In a surprising development, talks are underway to put a new east side K-8th grade school into a towering residential building planned for the parking lot of NYU Downtown Hospital, after Pace University pulled out of a deal with the developer.

Madelyn Wils, chairwoman of Community Board 1, said there were several reasons why a school would be an attractive option for the site's developer, Forest City Ratner.

"The good neighbor incentive is that he's putting 1,000 people on that site and if they choose to go to public school they won't have public school," said Madelyn Wils. "The second incentive is that the school can pay for itself."

The city has committed $44 million of the School Construction Authority budget to the creation of a new school and has requested another $25 million from the Lower Manhattan Development Corp. (LMDC).

Wils said adding a school to the project could help Ratner qualify for the $350 million in tax-free government Liberty Bonds they have sought. "There would be no reason for them to get Liberty Bonds if they don't do anything that's good for the public," she said.

The discussions took place in a meeting early last month between elected officials and representatives of the community, the hospital, and the developer, convened by Assemblyman Sheldon Silver to explore a contribution by the developer to a community amenity.

Shortly after the meeting began, the news came that Pace had just withdrawn from a pending lease agreement with Ratner, saying the developer had significantly increased the price.

Community representatives quickly jumped in to suggest a school. "Immediately after that announcement, they launched into, 'alright you don't have Pace, we need a school,'" said Paul Epstein, a resident of nearby 140 Nassau Street, who attended the meeting.

The developers were open to the idea, but expressed reservations about delays that could be caused by bringing the historically slow moving Department of Education into the process, acc, according to people who were at meeting. Community representatives pointed to the unusually speedy creation of P.S. 234, P.S./I.S. 89 and the Millennium high school as a demonstration of the neighborhood's record for fast tracking schools.

"We do have a precedent of circumventing the DOE," said Paul Goldstein, CB1 district manager.

After the meeting, Ratner requested the plans for P.S./I.S. 89, which had been cited at the meeting as an example of how a school could successfully be worked into a residential building. Those plans have been given to the project's architect, Frank Gehry.

It is unclear how the changes could affect the eventual size of the project. Pace was expected to move its business school and student dorms into 300,000 square feet of the new facility. A K-8th grade school would likely need only about 100,000 square feet. Twenty-five thousand square feet are earmarked for a hospital outpatient facility.

The financially strapped hospital sold the development rights for the lot to Forest City Ratner in December 2003. Finalization of that sale is currently impeded by a lawsuit brought by residents contesting the city's determination that the site can be built on as of right, without having to go through a City Council approval process.

The building was first proposed to be 50 stories high, but after complaints from Nassau Street residents that their light and air would be cut off, the plans were amended to set it back on the lot and create a plaza. In order to do that, Ratner said, they would need to increase the height of the building to 75 stories. That would make it the second tallest Downtown structure after the Freedom Tower on the World Trade Center site is completed.

The hospital parking lot was long favored by the community board as a location for a school. The Department of Education, however, had reservations about school buses competing with fire trucks and ambulances on Beekman and Spruce Streets.

When Ratner entered into the deal with Pace last spring, the hopes for the school on the site died. Now they have been resuscitated. Said Goldstein, "We've gone a very circuitous route."