The council is preparing to write off a debt of more than £51 million owed by the i360.
The move is aimed at clearing the way for a bidder to buy the viewing tower on Brighton seafront and reopen it.
The administrators of the i360 said that it would not be possible to sell the tourist attraction unless Brighton and Hove City Council writes off the money owed.
The council’s cabinet is expected to agree to wipe out the debt at a meeting next Thursday (23 January) but to ask for a percentage of future revenues.
A report to the cabinet said: “It is a condition of the preferred bidder’s offer that the assets they acquire are unencumbered.
“The city council retains the ability to decline releasing security on its loan if it does not feel this is the best offer available.
“This, however, would have the effect of making the asset unsellable and would result in blight on the seafront.”
The Labour cabinet also plans “to commission an external independent investigation to understand the circumstances of and lessons from the council’s original decision to loan public money to deliver the Brighton i360”.
Although the sum to be written off is more than £51 million, the amount that the council must repay to the government by 2041 is smaller.
The council brokered the loan from the Public Works Loan Board – and still owes £32 million or about £2.2 million a year over the next 16 years.
Despite hopes of a revenue-sharing arrangement, the council’s financial plans do not include any potential payments from the potential future operator.
The report to cabinet said that the directors of i360 Brighton Limited would “not benefit from the transaction”.
It added: “Shareholders have sunk equity and loans into the attraction that they will not recover.”
Three rounds of marketing have taken place. Two unnamed bidders have been in talks with the administrators but the debt is the stumbling block.
The report to the cabinet said: “The (preferred bidder) has been able to offer more assurance than the second bidder about their plans for the attraction, their experience of running large-scale leisure attractions and have more financial backing.
“This all assures the council that they are more likely to keep the attraction running, which is important given its prominent location on Brighton seafront, the employment involved and the impact on surrounding businesses.”
The administrators, Stephen Absolom and William Wright, both from specialist firm Interpath, took over the site on Friday 20 December and closed the business, with more than 100 staff losing their jobs.
The cabinet is due to meet at Hove Town Hall at 4.30pm next Thursday (23 January). The meeting is scheduled to be webcast on the council’s website.