Gov. David A. Paterson signed legislation Wednesday that was supposed to help the rehabilitation of the Franklin Building.

Problem is, the state Assembly changed the language "at the eleventh hour," said Gary C. Beasley, executive director of Neighbors of Watertown Inc., which is behind the Franklin project.

The law, which passed the state Legislature as A9023 and S6056 and will go into effect Jan. 1, changes rules for the state's Rehabilitation Tax Credit program.

It provides the program with more effective incentives and program features for those seeking to rehabilitate historic buildings in the state, said proponents including the Preservation League of New York State.

But the piece the Franklin Building project needed was allowing out-of-state investors to sell the tax credit to New York investors, who could actually use the credit. A New York tax credit can be used only on state taxes.

"If that had happened, our investors could have admitted a New York partner who could have bought the whole credit," Mr. Beasley said.

Neighbors plans to turn the three-story building at 50 Public Square into a mixed-use space with 16 residential units on upper floors, served by an elevator, and commercial units at street level. There will be six storefront spaces, one of which will be used for the residential entrance.

Overall, seven to 12 businesses will fit in the building.

The funding for the $7.8 million project included an estimated $3.8 million in tax credits from the state Division of Housing and Community Renewal and National Parks Service.

Those credits were sold to the National Development Council, a national fund of banks and investors. But the market for tax credits had gone soft, creating most of a $700,000 gap in the funding for the Franklin Building project.

Neighbors has had to stop work on the project, Mr. Beasley said, while another source of funding is secured. He said he expects a closing soon with a new government source.

In general, though, Mr. Beasley praised the legislation and said there are other Neighbors programs that could benefit. Those programs include the Watertown Main Street Facade Program and upper floor development.

"We are happy the state credit legislation passed and we look forward to further refinement," he said.

New York's first-ever rehabilitation tax credit was adopted as Chapter 547 of the Laws of 2006, but limitations of both the commercial and residential programs failed to provide sufficient incentives to deliver economic and community revitalization to municipalities in need.

"This expanded rehabilitation stimulus program is just what New York needs to encourage re-use of existing infrastructure, address affordable housing needs, and stimulate new private investment in the redevelopment of urban cores," said Jay DiLorenzo, president of the preservation league, which led the charge for enhanced tax credits, in a press release. "We have long known that these tax credits would promote economic stimulus."