DULUTH - The city of Duluth has pulled tax subsidies from the developer of a Lincoln Park Craft District apartment complex, after the developer's decision to convert a floor of housing into boutique hotel space.

P&R Cos. notified residents of two dozen apartments in March that they must move when their yearlong rental agreements expire, a surprising announcement for those living in the 74-unit Lincoln Park Flats. The building opened last June with the help of a $2.3 million tax increment financing (TIF) deal with the city. The decision to force residents out or onto a different floor led the city to review its agreement with the property manager and developer.

On Tuesday, the Duluth Economic Development Authority voted to stop tax subsidy payments and end its agreement with P&R Cos.

The termination is "the best of the worst options that we have," Commissioner Arik Forsman said, considering the potential that "taking this to litigation could end up with a much worse outcome for our residents."

The city was to make tax increment payments to the developer twice a year through 2048. Instead, only 2022 payments — totaling $875 — went to the company. With the end of the agreement, P&R Cos. is no longer required to offer 23 units at affordable housing rates, although the company said Tuesday it has 23 signed affordable housing rental agreements for the next year.

P&R Cos. pointed to the high costs of construction materials during the pandemic, along with record increases in lending interest rates for what made its original project unsustainable.

"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," spokeswoman Erin Makela said in a statement. "If we had not, there would still be an abandoned furniture store on Superior Street."

Commissioner Matt Cartier, who ultimately voted to end the TIF agreement, said the Tuesday decision wasn't "a good look" for the city.

"We want to look like we're open for business," he said. "We don't want to set a precedent here."

Planning Department Director Chris Fleege said he couldn't recall another time when the city pulled tax increment financing from a project, at least in the last decade.

The company's decision to convert housing to hotel space rankled residents, housing advocates and elected officials at a time when the city's rental and real estate markets are tight.

Mayor Emily Larson told councilors in March that "this is not the project we signed up for when we issued [tax increment financing]."

Councilors in April voted to be more explicit in future development agreements. New language will define allowed uses and minimum time periods that those should be in effect for all future residential development agreements where public money is awarded.

The city has also flagged existing housing development agreements in which tax breaks or other public money was involved, in the event their developers seek a permit to turn housing into something else. The Planning Department had issued a permit for Lincoln Park Flats to convert apartments into hotel rooms in March, a move that was made without extensive review because hotel land use is permitted within that zoning district, a city spokeswoman has said.

Makela said the city was initially supportive of the company's plans, as long as it maintained affordable housing. They are disappointed with the decision to "completely turn on a local business that has invested so much in its city simply for attempting to save its building," she said.