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Developer Geoffrey Thomson, who owns hotels in Queenstown, Te Anau and Rotorua, hopes to have a 4-star hotel open in in Princes St time for next year's Rugby World Cup.
"I think this is the most appropriate use of the building," Mr Thomson said in a statement on the Dunedin City Council website.
Dunedin Mayor Peter Chin said the news was bittersweet.
"We're disappointed our plans for the library have come to nothing. But the city will benefit from the development of a new hotel, which, like our library plans, will revitalise an iconic heritage inner-city precinct."
But that proposal was cut short after a firm offer to develop the building as a hotel was received by its owners South Canterbury Finance, the statement said.