Duluth pulls subsidies from housing developer in response to proposed ‘boutique hotel’

DULUTH, MN. (Northern News Now) - The City of Duluth has paused millions of dollars in funding from a housing developer after its decision to turn some of its apartment units into a hotel.

In a special meeting Tuesday, members of the Duluth Economic Development Authority (DEDA) voted to pull more than $2 million in subsidies from P&R Properties.

This comes weeks after P&R announced its decision to convert a third of the apartment units in the new Lincoln Park Flats building into a “boutique hotel.”

Many residents of the Lincoln Park Apartment complex were told they’d have to move to another floor or move out altogether, as the second floor was being converted into a hotel.

In early April, residents reacted to P&R’s announcement by rallying outside of the building expressing their concern that Duluth needs affordable housing, not hotels.

Shortly after, Duluthians filled a city council meeting sharing their anger following the actions of P&R Properties.

During the meeting, VP of Development Dante Tomassoni alleged the city knew about plans to convert the building into a hotel all along, despite the recent surprise and anger expressed by many city leaders, including the mayor.

However, the council was blindsided by P&R’s decision despite Tomassoni’s allegations.

The council said they support P&R Properties, but not this decision, and eventually showed their support to the residents of Lincoln Park Flats, voting to reaffirm their commitment to developing residential housing.

The city gave P&R Properties the funding in the first place under and agreement that a certain number of their units would be affordable.

Since the agreement was canceled, P&R is no longer required to provide that affordable housing.

The city can now use the money for other housing projects.

P&R Properties released the following statement in response to the city’s decision:

“The Lincoln Park Flats building took material delivery at the height of the pandemic when the construction supply chain costs spiked. Materials increases were as high as 500%. Post-pandemic, we saw record increases in lending interest rates. Those two factors alone, let alone all economic factors affecting the global marketplace at the time, were completely unprecedented in history. The truth about this project is that P&R is the only company that took the risk to build through the pandemic, providing jobs and stability to over 100 Twin Ports families in an uncertain time. If we had not, there would still be an abandoned furniture store on Superior Street.

It was our intention to maintain the building as a mixed-rate property. Unfortunately, due to the considerations mentioned above, we had to take drastic steps to maintain the financial stability of the property. Before switching to short-term rental units, we consulted with the City of Duluth and worked through all of the proper channels to obtain some form of a shorter-term rental license. A license, we were assured of receiving, because we were maintaining the affordable units per the terms of the Development Agreement. However, when the Council responded to media reports, we were informed the City removed their support from the conversion and said they believed we were in violation of the agreement. With the hotel conversion, we were maintaining 27 market rate units and 23 affordable units as required under the Development Agreement, unfortunately, the Councilors chose to cancel the Agreement.

Although we appreciate the efforts of City staff, we are disappointed at the Council’s reaction to completely turn on a local business that has invested so much in its city simply for attempting to save its building. Our only options were to pursue a legal course of action or agree to a mutual cancellation of the Development Agreement. We chose the latter.”

The City released the following statement:

“Termination of the development agreement and TIF note was a mutual decision with the developer that allows DEDA to release the TIF funding from the project and explore other uses of DEDA’s TIF capacity while allowing the developer to remedy the financial hardship issues it experienced under the original terms of the agreement.”

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