Huntsville has won a $1.3 million federal grant to plan the transformation of a large area west of Memorial Parkway into a “model mixed-income, mixed-use community.”

The change would close Butler Terrace, the city’s oldest and largest public housing development between Clinton Avenue and Governor’s Drive, and replace it with a mix of subsidized and “market-rate” apartments and/or condominiums. Earlier reports suggest current residents of Butler Terrace would be given federal housing vouchers they could use at any apartment or rental home whose owner accepts them. That has already drawn the attention of a federal judge supervising efforts to desegregate nearby public schools.

The Huntsville Housing Authority, city government’s partner in the transformation plan, briefed City Council members on the grant at the council’s Thursday night meeting. It is a three-year planning grant, HHA representatives said, and the city would still have to apply for federal funding to implement its plan at the end of the process.

That federal support, if approved, could be as high as $35 million. But Housing Authority planners cautioned the council that competition is fierce for the implementation funds.

The city is calling the area it wants to change Mill Creek. It is bounded on the north by I-565, on the east by Memorial Parkway, on the south by Bob Wallace Avenue and on the west by Triana Boulevard.

Mayor Tommy Battle said Thursday that Butler Terrace could be replaced with 20 percent publicly supported housing, 30 percent “affordable” housing and 50 percent “market rate” housing. Battle said affordable housing is going to “be at a premium” as the city continues to develop its downtown core. “This provides some affordable housing ... something very nice for the area that improves the housing there and also something we’ve had some input on,” Battle said.

Huntsville’s downtown east of the Parkway is rapidly changing with four new hotels under construction or about to be under construction, one new hotel already opened, and new restaurants and apartment complexes under construction or open. The Von Braun Center, the city’s concert, sports and performance venue east of the Parkway, is expanding to draw more acts and conventions, and that expansion along with growth at Redstone Arsenal is creating the hotel room demand.

The area west of Memorial Parkway has become home to new food, entertainment and art centers including Lowe Mill Arts & Entertainment, Campus 805 and Stovehouse. Old mill neighborhood homes west of the Parkway near the three developments are being replaced with new homes and upgraded with renovations.