OAKLAND, N.J. (AP) — A state appellate court says New Jersey properly issued permits for a 204-unit housing development planned for an area that include drinking water sources for millions of state residents.

The ruling issued Friday is a setback for environmental groups who oppose the project. They are considering a possible appeal to the state Supreme Court.

A New York City-based developer plans to build the homes and townhouses on an 85-acre tract on High Mountain in Oakland. The site is in the 390,000-acre Highlands region in which most large, private development projects are barred.

A legal battle over the project ended when environmental officials issued permits for the project in January 2015. That prompted a lawsuit by the Highlands Coalition and the Sierra Club.