[caption id="attachment_42552" align="alignright" width="300" caption="Construction of a five-story mixed-use development at the former Santa Rosa Cannery is planned to begin in 2013."][/caption]

SANTA ROSA -- A large mixed-use city-centered development planned at the site of the historic Santa Rosa Cannery has received a $1.5 million federal grant and the possibility of  an additional $5.6 million loan, a major boost to the project even though it has lost a health club as a potential lead tenant.

The grant, from the U.S. Department of Housing and Urban Development, will go towards the commercial side of the new Railroad Square development. Awarded to six cities, the Brownfield Economic Development Initiative grant also paves the way for a city backed, low-interest federal “Section 108” loan that could fund another $5.6 million.

The Santa Rosa City Council is expected to vote on the loan application on Nov. 1, which will use community development block grant funds as collateral.

The developer, San Francisco-based John Stewart Co., learned of the awarded funding around the time that the Club One plan dissolved, according to company Chairman John Stewart. The company was expected to build a two-story health club spanning the entire 40,000 square feet of commercial space and employ more than 200 people.

Club One co-founder and managing director of Clubsource Development Partners, Jill Stevens Kinney, said the company chose to change its plans after considering the uncertain economy and potential competition from a proposed wellness center near Santa Rosa Memorial Hospital. The center is still in development, and no date has been set for construction, said Katy Hillenmeyer, spokeswoman for St. Joesph Health System--Sonoma County, which operates Memorial.

“We are looking today at a situation where there is enough uncertainty that it’s caused us to take a step back,” said Ms. Kinney, who has been involved in the proposal for two years, said. “It doesn’t have anything to do with Santa Rosa or Railroad Square -- we love John Stewart, and we love the Railroad Square location.”

With the exit, the John Stewart Co. is now looking for commercial tenants. The proposed space can accommodate companies of several sizes, with an objective of creating the same net total of jobs — more than 200 — envisioned in the Club One proposal.

The developer said that the exit won’t affect long-term plans for the site, expected to begin construction in 2013. The three-phase development involves areas surrounding the future SMART rail station.

The initial five-story building planned for the cannery location represents the first phase. With two floors of retail, the upper floors will feature 82 units of housing, 68 of them designated affordable housing.

With the $11.4 million in Proposition 1C bond funding the developer already received from the state in 2009, the total of $18 million in “inexpensive money” should help support what are expected to be competitive lease rates for commercial tenants, said Mr. Stewart. The commercial portion is expected to cost $19.9 million to build, though it will be built along with the residential component.

The entire first phase is expected to cost $48 million, funded through tax credits for the commercial and residential portions, private equity, the city of Santa Rosa, Burbank Housing, state Proposition 1C funding and federal funding, according to the company.

A timeline has not been set for two additional phases. The second phase, south of the future station, could feature three buildings including office space, retail, a “market hall” and a garage. The third, north of the station, would include additional housing.

The John Stewart Company has owned the cannery property since 1999 and has spent $650,000 to date on environmental remediation and historic preservation there, Mr. Stewart said. The walls of the former cannery, along with the water tower, will be preserved in the development.

Club One still has its sights set on Santa Rosa, said Ms. Kinney. The company opened a location in Petaluma in 2009 and operates 68 locations in 10 states.

“We’re hoping that we’ll be back in the market at some point in time,” she said, “We love Santa Rosa, and we want to be in Santa Rosa.”