Mr Gill, 85, grew up with the heritage boat his grandfather helped build with a Ballarat boatmaker.

The paddle steamer was a feature on Lake Wendouree for many of its 121 years, and a group of volunteers was restoring it.

Hopes of a return to the water were ended abruptly when the shed it was in caught fire about 3am yesterday.

"It's just so sad," Mr Gill said.

"It's a tremendous loss - not only to the family - but also for Ballarat.

"It's unbelievable; the family's very broken up."

Mr Gill remembered working on the boat as a young man when his father, Douglas, ran the business.

"We grew up on the shores of the lake, just about lived at the lake," he said.

The Golden City's charm helped attract business and support the family for many years.

"It kept two houses going through the depression," Mr Gill said.

Feeling as though the boat was "like a member of the family", Mr Gill said he also felt for the volunteers who had put in so much time to restore the boat, only to see their dreams dashed as they were close to completion.

He said the "difficult and time-consuming" work of project leader George Brooks and the volunteers would have produced a "wonderful tourist attraction" when the Golden City returned to the lake.

"It was always the prettiest boat on the lake," he said.

"It was a beautiful sight. A replica could never replace the old one, but they will be able to build a nice boat just the same."

Golden City Paddle Steamer Museum Society president Bob Wuestewald said there had been nine people working on the project, along with others who had helped over the years.

The team worked an average 15 hours weekly, adding up to thousands of man-hours restoring the boat.

"All their effort and time is lost," he said.

"We started this project about two years ago, we were not far off from finishing.

"You can never replace it ... it was the last of 15 in a fleet that sailed on Lake Wendouree in the 1800s."