Santa Rosa is hoping to kick-start a transit-oriented development in Railroad Square by going after $7.1 million in federal grants and loans for a key portion of the project.

The City Council next week will consider whether to seek federal financing to help San Francisco developer John Stewart build a $48 million portion of a mixed-use project west of a future rail station.

This first phase of the New Railroad Square Project calls for construction of a two-story health club topped by 82 rental units. It would be located on the 2.1-acre site of a former cannery on Third Street, whose brick walls have been propped up for years awaiting construction.

The mixed-use development is part of a $200 million project, covering 7.4 acres, that would create a food and wine center and additional offices, shops and housing on the neighboring property owned by the Sonoma Marin Area Rail Transit station.

"It's a transformative project for our city," said Frank Kasimov, economic development specialist for the city.

The city wants to apply to the U.S. Department of Housing and Urban Development for two types of financing. A $1.5 million grant would help cover the cost of additional clean-up of contaminated soil on the site, which contained an underground fuel tank and massive crude oil bunker. The other is a $5.6 million low-interest loan aimed at helping redevelop the site.

"Not only does it transform a vacant parcel in Railroad Square into something that's vital and active, but it also generates economic activity," Kasimov said.

More than 1,000 jobs and tens of millions of dollars in economic output are expected to be generated by the project long-term, he said.

The additional funding is key because a $11.4 million state grant won for the project in 2010 is set to expire at the end of 2012, Stewart said. To date, the city and state have committed $18.6 million in financing toward the total project.

A high priority for the city for years, the development has been stalled by contamination on the site, negotiations with SMART, which owns the portion of the site closest to the rail line, and the collapse of the lending market.

Stewart's firm, the John Stewart Co., has owned the property since 1999, and he had originally hoped to see the project completed mid-decade.

"We did not realize how complicated it was going to be," Stewart said.

As it is, the company already has invested more than $7 million in the property, including significant environmental remediation, Stewart said.

The firm has hired an expert in HUD loans and the climate in Washington is good for projects like the one he's proposed, Stewart said.

"The current administration is very keen on mixed-use and transit-oriented development," Stewart said.

The city's backing is required for the HUD loan. If the loan to the developer goes bad, the city would repay it out of federal grant money dedicated to affordable housing.