The Freeland Water and Sewer District has lost out on a $10 million federal grant to help fund a proposed sewer system in the South End’s main commercial hub.

U.S. Department of Agriculture Rural Development officials notified the district on Wednesday that there were so many projects in the country being considered that the agency ran out of money this year.

Sewer proponents in Freeland were counting on the grant to ease the local burden when it forms a local improvement district, or LID, to fund the proposed $33.8 million project.

“Grant funds had already been obligated to other national projects and were no longer available in this funding cycle,” a press release issued by the water and sewer district on Friday quoted Peter McMillin, USDA community programs director.

McMillin also said the agency was concerned that “not enough evidence of property owner support for the project existed to support the establishment of a local improvement district,” according to the press release.

However, McMillin also said the project was a good one, and encouraged Freeland backers to continue to form an LID and to reapply next year, when more grants and loans will be available.

Loss of the grant means that the full project cost would have to be repaid by the property owners through a loan, which local backers believe is too risky, Chet Ross, president of the Greater Freeland Chamber of Commerce and one of the principle proponents of the sewer project, said Friday.

Ross said sewer supporters would continue their push to form an LID while searching for other sources of funding. He said ongoing community meetings would continue, as would the required analysis for forming an LID.

Ross said groundwork for the LID will take at least 90 days, and that backers wouldn’t be ready to move forward to form a LID until January at the earliest.

“Then we’ll have a better idea of what we have to do as far as costing goes, and what we have to have in terms of a grant to make it feasible for the community,” Ross said.

In July, sewer proponents said that with a $10 million grant from USDA, Freeland homeowners could expect to pay between $12,900 and $18,400 to hook up to a new sewer system.

That’s on top of an estimated $10,500 that homeowners may face to remove an existing septic tank.

Without the USDA grant, the cost to residents would increase.

“We’re disappointed,” Ross said Friday. “We had met everything the USDA asked of us.”

The district had been in pursuit of the USDA grant for at least a year, and had submitted numerous updates and revisions.

Ross said that that work won’t be lost, and that much of it would have had to be done anyway.

Backers for years have pushed for a sewer system in the South End’s major commercial area to help clean up Holmes Harbor and as a prerequisite for incorporation.

County planners expect the population of the Freeland area to grow to approximately 4,000 by the year 2020, with the bulk of new residents being retirees from the Seattle area.

Ross said proponents of a sewer system will continue to push for the project.

“We’ll keep doing what we’ve been doing, and see what shakes out,” Ross said.