After three years on the market and several false starts, the city-owned former J.C. Penney building at 238 Vernon St. – perhaps the most closely watched property downtown – has found a buyer.

Under an agreement approved last week by the City Council, Roseville-based KMS Development LLC will purchase the 16,500-square-foot building, which is currently vacant, for $650,000. That’s about $350,000 less than what the city paid for it in 2005, though officials say terms of the agreement require KMS to invest at least $440,000 in improvements – and perhaps much more – to make the property marketable.

Most recently an antique showroom, the address has been called a potential linchpin in downtown revitalization efforts because its central location on Vernon Street and large footprint could house an anchor tenant, such as a landmark restaurant, that would serve as a draw for the corridor. Officials hope that could in turn attract other desirable tenants to the district, in which the city has invested millions over the years to improve street amenities and infrastructure.

“It’s one of our largest buildings in a very prominent block of Vernon Street,” said Jan Shellito, city redevelopment manager.

The city originally purchased the building to ensure its use would align with redevelopment objectives. Since then, talks with several potential buyers – including a nightclub and restaurant – went nowhere.

Last year, the city began negotiating an agreement with KMS, which has been involved with other redevelopment projects, most notably along Sacramento’s Del Paso Boulevard.

Under the approved agreement, KMS – which will receive a 30-year, 4-percent loan from the city to pay for the building – must find a use for it that helps “create a vibrant downtown providing amenities that serve our community,” according to project objectives. That could mean filling the space with a restaurant, nightclub, housing, retail or a combination of those elements.

KMS will also improve the front and rear facades and complete a “soft demolition” of the interior to increase its marketability, according to the agreement.

“We think it’s a great building, though it certainly has challenges,” said KMS partner Stephen Pease. “There are not a lot of buildings with basements around, so we will have to figure out what we want to do with that part of it.”

Still, the building has certain advantages, Pease said.

“We believe there are some interesting things to it, possibly brick behind the walls and tin ceilings,” Pease said. “So we plan to expose that and bring out some of its character.”

Pease said plans are currently being drawn for the exterior improvements and interior reconstruction would start soon. In the meantime, he hopes to increase the building’s visibility by allowing it to be used for special events or fundraisers.

The sale, however, raised the eyebrows of councilman Richard Roccucci, who cast the lone dissenting vote.

Roccucci, a member of the Central Roseville Revitalization Committee, noted developers do not have a signed tenant agreement and questioned a clause that would allow an “interim tenant” to occupy the building until a more desirable one could be found.

“We don’t have a project here at all,” he said. “I wouldn’t speculate with my money on something like that.”

He also questioned the fiscal responsibility of providing a loan for the project.

“There are a lot of businesses up and down Vernon Street that could have used some of that money,” he said. “I don’t think it’s a wise use of our money.”

But Shellito said helping a project come to fruition at 238 Vernon could pay big dividends in the form of taxes paid and other, less tangible effects.

“The benefits of an active, vital tenant in Vernon Street has nothing to do with money,” she said. “It has to do with perception. Out of all of the public improvements since we finished the streetscape project, one of primary outcomes we’re seeking is investment by private sector. Private sector investment is the thing.”

The deal comes amid several key milestones for the city’s redevelopment agency, which recently completed a draft Downtown Specific Plan intended to guide development there. It is also wrapping up work on a multimillion-dollar infrastructure and streetscape improvement project in Old Town, and is scheduled to celebrate its culmination with a community party May 23.