The development would see up to 200 new build-to-rent homes built on the site of the former Dudley Leisure Centre in Wellington Road.
The site has been vacant since January last year following the relocation to the new purpose-built Duncan Edwards Leisure Centre in the town and Dudley Council is working with leading build-to-rent developer and regeneration specialist Placefirst and architect and design company Bond Bryan to progress proposals for the land.
It would see a new housing development on the 2.2-hectare brownfield site providing a mixture of rental properties, including apartments and family housing.
The council said the new housing would be worth an additional £50m to Dudley’s growing economy over the next 10 years and leader of Dudley Council, Councillor Patrick Harley, said the site was one of the borough's prime brownfield redevelopment sites.
He said: "The exciting proposition we are currently negotiating would represent significant capital investment into the borough.
"We have been in contact with Bond Bryan since our initial meeting at the MIPIM property conference last year and we are pleased with the current progress on this proposal which would see development taking place on a key brownfield site, which has always been our priority in preference to our precious green belt.
"MIPIM is the biggest property market in the world and our attendance there is helping to put the borough’s ambitions on the map for many investors.
"We’re delighted to be making such positive progress with the £40 million development proposals for the Wellington Road site and look forward to progressing this as soon as possible to bring the vision into reality in the near future."
Darran Lawless, development director at Placefirst, said: "We very much welcome the opportunity to work in partnership with Dudley Council to deliver a new high quality build-to-rent neighbourhood on this brownfield site.
"This builds on our track record of creating quality, energy-efficient homes designed for long term rent, with a focus on placemaking and adding social value to the areas in which we operate.
"We look forward to finalising details, sharing our proposals with the local community and commencing the formal planning process."
Tomasz Romaniewicz, architect at Bond Bryan, said: "We first became aware of the opportunities in Dudley after being impressed with their presence at MIPIM last year and we have made numerous visits to the borough since with prospective development partners.
"Working with Placefirst, we’re pleased to see the Wellington Road plans are progressing well and hope this can be the first of many successful projects Bond Bryan can be involved with in the coming years."
The council will continue to work in partnership on the proposals with Placefirst and Bond Bryan over the coming months ahead of formal planning processes being undertaken.