Older Tenant Crossing the line with new tenants what do I do?!?!

[Gary Domermuuth]

Hello BP,

My wife and I recently purchased a duplex in a great neighborhood in Albany.  When we bought the property we inherited a tenant in her 80's and she has lived there for over 40 years.  The property had been in her family for decades and she has an emotional attachment to it.  

When we bought the property the upstairs unit was vacant and we easily rented it to grad students.  By all accounts the students are respectful but have been known to have fun but nothing out of control.  When they moved in they had been getting along with my elder tenant, they had been baking her cookies and bringing her flowers.  About 3 weeks ago I found out that the elder tenant had been calling them names because of the clothes they wear and had crossed other lines the details of which I don't want to get into but lets just say it wasn't something to be taken lightly.  

When I spoke with my elder tenant she initially denied it but then changed her story.  She was upset and apologized to the girls, however, now it seems she has an ax to grind and literally calls the police for every little thing they do!!!  We like our upstairs tenants and want them to renew but I doubt that is going to happen as they are miserable.  Even if they don't renew I fear that no matter who we rent to the elder tenant will have a problem with them.  The elder tenant is something of a local legend because she has lived on that street forever and of course she has talked to everyone on the street claiming she is being mistreated so if we decide not to renew her lease we would be demonized but I also know that at her age she would have a hard time finding another place to go and in spite of everything I wouldn't want to leave her without a place to live but at the same time I am an investor not a saint.  What should I do?