A $500M project was supposed to transform a Duluth hilltop neighborhood. Now it’s in peril.

DULUTH – The New York-based developer set to construct a $500 million real estate project overlooking Lake Superior is in breach of his city contract.

Luzy Ostreicher in December presided over a public groundbreaking for one of the city’s largest private investments, a collection of buildings that would house 1,180 apartments, 120 condominiums and retail space. It would sit on the 53-acre site of the former Duluth Central High School and has been marketed as the city’s newest neighborhood.

But city officials say the city is missing key financial information, construction contracts are in default and little work has been done. Ostreicher’s agreement with the city will be severed if problems aren’t addressed in 45 days, potentially killing the project.

“It’s disappointing, because [housing is] the single biggest factor limiting growth in Duluth,” Mayor Roger Reinert said.

In a letter obtained through a public data request, the city notified Ostreicher that his Incline Plaza Development LLC and related limited liability companies have breached several pieces of an agreement with the Duluth Economic Development Authority (DEDA).

The City Council has granted millions in tax increment financing to the Incline Village project for the first of its three planned phases, intended for utilities and other infrastructure — although no money has yet been awarded.

It’s the first public sign of trouble for the project, but not for one of Ostreicher’s other investments in Duluth.

A separate Ostreicher real estate venture, Endi Plaza LLC, filed for bankruptcy the day before the Incline groundbreaking after its lender, Fannie Mae, said it falsified financial statements and defaulted on a nearly $52 million loan.

Endi said in a court filing that it filed bankruptcy to address Fannie Mae’s loan default suit; Chapter 11 bankruptcy reorganization shields debtors from ongoing litigation.

However, Endi asked the court in February to dismiss the bankruptcy because it was negotiating with Fannie Mae, a government-sponsored mortgage company. Fannie Mae required that the bankruptcy be dismissed. The loan dispute is now under St. Louis County district court’s jurisdiction.

Ostreicher also owns the Kenwood Village apartment and retail complex. Those investments and others total $85 million. His company bought the hillside property from the Duluth school district for $8 million in 2022.

Among the eight listed issues, DEDA Executive Director Tricia Hobbs wrote that funding sources Ostreicher submitted for the Incline Village are no longer accurate. The city is also missing evidence of project financing, which missed a deadline to begin construction despite four waivers allowing delays. The letter says the site hasn’t been maintained and Ostreicher’s companies are in default of its construction contracts.

Ostreicher, who practices Orthodox Judaism, was unavailable because he was observing a Jewish holiday. Duluth-based attorney Bill Burns represents the project and declined to comment Tuesday.

The president of the construction management firm representing Ostreicher, ICS, said he is hopeful that issues raised by the city will be addressed “so we can continue our work in the construction phase.”

“Incline Village is a unique and exciting project for Duluth,” Andy Faulkner said in a statement.

Previously ICS has attributed the developer’s delays in obtaining financing to economic uncertainties and increased construction costs, along with site studies done to minimize blasting and rock removal.

Reinert said Tuesday that if issues aren’t addressed by the deadline he’d be disappointed because of the city’s long history working on the development with Ostreicher. But he wouldn’t change his mind on the need for housing on that site, or its suitability for it.

“It’s a challenging environment to be doing this kind of work,” Reinert said, but the city needs hundreds of new homes to both attract new residents and house those already here.

“If we have to take a step back and seek a new partner on this,” a lot of groundwork is already done, he said.

Previous projects planned for the site have fallen through.

The multibuilding Incline Village underwent an alternative urban areawide review to study how different development scenarios will affect the environment. It was approved last spring.

A one-bedroom condo to be built as part of the first phase lists for $650,000 and a two-bedroom for $850,000.

Staff writer Mike Hughlett contributed to this report.