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"It took an idiot like me to take on a project like this," says architect Alan J Smith, with more pride than modesty. As well as running one of the North-east's most successful practices, with offices in Newcastle, London and Amsterdam, Smith radiates Geordie energy, chumminess and charisma. "People were telling me 'You're ever so brave,' and it was pretty scary at first," he goes on.

The scariness started when Smith decided to put his money where his mouth is – by acting as planner, architect, joint developer and part occupier of one of the most ambitious projects of his career: the conversion of a huge Victorian post office in the centre of Newcastle. Like many architects in the era of Lord Roger's urban taskforce, Smith preaches mixed-use urban regeneration. Genuine mixed use, he is keen to point out, means combining several complementary uses in a single building. "Mixed use in one building has that degree of vibrancy that you need in cosmopolitan architecture," he says.

With this philosophy in mind, Smith has devised and sunk his life savings into one of the most comprehensively mixed-use buildings of modern times in the heart of his home city. Already completed in the £5m scheme are a 1082 m² office and studio for his own practice, 12 luxury flats, a turfed roof terrace as large as a tennis court and 36 basement parking spaces. Another 1548 m² of lettable office space is just starting construction; later phases will comprise a restaurant, three artists' studios and an art gallery.

The building in question is Newcastle's former head post office, a huge grade II-listed building of 1872 with an imposing classical sandstone portico fronting a total of about 10 000 m² of internal space. Now renamed Red Box, in honour of its Royal Mail origins, the building stands in the historic heart of Newcastle, face to face with the 14th-century spire of the cathedral and a block away from the castle.

As the development brochure enthuses: "The scheme will restore life to what had become a decaying quarter of the city and, with its mix of arts, music, culture, living and leisure uses, will ensure this is done in a rich, not architecturally monosyllabic and sterile way."

Smith's big adventure started in July 1996 while his practice was converting the neighbouring Victorian St Nicholas ºÃÉ«ÏÈÉúTV to offices for London property magnate Harry Hyams. "At the time, the post office building was concealed behind shoring that was holding up the facades of the St Nicholas ºÃÉ«ÏÈÉúTV," he relates.

"I thought – why not buy it before the shoring comes down and people see how wonderful it is?

"Hyams wasn't interested in a mixed-use development, so I approached Sky Properties – a developer I knew in London – and we agreed a 50/50 joint venture. We paid £700 000 for the building, we were offered a £1.5m development grant from English Partnerships and we needed another £1.5m for the conversion."

Although the then DOE regional office expressed concern about an option to split the telegraph hall, and threatened to call it in for review, the scheme sailed through planning and listed building consent in six weeks. But then the development hit a brick wall.

"We couldn't raise the private finance," recalls Smith. "Banks just will not fund true mixed use. They only like vertical slices of single use. So we ended up approaching a total of 82 banks over about nine months. English Partnerships was no help, either, in finding matching funding, even though they offered us a grant of £1.5m."

Eventually, a deal was struck with Charterhouse Bank, and Balfour Beatty started a £1.5m contract to refurbish the building shell last December. Conversion of the interiors is being carried out in phases by Graeme Ash Shopfitters of Gateshead, a firm with a flair for de luxe hardwood joinery.

In Smith's design, the new uses fit happily together within the cavernous shell of the Victorian building. Smith's offices are located in the heart of the building on the second floor, where daylight floods into the design studio through large sash windows and a continuous central skylight. The commercial offices are given pride of place behind the classical portico, where they include the double-height telegraph hall and command a front row view of the cathedral. The 12 luxury flats are stacked in four floors at the rear of the building, where they benefit from their own street frontage and address. The other uses are also in the rear of the building below and behind the flats, giving the restaurant a 30 m street frontage and corner entrance, and the art gallery north-facing windows that cut out sunlight and glare.

The parking and plant have been hidden out of the way in the basement.

Other than internal partitioning, services installation and fit-out, the original building shell remains relatively untouched. The main alteration has been to demolish two upper floors to create an open roof terrace alongside the architect's office, while giving the lower flats views across the site to the cathedral spire. "We chucked away 1200 m² of space," explains Smith cheerfully, "but we opened up the volume."

The other main alteration to the building shell was to extend the penthouse flats upwards by a storey. The upper storeys take the form of lightweight timber-framed pods bolted together on the existing flat roof behind the stone parapets.

Smith's junior partner, Andrew Clark, says the main challenge was one of layout design rather than construction. "The building is multilayered and multistacked, with the different uses crossing over both horizontally and vertically," he says. "This gave us problems when it came to providing means of escape and secure internal access to the basement car parking for all users. For instance, we had to thread a central fire escape from the front right through to the back on the ground floor. Luckily, the fire officer was fairly pragmatic and relaxed."

The fit-out is plush, with the accent on two-tone satin-finished joinery in cherry and maple veneers. Although not as voguish as the neo-industrial zinc and grit-blasted glass concoctions beloved of loft converters, this style is arguably more in keeping with the classically detailed sandstone building and its mahogany panelling. It is also slanted towards the commercial market within which Smith's practice has carved a prosperous niche, and the building doubles as a showcase for the practice's development and design skills.

One weak note in the architectural design is a forbidding entrance hall to the architectural offices above. It is an oblong windowless box with a cold polished granite floor, inhabited by a life-sized rough-hewn timber sculpture of Lindisfarne monks. The only way through to the offices is by a small lift and even smaller spiral staircase at the opposite end.

Entrance hall aside, Smith has good reason to be proud of his high-density, multiple-use building conversion. The completed scheme is identical to the initial scheme, he claims, with the only casualty being a fitness club planned for the basement, that was scuppered by difficulties in routing access and means of escape. Three of the flats were sold before they were finished, which, says Smith, "just doesn't happen in Newcastle".

And the first tenant for the commercial office space is expected to sign up within days.

Indeed, Smith is so proud of the scheme that he has renamed his own practice after it: Red Box Design Group. As for the Grainger Town Partnership, the city council-backed agency charged with regenerating central Newcastle, it is so impressed with Red Box that it has reconfigured the boundary of its designated area to include Red Box as its trophy urban renaissance scheme.

In the midst of success, however, one element of the funding process still rankles. Smith points out that a condition of the development grant from English Partnerships was that, should the property valuation of the completed scheme come in higher than planned – that is, if the scheme were more commercially successful than anticipated – then part of the grant must be paid back to English Partnerships.

"There should be a rollover culture," he argues, "in which surplus funds are put back into other similar developments. That would encourage those developers that are successful at difficult urban regeneration schemes."

Evidently, Smith has lost his dread of being a developer and is raring to reuse his newly learned mixed-use conversion skills.