Landowner Max Wolf said that denial of the development means his company cannot afford to fix the hospital, which was built in 1911 and is in serious disrepair.
The councilors voted 7-4 to uphold a decision from the Missoula Historic Preservation Commission that denied a building permit to the Fort Missoula Commons.
Known as the Fort Missoula Commons, the proposal includes 16 new residential townhomes and two commercial buildings. The Missoula Historic Preservation Commission voted against the project in May.