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New state rules clarifying the dissolution of local redevelopment agencies could save Santa Rosa $7 million, but they also may force further delay in the ballyhooed Museum on the Square project.

The upside for the city, which like hundreds of others around the state saw its redevelopment agency dissolved in February, is that it now has a path to recoup $7 million in loans it made to the agency.

The downside is the process outlined by a new state law will further delay the effort to transform a downtown eyesore into a gleaming 10-story multi-use tower.

The City Council on Tuesday reviewed some of the impacts of Assembly Bill 1484, which was signed into law by Gov. Jerry Brown on June 27.

The main one was the need for the city to loan the remnants of its former redevelopment agency, known as the successor agency, an additional $183,000 for new administrative work required by the law, such as hiring an outside accountant to review the agency's financial documents.

Those tasks, if completed on time, should result in the state deeming the $7 million in loans as valid obligations, meaning the city would be repaid from property tax revenues once set aside for redevelopment.

"I think it's not a bad investment, spending $183,000 -- even though we'll get it back -- to get $7 million," said Councilman Jake Ours.

Another potential impact of the new law is the likely further delay of Museum on the Square, already more than two years behind schedule.

The city redevelopment agency in 2007 purchased the long-vacant AT&T building, and in 2010 agreed to sell it at a $1.1 million loss to a development team led by Hugh Futrell.

Plans call for transforming the concrete eyesore into a $23 million, glass-clad tower housing the Sonoma County Museum, a restaurant and four stories of office space capped by five stories of apartments.

Advocates say the project would create hundreds of jobs and tens of millions of dollars in economic activity for the city.

The dissolution of the redevelopment agency already delayed the project once this year. The title company handling the sale wanted assurances about who controlled the property in the wake of redevelopment's demise.

There are now three layers of oversight for the former redevelopment agency programs and assets -- the Santa Rosa City Council as the successor agency, a seven-member local oversight board that includes representatives of schools and other taxing districts, and the state Department of Finance.

Initially, the title company wanted assurance the state and oversight board agreed the property could be sold to Futrell. That required the City Council to approve a third six-month escrow extension through Dec. 31.

Now the title company wants to make sure the latest extension is valid. It's requiring the oversight board and the Department of Finance to sign off on the extension, as well. The new law gives the department up to 45 days to respond to such requests. That could take the process through November, which would leave the deal "highly challenged" to close by the end of the year, Futrell said.

It would also make funding for the project less likely this year, Futrell said. That's because the project is relying on federal "new market tax credits" that create incentives for lenders to invest in projects in low-income communities.

Those lenders currently are packaging their 2012 credits with qualified projects. But a project with an outstanding title question is not likely to be selected until the issue is resolved, Futrell said.

"Every month that goes by with an unsettled title issue makes it more difficult get 2012 credits and pushes us into the 2013 cycle," Futrell said.

In May, when the need for the latest extension was apparent, Futrell said the title issue had been resolved and construction remained on track to begin in the fall. That timeline is "no longer accurate," he said.

Futrell praised city officials for working diligently to overcome the latest set of hurdles, and said he's confident that clean title eventually will be granted.

"But if you are a tax-credit investor in, let's say Boston, Mass., looking at what's going on in California, you might not have the same degree of confidence," he said.

Dave Gouin, the city director of economic development and housing, confirmed another extension may be needed. His staff is preparing to update the City Council on the issue next month.

You can reach Staff Writer Kevin McCallum at 521-5207 or kevin.mccallum@pressdemocrat.com.