Embattled Detroit hospital developer files for bankruptcy

The New York City-based developer who has struggled for a decade to redevelop the historic Herman Kiefer hospital and surrounding property in Detroit has filed for Chapter 11 bankruptcy protection.

Herman Kiefer Development LLC, run by Ron Castellano, lists assets valued at $10 million to $50 million and liabilities between $1 million and $10 million, according to the Tuesday filing in the U.S. Bankruptcy Court for the Southern District of New York.

The filing comes just a few days after the Detroit Free Press reported that Castellano missed a June 4 deadline to turn that property back over to the city after Detroit officials contended he has made little to no progress on fulfilling the terms of a master development agreement for the 40-acre site.

The filing leaves the fate of the Herman Kiefer — one of the city’s seemingly continuously shrinking stockpile of vacant and rundown but historic properties — uncertain as the developer and creditors scrap in federal bankruptcy court.

Castellano bought the massive site on Taylor Street off the John C. Lodge Freeway/M-10 in the Virginia Park neighborhood for $925,000 in 2015, and the Detroit City Council officially approved the sale in 2018. Herman Kiefer Development owns not only the former hospital but also two adjacent buildings and, through a separate deal with the Detroit Land Bank Authority, more than 100 homes and more than 300 parcels of land surrounding it.

A voicemail was left with Castellano on Friday evening seeking an interview or comment, and an email was sent to his bankruptcy attorney with Glenn Agre Bergman & Fuentes LLP out of New York seeking the same.

Through a spokesperson, the city declined to comment Friday evening.

The 17-page bankruptcy filing lists 13 unsecured creditors, with Wayne County owed the most with about $1.1 million in unpaid taxes, the Detroit Water and Sewerage Department owed approximately $813,000 and New York City law firm Adler & Stachenfeld LLP owed close to $383,000. The total unsecured debt listed totals close to $2.4 million.

In January, Crain’s reported that city officials said the Herman Kiefer project had not met various benchmarks, including investment or activation requirements — a charge Castellano disputed.

Castellano told Crain’s six months ago that he disagreed with the city, saying he has spent $13.4 million on the property since 2018 and removed some 5.3 million pounds of debris from both inside and outside the buildings. He also said he has performed asbestos abatement and established long-term maintenance plans and hired 24/7 security at the site. He also said he has renovated some of the homes he purchased.

Castellano’s property purchase from the city included the 424,000-square-foot Herman Kiefer medical complex, which shuttered in 2013; the Crosman Alternative High School, a former Detroit Public Schools school that closed in 2007; and the former Hutchins Middle School that closed in 2009.

Under the master development agreement, Castellano had until February 2024 to invest at least $20 million into the project and/or have “activated” at least 35% of the floor area and land on the site. In addition, the investment commitment could be satisfied if the developer submits to the city evidence that it or third-party developers have paid or incurred aggregated costs.

City officials have previously countered that any progress on the site has not fulfilled the terms of the agreement.

“There are obligations under the development agreement to keep it secured and maintained from an aesthetic standpoint … That stewardship or that caretaker role, is something I think he did seriously, and so I’ll acknowledge that,” Luke Polcyn, Detroit’s senior executive for development and economic transformation, told Crain’s in a January story. “But that said, I think Ron has honestly done very little more than (cleaning up the property), and the activations have been temporary at best, and in no way meet the expectations of the city at the time that we entered into this developer agreement.”

Castellano told Crain’s in the winter that he had spent $2 million on renovating the more than 100 vacant homes he bought from the land bank. In a multiphase approach, Castellano said renovations had been completed at 14 homes and they had been sold, while another was becoming a rental home. A second phase targeted another 20 homes, and 13 more were scheduled for a third phase of renovations.

On Dec. 6, city officials gave Castellano six months to do one of the following: meet the development obligations or deed the property back to the city free and clear of encumbrances, including mortgages and back taxes.

The Herman Kiefer site is not the only massive Detroit property to end up in the hands of an out-of-state developer who ends up not fulfilling development promises after getting the real estate on the cheap.

Fernando Palazuelo, a Spanish developer who most recently was living in Peru, bought the former Packard Plant on Detroit’s east side — also approximately 40 acres or so — at a Wayne County tax-foreclosure auction, promising a Bohemian mixed-use redevelopment with everything from apartments to breweries, art galleries to light industrial space. That vision never occurred, and Palazuelo and the city sparred for years both in and out of court before Mayor Mike Duggan’s administration began razing the majority of the complex at East Grand Boulevard near I-94.

According to Historic Detroit, which tracks Detroit buildings and architecture history, the Herman Kiefer property traces its roots back to 1893, although the Albert Kahn-designed primary building didn’t open until 1928.

The hospital had originally been a clinic for diseases like measles, tuberculosis and smallpox, although buildings and pavilions were added over the years to accommodate a city with a growing population, according to Historic Detroit. The Herman Kiefer hospital closed in October 2013, just a couple of years after the complex — by that time home to the city health department — “was found to be in unsanitary, hazardous conditions,” Historic Detroit wrote. About 18 months before it closed, an investigation revealed a “widespread misuse of funds.”