Windsor House Hotel was sold off in September last year after 50 years in business.
Adur and Worthing Councils is now considering signing an agreement for up to ten years with Sussex-based housing company SDR Group for the former hotel to be used as emergency accommodation.
The hotel, in Windsor Road, Worthing, was bought by SDR Group and would involve the company managing the building with up to 44 local homeless residents staying there in individual rooms while long-term accommodation is found for them.
A spokesman for the council said: “We have a responsibility under the Housing Act to find somewhere for homeless residents to stay.
“We’re currently working with partners to create new self-contained flats for use as temporary accommodation, including on the site of the former RAF air cadets base in Victoria Road, Worthing, but these homes will take time to be made ready.
“In the meantime we’re currently having to support more than 200 people in emergency accommodation, but a lack of such property in the area means many of those residents are having to be put up in B&Bs, in some cases at more than £90 per person per night.
“The shortage of properties means some members of the community are having to be housed outside the borough, and sometimes outside Sussex, which affects their ability to work, their children’s education and their mental health.
“We estimate that the arrangement with SDR Group could reduce our bill for emergency accommodation over the next 10 years by £2.5m.
“If the plan to work with SDR Group goes ahead, the company would have to first secure planning permission before the hotel could be used as emergency accommodation.”
The decision to enter into the agreement will be discussed at a meeting at the council’s joint overview and scrutiny sommittee at The Shoreham Centre from 6.30pm on Tuesday, July 23.