A project to redevelop the Keddy Mill site, seen as a key factor in the revitalization of South Windham, will not proceed as planned, the developer said Tuesday, citing unforeseen engineering costs and the faltering real estate market.

Stephen Etzel, vice president of Hudson Realty Capital, which owns the site, told the Town Council Tuesday that demolishing the old mill and building 85 condominiums, as originally planned, would cost much more than expected due to faulty soil and the challenges of removing the mill’s western wall, which sits in the water. Coupled with falling real estate prices, Etzel said, the rising costs make the project financially unfeasible unless changes are made.

“The economics are so off that we will not be going forward with this project (as it is currently designed),” said Etzel.

Etzel said he hopes for a “complete restart” on the project so that community leaders, residents and others interested in the revitalization of South Windham can help decide in what direction to take the mill site development. At the order of the council, Etzel and Town Manager Tony Plante will in the next week set a date for a public forum on the issue.

The meeting with Etzel was of keen interest to the councilors, some of whom were clearly frustrated with the lack of progress at the site, which was approved as Windham’s only contract zone in 2005, opening the way for residential development. Since then, part of the parcel was sold to nonprofit Avesta housing, which constructed senior housing on the site.

Under the original plan, the mill was supposed to be demolished and the housing units built by this time, Councilor Blaine Davis said. In that time, the area has experienced both the best and worst of real estate markets, said Davis, questioning just when the company would start work at Little Falls.

Councilor Donna Chapman also sharply questioned Etzel on his company’s plans, asking if they had exhausted all avenues for funding, and if they were still prepared to develop the area. The mill project is central to the redevelopment of South Windham Village, and something has to be done soon, she said.

“It really is an eyesore over there,” said Chapman.

South Windham residents, too, are eager to see progress at the site. Carl Freeman, a resident of the Avesta senior housing unit, known as Little Falls Landing, said it feels like the project at the mill has dragged on.

“I’d like to see it torn down. Everyone here would,” said Freeman.

Deb Keller, director of development for Avesta Housing, said the Little Falls neighborhood is a great one, and would only benefit from development at the mill.

“We continue to be hopeful and excited to see another addition to the Keddy Mill site,” she said.

The delays, while frustrating to some, were unavoidable, Etzel said. The full extent of the challenges at the site, which include the need for soil “pre-loading”, in which material is placed on top of the site to settle the soil and combat unstable soil in part of the site, as well as the construction of a 28-foot retaining wall to take down part of the mill, were only discovered in the final phases of engineering, Etzel said. Hudson Realty was waiting for the results of cost estimates and structural tests before updating the council, he said.

Also, because of the contamination of the site – asbestos, petroleum and other contaminants would have to be cleaned up immediately after demolition – and its proximity to the water and a hydroelectric dam, the project has to be done all at once, meaning Hudson Realty could not start one phase without knowing if it would continue immediately, Etzel said.

Outside funding, such as federal grants, have been pursued, though unsuccessfully so far, Etzel said. The town is waiting to hear this month on a federal Brownfield grant that may help Windham figure out how to handle sites like Keddy Mill, Plante said. Hudson Realty has put around $1 million into the project, Etzel said.

“As a company, we stay absolutely committed to revitalizing this site,” he told councilors.

The soil issues mean that 22 units in the original plan would require a piling system, at around $30,000 per unit, Etzel said. The retaining wall would cost around $1 million. In all, the project would likely cost around $18.5 million, with a return at prevailing real estate prices of $13-14 million, he said.

Adding 50 percent more units would help close that gap, Etzel told the council, but such a high density plan is unlikely to be welcomed by town planners or residents.

A better fit, he said, would be a plan that moves the 22 units in question so they do not need the expensive piling system. Also, a new plan may mean the part of the mill that is costly to remove stays put, erasing that part of the project’s price tag. The new plan, which could be put together in as little as six months, could include commercial space, parks or anything else that is thought up by the public and found to be feasible, Etzel said.

“There are possibilities there,” he said.

A project slated to demolish the Keddy Mill in South Windham and erect condominiums is on hold, and the developer wants input from residents before moving forward with a new plan.