The City of Toronto has decided to purchase a former downtown nightclub and convert the space into a 40-bed homeless shelter and referral centre.

Council voted 21-9 on Friday in favour of the controversial renovation plan that will cost $5.5 million, the Toronto Star reported.

The shelter will be housed inside the former Fez Batik nightclub, at the corner of Richmond and Peter streets, in the entertainment district.

When the city floated the idea earlier this year, it was met with heavy criticism from downtown business owners and residents.

Opponents are concerned about property values, tourism and the effect on local businesses. They also say it's not a smart move to place the homeless, who often have drug and alcohol addictions, into an environment where alcohol use is abundant.

Some councillors feel the city is paying too much money for the shelter.

"This is an example of the city wasting taxpayers' money,'' Councillor Denzil Minnan-Wong told the Star.

City staff looked at 50 sites for the shelter, but they were ruled unsuitable for various reasons, including being too small. The other locations didn't meet criteria in the city's shelter bylaw, such as being on a major or minor arterial road.

Toronto needed to have a deal in place by May 31 as there is a time limit on federal funding for the purchase, the newspaper reported.

Councillor Adam Vaughan, who represents the area, supported the proposal.

"This is obviously a difficult decision for the community. It's not so difficult for myself. I understand the need to provide services to the homeless in this community, because I've lived in this community for three years, up until recently,'' Vaughan told the Star.

The new site will replace a shelter at 110 Edward St., which is being torn down for affordable housing.