said Garcia. "Just give us a chance."

The attorney points to the numerous blight tickets it has issued against Kelly properties since the May 3, 2019 settlement agreement that released Kelly from over 800 blight tickets totaling, according to the city’s math, over $250,000.

"We haven’t given him a pass," said Garcia, stressing that the Buildings, Safety Engineering and Environmental Department was not "reissuing" tickets that had been dismissed, but was rather citing Kelly-owned buildings for code violations that persist now — the period after the spring settlement.

Whether this approach will work, however, is still unclear. Not because of future land swaps, but rather litigation.

On Nov. 14 — the same day Semaan originally met with city officials about code enforcement — the property owner filed a complaint against the city, alleging that portions of the 2019 land-swap agreement were not being enforced.

The suit names various property tax lawsuits that it alleges should have — but have yet to be — dismissed with prejudice as the settlement agreement outlined. Additionally, it focuses on numerous blight tickets that it claims have not been dismissed with prejudice. The argument hinges on the idea that once a blight ticket was dismissed with prejudice, the issue cannot re-visited.

Garcia argues that this is not the case.

"He’s susceptible to the rules post-May 2019 just like everyone else," said Garcia. "He got forgiven for stuff that happened before then, but that was just a way of buying property."

The complaint alleges breach of contract, exemplary damages — such as “harassment through the mailing of debt collection letters related to matters that were released by the Agreement” — and libel. It states, for example, that the city posted complaints for real property taxes on Kelly’s door this past summer for suits that were supposed to be dismissed via the settlement.

"The publication of the above statements in courts and to the public have resulted in damage to the Plaintiffs' reputation in the community and economic loss, including emotional distress, loss of business, humiliation, mortification, and embarrassment," the complaint states, asking for a judgment in excess of $25,000 in form of compensatory and exemplary damages (including interest), attorney fees and "any and all such further relief as this Court may deem to be fair, just, or equitable."

According to Garcia, "The City disagrees with Mr. Kelly's take on things."

He also maintains accountability is coming.

"Yes, it is hard to hold Mr. Kelly accountable because he owns so much property and he owns it with so many different business entities and he provides housing under so many different systems, or arrangements. But, we’re up to the challenge," said Garcia, pointing to success seen around several properties Kelly owns near Henry Ford Hospital, which, due to a consent agreement, are currently in the process of being brought up to code.

"We will pursue the best interests of the city of Detroit," he said, "including all the renters who are living in properties owned by Michael Kelly."