The St. Paul Port Authority has agreed to a tentative settlement that will end a five-year fight with investors over a busted development fund, according to a statement from the agency Tuesday.

The 2,600 bondholders in the so-called 876 Fund will continue to receive tax-exempt interest payments on their investments until 2032, an extension of 26 years from 2006, when the Port Authority sought to cash out the bonds at a discount.

Port Authority President Louis Jambois said the settlement is good for bondholders and the city. "Litigation with no end in sight is a distraction from our mission at the port authority to create quality job opportunities, expand the tax base and advance sustainable development," he said in a prepared statement.

As part of the settlement, the Port Authority will release $22 million in escrow, half of which will be used to pay past and current interest up to Dec. 1. The escrow also will cover approximately $2.2 million in legal fees and related expenses for the bondholders.

The remaining escrow will be used for a Dutch auction that allows bondholders who would prefer to take cash to sell their bonds.

Attorney Keith Broady, of Lommen Abdo law firm in Minneapolis, sued on behalf of bondholders who owned $20 million of the $51 million in principal remaining. "Both the short-term and long-term returns on the 876 bonds will be substantially better than if the Port Authority had cashed out in 2006," he said.

Ramsey County District Judge Robert Awsumb must sign off on the settlement before it is final. He has scheduled a hearing Thursday and a final session Oct. 27.

The Port Authority issued about $429 million in development bonds between 1974 and 1991 that paid for 139 projects, including warehouses and industrial parks designed to broaden the tax base. But more than 60 percent of the value of those projects evaporated in the real estate bust of the late 1980s.

In 1991, the Port Authority realized the 876 Fund wouldn't be able to generate enough money to pay back investors. The last of the bonds was to mature in 2022. The Port Authority retired $123.8 million in principal through three earlier buybacks in which bondholders received a percentage of what they originally were owed.

The authority now will make interest payments through Sept. 1, 2032.

The bonds were backed by project revenues, such as leases and tonnage fees from river shipping, not St. Paul property taxes.

Rochelle Olson • 651-925-5035 Twitter: @rochelleolson