Neighbors of Watertown has received federal approvals to go ahead with the renovation of the Franklin Building.

While Neighbors Executive Director Gary C. Beasley said there are a few more steps before work will begin, this was a major piece of the puzzle.

"This was a key item and we're hoping everything else falls in place in the next 60 days," he said.

Mr. Beasley said Neighbors needs to finish negotiating a construction loan, close with investors, finish design plans and specifications and obtain approval from the state Division of Housing and Community Renewal for the plans.

Neighbors received approval from the Department of Housing and Urban Development to spend federal money after the department approved the environmental review that had been completed on the site. After HUD approval, Neighbors could begin work.

"I'm sure we're looking at after the first of the year," Mr. Beasley told the Watertown Local Development Corp. on Nov. 20. "Having said that, we're working. The contractor and engineer is in and out doing all we can without violating the nondisturbance order."

The Franklin Building project will cost about $7.8 million. Construction will be about $6 million. Other project costs include design and engineering, legal costs and interest.

The funding sources include:

■ $3.8 million in tax credits from the Division of Housing and Community Renewal and National Parks Service.

■ $1.55 million from the Restore NY Communities Initiative program.

■ $1.4 million from the state's HOME program.

■ $500,000 from the state's Housing Trust Fund.

■ $375,000 from the Community Development Block Grant program.

■ $100,000 from the state's Urban Initiatives grant.

■ $70,000 from the state Main Street program.

■ $50,000 from National Grid.

The tax credits will be sold to National Development Council, a national fund of banks and investors.

Using tax credits from the Parks Service puts restrictions on alterations to the former YWCA building. Neighbors is completing a design in which it will simply put flooring over a 2,000-square-foot pool on the ground floor and preserve the walls, which are tiled halfway up. It also is preserving a large lobby in the center of the building and the exterior facade.

The Franklin Building is owned by Public Square Developers LP. WLDC, also known as Watertown Trust, which has served as the general partner via the limited liability corporation 50 Public Square. But Neighbors of Watertown is taking over as general partner.

"When we close on the construction loan, we can pay back the used money to the LDC," Mr. Beasley told the Trust board members.

Trust Executive Director Donald W. Rutherford said, "For our cash flow, it will allow us to do other things. It may be better for us to use a construction loan."

Neighbors plans to turn the three-story building at 50 Public Square into a mixed-use space with 16 residential units on upper floors, served by an elevator, and commercial units at street level. There will be six storefront spaces, one of which will be used for the residential entrance. Overall, seven to 12 businesses will fit in the building.

Mr. Beasley said Neighbors took on the project because private developers won't work on such a complicated project.

"Being a nonprofit, we are eligible for tools they can't use," he said. "We step in where private developers won't go. The projects take a lot of time and are very difficult."