RALEIGH - An expected cornerstone of downtown's revival has fallen further behind schedule as the developer of the proposed 25-story Hillsborough Street tower contends with a tightening lending environment.

The Reynolds Co. hopes that construction of the tower -- tentatively called The Hillsborough and planned to include a 136-room boutique hotel and 26 luxury condominiums -- will start in winter, instead of by Tuesday.

The delay illustrates the financing roadblocks facing the city and builders as lenders reduce risk in a slowing economy.

Several projects have been delayed or tweaked as lenders boost interest rates or require developers to provide more equity.

"It's just a mess out there right now," said David Reynolds, a partner in the Raleigh firm that has planned the tower at Hillsborough and Dawson streets since 2000.

A year ago, Reynolds planned to pay at least 25 percent equity into the $65 million project, expecting to borrow the rest at an interest rate of about 7.5 percent.

Lenders are now requiring about 45 percent equity and offering to finance the rest at about 9.5 percent. "That just hammers your returns," he said, declining to name prospective financiers.

"There's risk associated with this project; there's no question about that," he said. "But we feel that our proposed capital structure is appropriate."

Less than a year ago, when business travel and home sales were flourishing locally, it was common for lenders to finance 90 percent of such a project.

Lenders' skittishness recently led Empire Properties of Raleigh to reduce its number of condos and increase the number of hotel rooms at The Lafayette, a 22-story project it plans to build on a half-acre, city-owned lot just south of the new convention center. The changes are one reason it is scheduled to open in May 2010, five months after the previous target.

Empire's schedule and scope changes required the blessing of the city, which agreed to sell the land to Empire, assuming the developer met development deadlines. An amended agreement, approved last week by the City Council, requires construction to start before November. If not, the city could seek another developer.

The Reynolds project would need a similar extension to proceed, or it would face the same threat.

The city agreed to sell a tract for the project. The property, which included a former police building, has since been cleared. Site plans for the building have been approved. It's the cost of financing that would force Reynolds to miss the Tuesday construction deadline.

"We're not going to propose that we jump into a bad deal for another reason than to get started under the city's time frame," Reynolds said. He plans to ask the city to extend the deadline until winter, when he expects lenders to have more confidence.

Getting approval might prove thorny but not impossible. The city has extended several deadlines for the developer, while threatening -- but not executing -- its option to find another developer. The latest extension came in October, months after the City Council granted what it promised would be its final extension.

City officials have since become more wary of extending downtown development agreements -- particularly those for projects with hotel rooms, which are needed to lure conventions to the city.

But the city might have to be flexible. Its threat to turn to another developer is virtually moot, considering the lending environment.

"It doesn't really exist right now," Mayor Charles Meeker said Friday. "I think the council will want to wait until the financial markets calm down in New York and review if the project can be financed at that time."