East Devon college planned to let a Lidl superstore be built on land it owns in Tiverton. The sale would have funded a state-of-the-art business and enterprise centre.
But the project was thrown out by Mid Devon District Council who feared too much traffic would be generated by the plans.
The centre is seen by the college as a key educational development which would provide academic training and on-site business units to hone business skills in the area.
When the plan was announced in January, it had the backing of Tiverton town council.
College business development manager Rod Brookes said: "It is a setback but we will be looking at new ways to raise the money."
The college will appeal and is also applying to the South West Regional Development Agency for pound;1.2 million towards the project.