NEWCASTLE councillors endorsed their preferred developer for the old Empire Hotel site behind closed doors at a meeting last week.
Last year it was reported that Newcastle council would invest $2.9 million in the housing project, using leftover funds from the early 1990s when the council received $23.5 million from the federal and state governments under the Building Better Cities program.
A condition of the grant was that it needed to fund adaptive and affordable housing in the inner city.
The Empire Hotel site, which is opposite KFC in Hunter Street, has been a hangout for drug users and homeless people since it closed.
A 14-storey apartment building is planned for the site, with at least 25 affordable housing units to be included.
The state government will contribute the land value of $2.8 million.
Compass Housing chief executive Greg Budworth said the federal government's axing of the National Rental Affordability Scheme would have big implications for the Hunter's ability to create affordable housing.
He said development of the Empire site was rare good news as the crisis in affordable housing in Newcastle and the Hunter worsened.
The project would provide much-needed affordable housing for local people, he said.
Compass Housing will be able to use the new apartments as equity to build more public housing.
"We aim to leverage up to 25 per cent of the value of a property as borrowings to develop more affordable housing," he said.