Car dealership tycoon Archie MacLean can now begin work to turn the Stockbridge landmark into an upmarket restaurant and bar with accommodation.
The decaying B-listed landmark has lain empty for eight years, with several previous proposals to revamp the Georgian structure having fallen through.
Council planning officials had urged councillors to refuse the bid, which would see a modern extension added to the rear of the Raeburn Place property.
They claimed the materials were “crude and not of the quality required for Georgian listed buildings in Edinburgh” and the development had been threatened.
Councillors said they were not prepared to refuse the bid only for the building to lie empty and become at risk of structural damage, although five of the 12 opposed the decision.
Mr MacLean, who made his fortune with the Borders Motor Group and paid £1.5 million for the property, narrowly outbid JD Wetherspoon, which was interested in turning the former hotel into a discount chain pub.
He joined with local councillors supportive of the scheme to collect 7601 signatures calling for the Raeburn to be redeveloped.
Mr MacLean said he hoped work would begin by July and last around 15 months, with the boutique hotel opening in September 2013.
He said: “We are delighted and do appreciate all the support local people have given – they have been terrific.
“It’s been a difficult four or five months and there was concern we were not going to get there. I think from a common-sense point of view it’s the right decision.
“We had the support of the community council, four councillors, and almost 100 per cent of business.”
Stockbridge and Inverleith Community Council chairman Nigel Bagshaw said the decision would benefit the area.
He said: “We supported it because we asked for local views and I don’t think we received a single objection. It was pretty clear cut and our job is to represent the views of the local people. So we wrote a letter of support explaining the position locally, which seems to have helped.
“The building is in a bad state of decay and needs attention. We would be pleased to see local jobs being created there and it should be a boost to Stockbridge as a whole.”
Stockbridge councillor Tim McKay, who also sits on the planning committee, added: “If you look at it just now it’s an absolute midden.”
Former council leader Eric Milligan, also a member of the planning committee, said he could remember attempts to redevelop and extend the Raeburn stretching back to “before the millennium”.
He added: “Here we are in 2012 and we’re still agonising over this.”
At one stage pub tycoon Kenny Waugh, of Festival Inns, had intended to transform the site into a £15m hotel and rugby clubhouse for Edinburgh Accies, although the bid collapsed.
As the Evening News told earlier this month, the club now intend to transform their under-used site into a mini stadium for 5000 spectators.