In a tense public hearing Thursday night, members of Martha’s Vineyard Commission grappled with both themselves and a developer over a proposal to demolish the historic building in downtown Oak Bluffs housing the Red Cat Kitchen restaurant.

The old wooden bungalow, known as the Menotomy building at 14 Kennebec avenue, dates to the 19th century and has housed numerous businesses over its 100-plus years, including a paint shop, Zapotec restaurant, and now the Red Cat. It also includes a second-floor apartment space that has been historically used as a rental.

The building was purchased late last year for $690,000 by an LLC that lists Chilmark resident Gary Jones as its principal and includes Oak Bluffs selectman Brian Packish as a partner in the transaction. Mr. Packish has submitted a plan to raze the building and replace it with a three-story structure that would house the restaurant on the first floor and four apartments on the two top floors.

The proposed building would cover most of the property’s .05-acre lot, and would have a small porch, gabled roof and two-story turret. The plan calls for increasing the square footage of the building by approximately 2,500 square feet. Chuck Sullivan is the architect.

During a public hearing with the commission Thursday night, Mr. Packish said the decrepit state of the current building and its non-compliance with modern codes and ADA regulations necessitated a full demolition.

“As we went through bathrooms and we went through ADA accessibility, it became very obvious that the existing structure couldn’t accommodate today’s code as well as structural loading, things of that nature,” Mr. Packish told commissioners. “That’s what moved us quickly into a demolition position.”

In their analysis of the building’s historic relevance, commission staff scored the building a seven out of 13 on their scale and determined that the building had “limited significance,” with no distinguishing design or historic architectural features of note. The Oak Bluffs historic district commission has determined the project is not significant.

The sticking point for commissioners and members of the public on Thursday was not the historic significance of the old building, but the proposed use of the new one. The plan to add four one-bedroom market-rate apartments aims to make the project commercially viable. It also provoked spirited discussion about affordable housing.

The commission, which has long had a policy requiring affordable housing contributions on development projects, recently adopted a complicated revised formula for determining housing mitigation for mixed-use commercial structures. The formula takes into account variables like added square footage of commercial space and the number of market-rate units. The Menotomy building will be the first mixed-use commercial development to test the new formula.

According to testimony, the current building has one apartment with three bedrooms that share a kitchen and living space. While Mr. Packish felt the three separate bedrooms constituted three “units” because historically they had been rented out separately, many commissioners thought otherwise and saw the apartment as a single unit with three bedrooms.

Because the commission formula is dependent on the change of units used as a multiplier on the overall value of the property, the difference between one and three units could be quite expensive. Mr. Packish has offered to provide the commission with a one-time fee of $50,000 for affordable housing mitigation. But the commission estimated the mitigation to be somewhere between $150,000 and $250,000.

“There’s a problem in the way the intensity factor is laid out,” Mr. Packish said. “That is what is occurring here . . . we have to figure out how to navigate that.”

The issue prompted some sparring between commissioners Linda Sibley and Clarence A. (Trip) Barnes 3rd before more pointed questioning from other commissioners. Gail Barmakian asked whether the units could be affordable; Mr. Packish responded that he would have to change his entire business plan and turn the building into a hotel. Commissioner Ernie Thomas told Mr. Packish he felt that the units should be used for affordable or workforce housing. Commissioner Josh Goldstein asked Mr. Packish where the employees of the restaurant would live if the apartments were market-rate, sparking a testy personal exchange.

“Wherever they choose to rent,” Mr. Packish responded. “Where do you house your employees?” he asked Mr. Goldstein, whose family owns the Mansion House in Vineyard Haven.

“I don’t appreciate that attack,” Mr. Goldstein replied.

Tempers cooled momentarily, but members of the public had mixed feelings about the proposed use of the units, prompting further discussion. Oak Bluffs resident Mark Leonard said he felt the units should go to affordable or workforce housing as well, citing the commission’s charter and mandate to preserve diverse communities.

“This really adds stress on the community and the low, moderate income and year-round residents, because what is being proposed is nothing but short term rentals,” Mr. Leonard said. “We all know the challenges people are facing in trying to find housing here.”

But Jim Bishop, who is chairman of the Oak Bluffs affordable housing committee, defended the new plan, noting that the commission had recently waived affordable housing mitigation for the Martha’s Vineyard Community Services campus expansion plan.

“It’s a derelict building. Someone wants to step up and build something, and we’re grinding about one unit,” Mr. Bishop said. “I find that ludicrous.”

Red Cat Kitchen chef and co-owner Ben DeForest spoke in support of the plan, citing excitement at the prospect of a larger kitchen and saying he felt using the upstairs apartments as work force housing would be a “slippery slope.”

“[The owners] have come forward to take that building to a new place,” Mr. DeForest said. “This building is no treasure. It needs to be replaced.”

After an hour and a half of discussion, commissioners closed the public hearing. A vote is expected in two weeks.

In other business, commissioners unanimously approved a renovation to a barn on the site of the Mill House property in Vineyard Haven. Architect Patrick Ahearn showed plans that would turn the barn into a two-car garage with a workshop, storage and gym in the basement. The building would maintain its current dormers and front-facing barn double-doors.

As part of the commission’s after-the-fact review of the Mill House demolition decision last year, the applicant was required to return for approval of any proposed changes to the barn.