A Minneapolis-based developer has given up on a $24 million redevelopment project in Shakopee, delivering a dramatic blow to efforts to revitalize the city's historic downtown.

CPM Cos. had planned to buy and demolish the old City Hall and replace it with a 70-unit, market-rate apartment complex geared toward young professionals. A few blocks away, the developer also sought to build a 110-room hotel. The project was touted by some city officials as a "transformative" effort to help attract tourism to the region and spark further growth.

In an e-mail to City Council members on Monday, City Administrator Bill Reynolds stated flatly that the CPM deal was dead.

"They are no longer interested in investing in downtown Shakopee," Reynolds wrote, citing "political issues" on the governing body and "bad press" as the developer's primary reasons for walking away. "We will regroup, but having CPM walk will not help our chances," he wrote.

The developer said in a statement Tuesday that politics was not behind its decision to cancel the project.

"We appreciate the collaborative effort from the City of Shakopee in the continued revitalization of downtown Shakopee," CPM said. "Unfortunately we were not able to structure a project that would meet the City's and CPM's objectives while still being financially viable."

The deal's collapse unleashed a tempest at City Hall.

In an interview, Reynolds described the southwestern suburb as a community in transition, with a five-member council split between two different visions for the future. Three members see an opportunity to promote downtown growth, while two others fear the city might be expanding too quickly.

"It's difficult to figure out where we're headed as a community in the current political climate," Reynolds said. "But we ultimately need to figure out who we want to be when we grow up."

He also blamed an editorial in the Shakopee Valley News and commentary on social media for souring the public's perception of the project with misinformation, which exacerbated other tensions on the council.

The deal fell through a week after council member Mike Luce filed a police report accusing colleague Jay Whiting, without any proof, of misspending funds from the Shakopee Heritage Society. Shakopee police closed the case after a one-day investigation, which they later characterized as frivolous. The council censured Luce last spring for his treatment of city staff and for repeatedly exceeding his authority.

After Luce learned of the development's demise Monday, he sent an angry e-mail to Reynolds accusing him of botching the project and sticking the city with two "derelict" properties that need to be bulldozed. Luce told Reynolds he should resign over his "ineptitude."

"Please. Put it up for a vote," Reynolds responded in an e-mail obtained by the Star Tribune. "Do something in the sunshine for once instead of lurking around the back alleys and around the corner as you harass, intimidate and otherwise bully good people."

News of the spiked CPM project delivered a blow to downtown business owners, who envisioned more foot traffic from a hotel near Huber Park. Advocates of the proposal said apartments would help drive residents back to the city's core, offering an alternative to single-family houses pulling residents to the outskirts of town.

Billy Wermerskirchen, owner of the men's clothing store Bill's Toggery, said Tuesday he fears that a schism on the council will scare away potential developers.

"My biggest fear is that it puts a sign up for all of the developers that Shakopee is not going to be easy to deal with," Wermerskirchen said.

Internal memos between city staff members show that leaders have feared for more than a month that CPM would walk.

As early as mid-July, signs emerged that financing and political obstacles might be too great to overcome. At one point, Michael Kerski, Shakopee's director of planning and development, e-mailed CPM developer Bjorn Strommen to clarify "rumors" of the faltering deal.

When council members learned that the project might require adopting a tax increment financing (TIF) district — which captures new property tax revenue to help pay for development — Luce and councilman Matt Lehman balked.

Lehman says he dislikes the idea of forcing taxpayers to subsidize wealthy developers. "I want businesses to pay taxes like mine does — like the rest of us do," he said in a recent interview.

However, the deal apparently didn't add up even with TIF money. Strommen sent an e-mail Friday to Kerski outlining several financing options, all of which included TIF funding. They showed net shortages ranging from $1.3 million to $2.1 million. "Even with these updates we have a gap and I'm not sure if we have a path to get there," he wrote.

Liz Sawyer • 612-673-4648