The future of a massive hilltop housing development in Duluth at the site of a long-vacant former high school is now in doubt, after the Duluth Economic Development Authority, or DEDA, voted Wednesday night to terminate its agreement with the project’s New York-based developer.
DEDA said the family-owned real estate company headed by Luzy Ostreicher failed to provide proof of financing for the $500 million development dubbed “Incline Village,” at the former location of Duluth Central High School overlooking downtown and Lake Superior.
That was among eight contract obligations the developer had failed to meet, spelled out in a letter from DEDA executive director Tricia Hobbs to Ostreicher in early June, which gave the developer 45 days to address the issues.
When he failed to do so, DEDA officials told Ostreicher they had no choice but to cancel the contract.
"The one thing that I want to note is terminating the contract tonight does not preclude you from working on a new development agreement with proof of financing,” said Roz Randorf, Duluth city councilor and DEDA commissioner.
“Certainly that's no guarantee that that would be agreed upon or signed, but certainly that would be something that you'd be able to pursue again. But tonight what we have in front of us is we have a breach of contract,” she said.
Ostreicher purchased the 53-acre site two years ago from the Duluth public school district for $8 million.
Since breaking ground in December, his attorney Bill Burns says he’s spent $10 million in cash and about $5 million in debt on the project, which calls for 1,200 market rate condos and apartments in several different buildings, built over the next decade, in a city in critical need of additional housing. The first phase of construction included a 70-unit condo building.
Burns acknowledged the developer has failed to provide proof of financing. But he told the economic development commission that was because St. Cloud-based Stearns Bank had failed to provide a promised line of credit, which he said would have unlocked $45 million in financing for the project.
Burns told the commission Ostreicher is suing Stearns Bank in federal court.
He asked DEDA for a 120-day extension, adding that a different, “very serious lender” was interested in financing the project. He said aside from the financing, the other major contract violations had been addressed.
“I have to emphasize that the city of Duluth is not at risk here, other than at risk of returning this property to another 15 years of purgatory,” Burns said.
The development agreement, signed in March 2024, includes about $25 million in tax-increment financing for the first phase of the project. TIF is a subsidy that uses property tax revenues generated by the project to help pay for development costs.
Burns said the TIF financing was essential for a project that faced "historically high interest rates, continued inflation…and also, of course, the uncertainty of the tariffs that have been imposed and their impact on multiple parts of the construction industry."
Janet Kennedy, a city council member who also serves as a DEDA commissioner, said canceling the development agreement offers a chance for a “reset.”
"This project, I believe, still is something that the community wants to see,” Kennedy said. “This is coming from the voice of the community that I've been hearing that we need to make sure we're following the rules and the laws, because it's their money, it's their taxes, it's their TIF.”
Randorf emphasized that no public dollars have been disbursed, since construction has yet to begin and property tax revenues haven’t yet been generated.
Burns expressed concern that a possible second development agreement with the city may not include as substantial of a TIF subsidy. Burns said "it's been expressed" to the developer that the first agreement was “too generous."
Burns suggested that a reduced TIF package would make it impossible to proceed on the project. "I'm mystified by what's happening,” he said.
Luzy Ostreicher also briefly addressed the DEDA commissioners. He said he hopped on a plane that morning to address them in person—one of 30 trips he’s made to Duluth in the past year and a half, Burns said.
"Close your eyes and try to think about 50 years later and look back if this was the right decision or not,” said Ostreicher. “I think that's really what we need to do now, if we’re looking to get housing for the people of Duluth. In 120 days, we can accomplish that, and it doesn't cost anybody a dime.”
But the economic development authority rejected his pleas on a 4-1 vote, with one member abstaining.
Ostreicher has also run into troubles at some of his other Duluth investments. His family company has purchased two apartment buildings in Duluth for a combined price of about $77 million.
One of his companies declared bankruptcy the day before the Incline Village groundbreaking, after its lender, Fannie Mae, said the company defaulted on a nearly $52 million loan for a 142-unit apartment building it purchased in 2021.
