A company that wants to build a riverbank boutique hotel in Winnipeg passed its first test Tuesday when a city committee agreed to offer a 50-year lease to the private company.

Sunstone Resort Communities wants to build the $11-million hotel on property identified as parkland just off Waterfront Drive. Because of that designation, the city can't sell the lot but must lease it instead.

The project, which would be built adjacent to the Alexander Docks, must be approved by council at a later date. Because of the parkland designation, two-thirds of council must vote in favour of the project for it to pass, rather than the typical simple majority.

The company must also hold public consultations on the project.

Sunstone, which has already built a condominium project on Waterfront Drive, also wants to convert the vacant Harbour Master Building near the site into a restaurant.

Built in 1923 to produce electricity and provide steam heat to downtown buildings, the 2,500-square-foot building was later transformed into the office and workshop space for the city's harbour master.

A deck around the now-vacant building forms part of the riverside walkway in Stephen Juba Park.

The city has been trying to get something developed on that land for about four years and has seen two proposals fall through, mainly because of the challenges and limitations due to easements in the area.

Manitoba Hydro has an easements due to an underground transmission line while the City of Winnipeg has another due to an aquaduct.

The proposed hotel would be about 70,000 square feet, have 60 to 70 rooms and be about three storeys tall. The city wants to limit the height in order to maintain the river view for residents in condos on Waterfront.

"So it's not a giant, like you'd see in other parts of downtown," said Coun. Justin Swandel, chair of the downtown development committee that agreed to the lease.

As part of the proposed agreement, the city would only charge $1 per year year for the first five years of the lease. The annual fee would increase to $49,000 for years six to 15, and then to $56,350 for years 16 to 20, and then to 64,800 for years 21 to 25.

The lease would be assessed after that, based on market value appraisal.

On top of the lease, Sunstone would also pay annual property taxes.

Should the company fail to live up to the agreement, the building would revert to city ownership.

Controversial development in Osborne

Sunstone is the same company that intends to built an 11-storey residential unit on Roslyn Road, west of Osborne Street.

Dennistoun House on Roslyn Road was built in 1908 for Justice Robert Dennistoun. It was most recently used as a rooming house with rental suites. (Google Street View)

The project is a source of controversy because it involves the demolition of a 103-year-old home.

Dennistoun House, at 166 Roslyn Rd., was removed from the city's historic building list to make way for the demolition. The decision, made by council in June 2009, was challenged in court by a group of Osborne Village residents.

They argued council did not give proper consideration to the neighbourhood's long-term plan, or a recommendation from the historical building's committee to keep Dennistoun house listed.

A judge disagreed and in July 2010, ruled in the city's favour.

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The building in the left background is the former Harbour Master Building proposed to become a restaurant.