A tentative settlement in Dan McClary’s lawsuit against Water District 19 has been reached, giving the Federal Way developer permission to build a smaller version of his proposed motel but requiring that he undertake several water-conservation measures.

The out-of-court agreement, signed by all parties but not yet codified as a legal document, also awards McClary $275,000 in partial payment of his legal fees, a cost that will be covered by the district’s insurance; requires that his eight buildings at Vashon Village be reconfigured into four; and calls for covenants to ensure he doesn’t lease space to high water-using tenants such as a restaurant or a day-care center.

Both sides said they were glad to have the dispute — slated to head to trial this week — behind them. Had it gone to trial, several Islanders could have been called to testify in a legal squabble that would have likely garnered considerable attention and provided a window into some of the Island’s long-simmering disputes over growth, development and water.

“The tentative settlement is hugely significant in that we’ve been spending hundreds of hours on this,” said Frank Jackson, who chairs the three-member volunteer commission that oversees the water utility. “We’re looking forward to a final settlement.”

“It’s over and done. I’m happy, and I’m trying to get my life back together,” McClary said.

McClary, a Federal Way developer who owns Vashon Village on the north end of town, had gone to the small Island utility more than two years ago seeking a certificate of water availability to build a 24-room inn replete with an in-house laundry, maids’ quarters and a conference area that legal documents at one point said could total 10,000 square feet. Such a certificate is needed before a developer can apply for a building permit.

To facilitate his request, McClary asked that the eight water shares he has for the eight buildings currently in place at the 4.5-acre business park be reconfigured, so that one water share or meter served the eight buildings and the seven additional shares went to support his proposed motel.

The district balked, saying that McClary’s requested reconfiguration of water shares — one of the most unusual requests it had received in years — went against its long-standing policy that only one meter or share could serve one building. The district, which has had a moratorium on new water shares in place for more than a decade, feared that granting McClary’s request could open the door to other petitions, putting even more pressure on a district that it is already struggling to serve its customers during peak summertime demand.

In June 2007, McClary sued the district, seeking his certificate of water availability as well as $1.2 million in damages.

Under the tentative settlement, McClary will be given the green light to build a 16-room motel with 720 square feet for a conference center, pending building permits from the county. The inn will not be allowed to have a restaurant, pool, Jacuzzi or laundry and will have to be fitted with ultra-low flow water fixtures, according to a four-page settlement letter signed by both parties. Landscaping will also need to incorporate the latest in water conservation features.

The letter also says the eight buildings at Vashon Village will have to be reconfigured into four, as defined by county code; McClary said it’s possible he could do that by using breezeways or some other artful, architectural connection.

“I think it can be done very tastefully,” he said.

The district’s three commissioners said the agreement is significant because it upholds the principle by which the district makes its decisions over water shares. McClary had argued that under District 19 policy, he was allocated a certain amount of water — 800 gallons per day — and that because his tenants used far below that amount he should be able to rearrange his water shares in a way that enabled him to have his full “allocation.” The district, however, argued that the 800 gallon figure was a number it used for planning purposes — not an allocation — and that McClary was actually using a novel theory to jump ahead of more than 100 people on its waiting list for water shares.

Jackson said he was glad to have the district’s principle upheld. “It’s an industry standard to have one meter per commercial building,” he said.

“We believe and our lawyers believe that what we’re approving conforms with our 30 years of policy,” added Steve Haworth, another commissioner. “The bottom line is that it’ll be four buildings using four water shares.”

All three commissioners — the third is Richard Bard — said they’d likely have more to say once the settlement is filed as a legal court document, adding they didn’t want to make any comments that could jeopardize the situation.

But Bard said a particularly difficult piece in the negotiation was the payment to McClary — an item in the settlement proposal that the three commissioners initially opposed. The commissioners reconsidered that issue, however, after the insurance company “that backs up the district’s risk pool strongly pressed us to go along with it, due in large part to the cost of pursuing the case through trial,” Bard said in an e-mail. As a result, they voted again on the issue and agreed to the proposed settlement, although this time with Bard abstaining.

“It represented my ambivalence toward the settlement,” Bard said in explanation of his vote. “As much as I see the practicality of this financial component, I still don’t like it.”

As for McClary, he said he doesn’t know when he might move forward on his long-sought motel.

“Right now, I’m going to hold off a little bit, with the way the economy is,” he said. “The last thing I want is an empty building.”

But he said he fully sees himself embarking on plans for the project sometime in the next year or two.

“In the meantime, Vashon Village is full and with a waiting list,” he said. “I’m just going to revel in that for a little bit.”