A software company that had agreed to lease a floor or more of the former AT&T building has pulled out of the high-profile city redevelopment project.

Arlington, Va.-based Metier, Ltd. was one of two companies that had committed to occupying space in the Museum on the Square project, which would transform the vacant city-owned monolith into a gleaming mixed-use tower.

But after more than a year of negotiation, Metier officials several months ago informed the developers they would not be leasing space in the building.

"We were at the point of documentation when they pulled the plug," said Hugh Futrell, who is developing the project with partner Bill Carle.

Douglas Clark, Metier's chief executive officer, said company officials were still "huge fans" of the project but worried about outgrowing the building. The fast-growing company had tentatively agreed to occupy one floor and was considering leasing a second, but growth projections showed it needing even more space long-term, Clark said.

He expects the company's West Coast operations will need to grow beyond 100 people in three years, and finding that much space downtown is a challenge, he said.

"Once you are confronted with needing substantial office space, it's just not in downtown," Clark said.

The company, which currently has offices at 50 Courthouse Square, continues to consider other downtown locations, but also is eyeing more suburban settings with greater expansion opportunities, Clark said.

"We really want to stay in Santa Rosa," he said.

Futrell said the decision, while disappointing, is not a major setback for the project, which proposes to convert the windowless eyesore into a 10-story glass-clad tower. He said the project remains viable, serious talks are underway with another potential tenant and construction is anticipated to begin this fall.

"I don't consider it a setback because we're negotiating with a high-quality tenant looking to take more space than M?ier was taking and that deal is very close to consummation," Futrell said, declining to identify the potential tenant.

Museum on the Square is the most highly anticipated development project proposed for the downtown. It includes a restaurant and gallery space for the Sonoma County Museum on the first floor, four stories of office space and also five stories of apartments atop the existing concrete structure, which was built to withstand a nuclear blast.

An economic analysis by the city predicts the project would provide a powerful boost to the downtown during and after construction, including 261 short-term construction jobs, 523 long-term jobs and $68 million in increased annual economic activity.

The city purchased the long-vacant building with $3 million in redevelopment funds in 2007, and remains optimistic that the sale of the building to Futrell for $1.9 million will occur by the end of the year as planned, said Dave Gouin, Santa Rosa's director of economic development.

"The development is still on track and everything looks positive," Gouin said. "We feel the space will be filled with other professional groups."

Obtaining signed leases from future tenants is crucial if the project is to secure financing, Futrell said. Lenders have said 75 percent of the commercial space needs to be pre-leased before they will fund construction, he said.

Depending on the amount of space taken by the potential new tenant, the project will either meet or nearly meet that pre-leasing threshold, Futrell said.

"We're deep into very serious negotiations and I believe that all parties involved believe that the deal with be resolved in the next month or so," Futrell said.

Several mid-rise and high-rise buildings proposed for downtown stalled as financing dried up during the recession.

The project has been designed by TLCD Architecture, which will move its offices into the building when it is completed.

The city has estimated the cost of the project at $23 million, which would make it the most ambitious downtown development in years. Precise cost estimates won't be available until construction drawings are completed, a process now underway, Futrell said. He said he expects to apply for building permits in August.

Former Mayor Susan Gorin said she was surprised by the news given Clark's previous commitment to setting up shop downtown. "He was pretty firm in his vision about what he was seeking for his company," Gorin said.

That included easy access for employees to various downtown amenities, such as restaurants, nightlife, shopping and transit opportunities, such as the SMART train. Clark had also said that Metier employees had expressed interest in living in the apartments above their offices.

Despite the company's change of heart, Clark said he's certain the project will be successful.

"It's going to be fantastic," he said.