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Molalla City Council took a gamble in December when it approved the waiver of up to $1 million in system development charges to lure potential developers.

Now, two Molalla development partners plan to take all of that money.

Karl Ivanov of I & E Construction and Troy Vest of Troy’s Diesel & Truck Repair Service plan to build a new 160-unit apartment complex with ground-floor retail in downtown Molalla. They will have to pay only $400,000 in SDCs instead of the usual $1.4 million.

“I think we have achieved what we set out to do,” said Molalla city manager John Atkins Jr., who came up with the SDC waiver plan. “We’ve attracted interest, which has led to a live applicant who will put residents into our downtown core.”

The partners recently developed and completely leased out the Stoneplace Apartments in Molalla. For the new project, Vest would provide 8.5 acres of land in downtown Molalla and Ivanov would build the project.

Vest several years ago purchased 8.5 acres of land near downtown Molalla with the hope of one day developing the land into a light industrial business park. But nothing moved forward.

“Getting the best return for the dollar on the land makes it tough,” Vest said. “If we built up a light industrial area like the property is zoned for, I don’t think we could fill it. We looked at apartments two and a half years ago, but the total cost of the project versus what it was worth didn’t equal out.”

Then the city announced its offer to waive up to $1 million in system development charges.

“With the SDC waiver on the table, it just made sense,” Ivanov said.

Vest said the SDC waiver allows the project to pencil out, but just barely. As the project moved into the design phase, Vest discovered that construction of two new city streets and 3,330 feet of street improvements would be necessary. Such work added cost to the estimated $10 million project. The team also is responsible for $400,000 in SDCs as well as $530,000 in additional city fees.

“We’re very close, but we’re still working on the numbers,” Vest said. “We do want to move forward, but it still needs to be economically and physically possible.”

To close the gap, Ivanov and Vest are hoping to pre-lease some of the mixed-use project’s retail spaces. Vest would like it to be entirely pre-leased before construction begins, but added that even if 30 percent of the space were pre-leased, the project could move ahead quicker.

“We’ve had a potential lessee contact the city and it looks promising,” Vest said. “I would think that retailers would want to be downtown, especially with the apartments being so close.”

There is presently little housing in downtown Molalla, according to Atkins, but residents have expressed interest in living closer to the city’s core. If the apartment building is constructed, Atkins said, the influx of retailers and increased foot traffic could help lure new businesses and services to downtown.

Atkins acknowledged that some residents weren’t happy that the entire SDC pot will go to one project.

“There are folks who are disappointed,” Atkins said. “But that was the rule. Unless this project is withdrawn or scaled down, we’re going to provide that $1 million. It’s first come, first serve.”

Ivanov expects to submit a final application to the city this week for the SDC funds. That application will then be reviewed by the city’s planning commission. If the developers receive approval, they would then have 180 days to start construction as per the SDC waiver rules. If the application is denied, the $1 million in SDCs will be on the table until Dec. 31.