DULUTH — Residents of two dozen apartments in a new Lincoln Park Craft District subsidized housing complex will be forced to move to make way for a boutique hotel, a decision that's led the city of Duluth to review its agreement with the complex's owner.

The company behind Lincoln Park Flats — 74 rental housing units built with the help of a more than $2 million subsidy from the city of Duluth — gave residents of its second floor notice last week that they would need to move at the end of their yearlong rental agreement. The move comes as the city struggles with a housing crisis, both in rental and real estate markets.

While property manager and developer P&R Companies offered housing on other floors of the building or in other properties it owns, the abrupt change "blindsided" residents, who signed on to live at an apartment building and not a hotel, said resident Presley Eldien.

"It's been really stressful," she said. "I have essentially two months to figure out what to do."

The complex was built during the pandemic when material costs grew, said Erin Makela, of P&R Companies.

That, combined with rising interest rates, has made their original business model unsustainable, she said.

"We'd rather operate a multifamily complex," Makela said. But, "we had to make some difficult decisions and changes to how we're tackling [interest rates]."

The decision has rankled members of the Duluth City Council and Mayor Emily Larson. Larson wrote to councilors this week that the project was now under legal review.

"This is not the project we signed up for when we issued [tax increment financing]," she wrote, noting that she was working with council President Janet Kennedy and Vice President Roz Randorf on a policy change "to prevent this from happening again."

City Councilor Hannah Alstead represents the Lincoln Park neighborhood. She said the displacement of residents is concerning, and could have been handled better by the property managers.

"It came out of nowhere, and that's what's frustrating," she said.

Former Councilor Joel Sipress, who voted to approve the project in 2020, wrote to council members this week with his concerns.

"The loss of publicly subsidized housing units is appalling," he said. "This hotel conversion will hurt everyone currently struggling in Duluth's rental market ... and it undermines confidence in Duluth city government and its efforts to promote housing affordability."

Makela said the company continues to comply with its development agreement with the city, which gave it a hotel permit March 8.

The city is working with P&R on a solution, said Noah Schuchman, the city's chief administrative officer, on Friday night.

"While the city does not have legal standing to prevent the end of a resident's lease, we have asked the property owner to stop action on affected residents as an act of good faith as these conversations continue," he said.

Makela said the company learned Wednesday that there was room for everyone on the second floor to move to another floor, based on the number of people who've already declined to renew rental agreements. Most are able to choose apartments that cost about the same, she said, and the company will continue to offer at least 23 apartments at an affordable rate, per its agreement with the city.

The hotel floor will include a front desk with staff to assist guests and residential floors will have secure entrances.

P&R's chief operating officer said the Duluth-based business is simply attempting to keep rents low.

"It's unfortunate that when a project like this hurts us and we try to be innovative to save it, we're struck with so much negativity," COO Dante Tomassoni said in a statement.

For Eldien, a 25-year-old Duluth native who moved back to the city to work for Maurice's after attending college elsewhere, it means forgoing her first time living alone in a one-bedroom apartment she planned to stay in for several years, close to work and in the walkable Lincoln Park neighborhood.

If she stayed, her current rent of $1,150 would rise to $1,200, plus some new fees under a renewed agreement, and is more than she can afford. She'll take on a roommate to find something affordable elsewhere in the city, she said, because she no longer wants to rent from P&R.

"The experience has been so poor," Eldien said.

P&R owns seven apartment buildings in Duluth, Superior and Hermantown.