Development of Duluth Central High School site in limbo after contract terminated

An ambitious $500 million real estate project on Duluth’s hillside is in limbo after the city’s economic development agency Wednesday formally terminated the developer’s contract.

The Duluth Economic Development Authority (DEDA) in early June determined that developer Lazar “Luzy” Ostreicher had breached an agreement for the project, which would ultimately create over 1,200 housing units — essentially a new neighborhood — on 53 acres.

DEDA gave Ostreicher’s Incline Plaza Development company 45 days to clear up the breaches. Incline Plaza, which has blamed a St. Cloud bank for the collapse of its financing, wasn’t able to do that.

DEDA’s board canceled Ostreicher’s development agreement Wednesday evening in a 5-0 vote, with one abstention.

By terminating the development agreement, DEDA axed $75 million in tax increment financing (TIF) for the Incline project, which would stand on the site of Duluth’s old Central High School.

“I know the community was excited about the project and I was excited about the project,” Janet Kennedy, a DEDA commissioner and Duluth city councilor said at the meeting. But “we need to make sure we are following the rules and the laws.”

At stake is the community’s money, she said. “It’s their TIF and it’s their taxes.”

“I have been doing this for 50 years and I have never been faced with such a precipitous unfounded action of this nature by a public body. We can just give Duluth back its reputation for being a terrible place to do development.”

City officials and Duluth business leaders joined Ostreicher in December at a festive public groundbreaking for the project. Its first phase involved the construction of about 120 condominiums.

But in early June, the DEDA determined that Incline Plaza had breached eight parts of its development agreement: Key financial information was missing, construction contracts were in default, and little work had been done.

None of the TIF money granted for the project has been distributed.

But the TIF grant is “the key to the feasibility of this project,” Burns told DEDA commissioners at Wednesday’s meeting. A “very serious lender” is looking at refinancing the project, but only if the TIF money is available, he added.

Incline Plaza claims that Stearns Bank was supposed to issue a standby letter of credit worth $27 million that would have financially backstopped the investment. The letter of credit would have been transmitted through SWIFT, a global communications system for banks.

But Stearns was not able to make the transaction, and Incline Plaza has said “that the bank deliberately or negligently misrepresented” that it was connected to SWIFT and could send the letter of credit. Incline sued Stearns Bank over the matter earlier this month.

Stearns Bank has repeatedly declined to comment, and it has yet to respond to the suit in court.

Ostreicher, of Monsey, N.Y., addressed DEDA commissioners Wednesday, saying he had heard that other projects in the past had gotten extensions of their development agreements.

“It is the first extension we are asking for — for a totally unforeseen circumstance.”