A clearer picture of the proposed housing project at Paseo Nuevo and across from the Canary Hotel in downtown Santa Barbara is starting to emerge.

The city and architectural team representing the developer, Paseo Propco LLC, took a revised project to the Historic Landmarks Commission, and company officials were met with a strong message: It’s too big.

HLC member Sheila Lodge said she is “very troubled by the design.”

“I want to know what happened to the 60-foot height limit that is in our charter,” Lodge said. “This is 75 feet, a block long. It is huge. This is not the future I want to see for downtown.”

The project is proposed under the state density bonus law, which allows developers to exceed local height limit restrictions if they build affordable housing.

Developers plan to demolish the former Macy’s building and build a 7-story, 233-unit market-rate apartment building.

The development would stretch from the corner of State and Ortega streets, around the corner to Chapala. They want to build a space that attracts a high-end, upscale market on the corner of State and Ortega streets.

The plan also calls for six levels of below-market rate housing on top of Parking Lot 2, on the corner of Chapala and Canon Perdido streets.

The 85 units will consist of 21 studios at 435 square feet, 23 one-bedrooms ranging from 540 to 552 square feet, 21 two-bedroom units ranging from 750 to 769 square feet, and 20 three-bedrooms, ranging from 945 to 980 square feet.

The exact levels of affordability have not been determined.

Although state bonus density law allows the developer to exceed the height limit, the city actually has more control over the height limit in this case because it owns the land.

City officials, however, are afraid that the Paseo Nuevo leaseholders, AB Commercial, will walk from the deal if they don’t get to exceed the city’s height limit.

The city is offering many concessions to the developer, including giving the land away to them, valued somewhere between $32 million and $39 million; offering a portion of its annual property tax at the site; and not fighting the 60-foot height limit in the city charter.

“Yes, we could insist that they abide by the lease, but that means nothing is going to happen for 40 years, or you get a different project that is potentially uneconomic,” said Assistant City Attorney Dan Hentschke.

Hentschke said the project is based on the idea that the existing configuration of the mall is an uneconomic property. Hentschke said AB Commercial owns the next 40 years of the lease, and therefore the development interests.

“That’s why AB can come in and use the density bonus law to accomplish this program,” Hentschke said.

Even though the downtown real estate is among the most treasured in the state, the current lease agreement lasts another 40 years.

AB Commercial would have difficulty selling the mall in its current form because 40 years is not enough time to pay off an amortized loan.

City Administrator Kelly McAdoo said the city and AB have been in discussions for about three years to find a project that makes financial sense.

Even with all of the concessions by the city, the developers said they only plan to see a 6% return. McAdoo said most developers won’t do a project unless there is a return of at least 8-10%.

Other commissioners expressed concern about the height of the building, but also said that might be a tradeoff for the benefit of bringing people downtown and revitalizing the area.

Commissioner Cass Ensberg said more attention should be paid to Ortega Street, and she questioned the need for a market, particularly when the Ralph’s Fresh Fare is a block away.

She said more boutique shops would be preferred.

Ensberg said the future of downtown should not be 60-foot and 70-foot tall buildings, but instead a variety of building heights.

Other comments included requesting that the developer design the affordable building with as much elegance as the market-rate buildings.

AB Commercial has not yet submitted a formal application. City officials said the market-rate and the affordable units must be separate.

“In order to qualify for tax credit financing for those affordable units, it has to be a purely affordable building,” said McAdoo.

The proposal is expected to go to the City Council on Dec. 2 for a development agreement. McAdoo said she anticipates the developer to submit an application in the spring.

Duncan Paterson, studio leader, design director, principal and Mixed Use & Retail Centers Leader for Gensel Architecture, and Clay Aurell, principal at AB Design Studio, represented the developers at the meeting.

Paseo Nuevo was built in 1990 and saved the downtown area from a proliferation of surf and T-shirt shops and liquor stores.

The rise of online sales and the overall decline of retail, however, have hurt the mall’s popularity.

Although the mall remains vibrant and a hub for year-round activity, particularly in Center Court, the loss of anchor tenants Nordstrom and Macy’s has had a considerable impact.