The £250 million Edinburgh Royal Hospital for Sick Children (ERHSC) will not be ready for another five years even if construction begins in 2013.
The breakthrough came as one consultant revealed the extent of conditions at the ageing facility at Sciennes. The project has been held up over a number of funding issues and the latest came about when one of 11 financial institutions involved in a land agreement where the new hospital would be built did not settle terms.
ERHSC consultant Chris Adams wrote in a letter of complaint about the impasse that the situation was so bad "while walking through the corridor to operate on the spine of a 14-year-old girl from Lanarkshire, I walked round a bucket collecting water coming through the ceiling".
It has been confirmed all 11 financial institutions have agreed a deal over the landswap that would allow the new hospital to be built in a car park at Edinburgh Royal Infirmary at Little France on the outskirts of the city.
Papers are due to be signed on the handover and tenders for the work will go out in the autumn after the agreement between site operator Consort and the banks, NHS Lothian confirmed.
It is unclear what will happen to the current site.
The 19-acre former Edinburgh Royal Infirmary site near the Meadows was redeveloped at a cost of £400m as the Quartermile development of luxury apartments.
The health board rejected a Freedom of Information request over those financial institutions involved and the one that held up the process.
Brian Currie, project director, NHS Lothian, said: "We are pleased discussions with Consort and their funders over changes to the original Royal Infirmary of Edinburgh PFI contract to allow the site currently occupied by car park B to transfer to NHS Lothian, have progressed and all 11 funders are now in agreement. We expect this change to the original agreement will be signed in the coming weeks and will allow us to work with the Scottish Futures Trust on the next steps along the procurement process. This will include having the Outline Business Case agreed by Scottish Government.
"We expect to start the process of selecting a preferred bidder for this important project in the autumn of this year. The new building is due to open in 2017.
"It is recognised the current Royal Hospital for Sick Children building, which is almost 120 years old, is no longer fit for purpose."
Rickey Henderson, Edinburgh City Council's health and social care convener, welcomed the news, but added: "It will be a long, complex process, but this is a step in the right direction."
The project will provide services from the Royal Hospital for Sick Children, the Child and Adolescent Mental Health Service and the Department of Clinical Neurosciences in a single building adjoining the ERI.