Let the negotiations begin.

The City of Santa Barbara and AB Commercial, the owner of Paseo Nuevo mall, can now formally begin talks to decide the fate of the city’s downtown shopping center after the City Council’s formal action Tuesday to begin negotiations for a development agreement.

The owners of the mall want to demolish the former Macy’s building and build 233 market-rate apartments in its place, and another 80 below-market-rate apartments on the current site of Parking Lot 2.

Most of the interior of the mall would remain, but AB Commercial wants to add a luxury, high-end grocery market to anchor the mall on one side and add a fitness gym on the other side.

The city plans to give away the land underneath the mall and parking lot, worth between $32 million and $39 million, as an incentive for AB Commercial to invest in the mall and build housing, a goal of city officials for several years.

With dozens of vacant storefronts, State Street in disarray and challenges with the homeless population downtown, city officials believe that bringing residents downtown would revitalize the area.

Santa Barbara Mayor Randy Rowse said he does not “love” all of the details, including the loss of 186 parking spaces in Parking Lot 2, but there are positives.

“Any affordable housing is pretty amazing, but 80 affordable units is a freakin’ miracle,” Rowse said.

AB Commercial owns the long-term leases on the mall, good for another 40 years, and the city owns the land underneath. The original plan was to demolish the entire mall, but AB Commercial said it was too expensive.

The new plan calls for a seven-story, 233-unit market-rate apartment building that would stretch from the corner of State and Ortega streets around the corner to Chapala Street. City administration said it intends for the city Housing Authority to manage the 80 below-market-rate units on Parking Lot 2, but those details have yet to be worked out.

Tuesday’s action allows the parties to discuss specifics and return to the council for a vote.

Several of the council members expressed positivity but also concerns and questions. Councilwoman Kristen Sneddon opposed the idea of a high-end grocery store paired with the market-rate units.

She suggested a Sprouts instead of some of the rumored stores, such as Eataly or Erewhon.

“I would prefer a community-type market over a high-end specialty market,” she said.

Councilwoman Meagan Harmon said there are “a lot of really big, really important, really central questions about this deal that need to be negotiated.”

“Housing downtown is absolutely critical to our revitalization strategy,” Harmon said.

Councilman Mike Jordan said he would like to see a child care center as part of the development, or even a mini-library. He added that as part of the negotiations that AB Commercial needs to make sure that it actually builds the project if it chooses to demolish the former Macy’s building.

He referenced the La Entrada site downtown, which is now the Hotel Californian, and the Canary Hotel, which was a senior residential facility before it became a hotel. Both sites saw several-year delays with large holes in the ground because the developers ran out of financing.

“Our failure to perform on AB’s part needs to be bullet-proof,” Jordan said. “It has to be something that makes us whole and is bullet-proof if something happens there, so we don’t end up with half a project or a demolished lot, which is worse than what is there now.”

Paseo Nuevo is located in a highly desirable city, but the current owners, an investment firm that foreclosed on the property from the previous owners who couldn’t make their payments, would have difficulty selling the mall without a partnership with the city.

The remaining 40 years on the lease is not enough time for a new owner to amortize a loan. If AB Commercial does not acquire the land from the city for free, it will not build housing, and the mall as it is would likely remain in its current form.

Although the interior of the mall features a mix of shops, locally or corporate owned, the mall’s two largest anchors left — Macy’s and Nordstrom. Without those brand tenants, the mall has struggled, although it’s often busy and vibrant.

Once the city gives the land to AB Commercial and formal agreements are reached, AB Commercial could sell the mall. At that point, the city would have no more involvement or ownership of any parts of Paseo Nuevo. The city, however, has said that the below-market-rate units would stay affordable for 90 years.

Councilwoman Wendy Santamaria said members of the public should have a right to have input on the plan and the ability to shape the deal.

“I want to ensure that robust public engagement is happening at the same time these negotiations are happening,” Santamaria said. “I don’t want to see this development agreement too far advanced to the point where public input is no longer able to be taken into consideration.”

She said the public’s view is essential and that community meetings should happen now.

“I don’t want to delay this project, but I don’t want to expedite it at the expense of community input,” Santamaria said.