A year ago Varndean College in Brighton staged a public exhibition of plans to develop the campus. The sixth-form college aimed to expand and improve buildings to accommodate large numbers coming to the college from city secondaries in 2003 and 2004.
A year on, it has had to shelve plans to expand and scale down the refurbishment.
Principal Alan Jenkins said: "We are one of the most overcrowded colleges in the country." He added that significant parts of the college need repairs and updating.
The pound;5 million development hinged on selling part of its playing fields for housing and this angered the local community. The college claimed it had no choice as it could only get 35 per cent of the cash it needed from the Government.
Planning officers recommended the application be refused and the college withdrew its bid.
The case has much wider implications.It highlights criticism of the capital funding system which puts pressure on general FE and sixth-form colleges to sell assets to improve their campuses.
Ministers appear to be heeding the messages of the Varndean case. Margaret Hodge, minister for lifelong learning and higher education, hinted at more flexibility in capital funding in certain cases.
"That response would be based on the strategic need of the project, and the ability of the college to find contributory funding," she wrote to Brighton MP David Lepper earlier this year.
She said that the Learning and Skills Council had already changed its arrangements for 2002-3, which allowed maximum funding for general projects to rise from 35 per cent to 50 per cent - and in some special categories, 100 per cent.
However, this sounds much more generous than the latest announcement on capital funding from the LSC itself. It says a 35 per cent grant towards project costs "should still be regarded usually as a maximum and a lower grant may be offered if appropriate".
The LSC says "in very exceptional circumstances" additional funds may be available for certain kinds of capital project, for example providing accommodation for a centre of vocational excellence, or to address the Government's 14 to 19 agenda.
An LSC spokesman said: "It might be as high as 50 per cent if circumstances demand it, and in theory it could be more than that."
Since new legislation in 1998, local authorities and schools in England need permission from the Education Secretary before they can sell off any school playing fields.
Disposal of property by FE colleges is subject to the LSC's agreement and proceeds being reinvested into FE.
After the Varndean College case, the Department for Education and Skills asked the LSC to take the issue of community use into account when considering a sale. The LSC has now tightened guidelines for college playing field sales..
FE and sixth-form colleges now have to prove they have fully consulted local groups and that they have local support for sell-offs.
The capital funding gap remains a serious issue - particularly for colleges which don't have valuable land to sell, or in parts of the UK where land has comparatively little value.
"There are those without land, without assets, who just need a bit of help," says Martin Pritchett, the Association of Colleges' director of estates. "It is invariably the sixth-form college sector, the small scale colleges perhaps, which have great trouble. They haven't got enough land or have sold off too much already. Whatever the case may be, they haven't got those assets to dispose of."
Alan Jenkins, principal of Varndean College, welcomes greater funding flexibility, but says it does not go far enough.
"I don't think it will mean an end of colleges like ourselves having to consider disposal of assets to realise the full funding package.
"I think all of us would say that approved schemes should ideally attract 100 per cent funding. But I don't think any of us are naive enough to expect that to happen."