Mayor Gavin Newsom struck a deal Wednesday with the U.S. Navy to transfer Treasure Island to San Francisco for a $55 million guaranteed payment over several years. Additional considerations could make the package worth more than $105 million to the federal government.

The agreement paves the way for the city to undertake one of its most ambitious development projects - remaking the closed naval base on a man-made island in the middle of San Francisco Bay into a model of sustainable development.

"We can finally begin the hard work of making sure the city's grand vision for Treasure Island can be realized," Newsom said in a statement announcing the deal with Secretary of the Navy Ray Mabus.

The mayor and local congressional leaders hailed the agreement as an economic boon that will create badly needed jobs after years of talks.

The city, facing a projected budget deficit of $522 million for the next fiscal year, will use revenue that the development of the island generates to pay the Navy, said Michael Cohen, head of the city's economic development office.

The planned development would transform an isolated patch of flat land with sweeping city views into a neighborhood with 6,000 homes, a gleaming 60-story high-rise and a new commercial town center - all with a goal of being the most environmentally friendly development in the country.

There would be at least six residential towers, a new ferry terminal, organic farm and 300 acres of open space. The plan is to build housing through private and public financing. Lennar Urban, the developer reshaping the city's southeastern waterfront around Hunters Point, and multiple partners will stake $500 million, with the city providing an additional $700 million in bond money financed by property taxes collected once the development is completed. The initial $1.2 billion will pay for the project's infrastructure and some of the housing.

The site has unique challenges, though. It's largely on seismically unsafe landfill and could flood if sea levels rise.

The agreement with the Navy lays out basic terms for the city to take ownership of almost all of Treasure Island and the northern portion of neighboring Yerba Buena Island, a total of about 450 acres of land. Details of the handover will be negotiated over the next few months, Cohen said.

San Francisco will pay $55 million over several years, plus $50 million that both sides described as an interim payment. Cohen declined to discuss the details of that second payment, but said it "will be structured to allow necessary private capital to be invested in the project."

The Navy may also share in the profits with the city and developer if the development performs extremely well.

The Navy will pay for environmental cleanup at the base, which closed in 1997. More than half of that cleanup has already been completed, and the remainder of the work is not very significant, Cohen said. He hopes to have development plans wrapped up by the end of 2010.

Newsom's office says the project will create thousands of construction jobs annually over the next two decades and 3,000 permanent jobs.

Local congressional leaders, including Sen. Dianne Feinstein, D-Calif., hailed what she called a "landmark agreement" that "will ... spur economic growth just when the San Francisco Bay Area needs it."

The deal came after years of back and forth between the city and the Navy on the value of the land.

The Navy appraised the land at $250 million, while an independent analysis by KPMG estimated the value at $22 million, House Speaker Nancy Pelosi, D-San Francisco, wrote in an Oct. 30 letter. The city was willing to pay $40 million up front and maybe more depending on the final cost of rehabbing the site.

Pelosi pushed a bill that called on the military to speed up base transfers and authorized payment mechanisms based on revenue generated at the site rather than estimated value.

"Those provisions were an essential component of today's success," Pelosi said. "These forthcoming economic benefits will provide a welcome boost to San Francisco's economic recovery, and to the entire region."