He was keen to see it modelled on the Mauao agreement.
He said the land to be transferred would become a reserve, with access guaranteed to harbour navigational aids and public access to parts of the land.
"Much of Panepane is plantation forest, so was currently inaccessible to the public."
Mr Paterson said the process would take about two years, starting with drafting a memorandum of understanding between the council and tangata whenua.
"The wider community will be invited to offer feedback."
Looking at Panepane in the wider context of Treaty settlements in Tauranga Moana, he said it signalled a new era in partnering with tangata whenua.
A few days after the council's December 17 confidential decision, representatives of the island's five hapu decided by a vote of 25-4 to form a legal body to take ownership of Panepane.
Hauata Palmer, an elder of the island's Ngai Tuwhiwhia hapu, said most of the 200ha had not been used for the purpose it was taken for under the Public Works Act in 1923, with only a small area needed for the navigational lights and beacon.
Whatever options were decided by the hapu group to fund maintenance of the Maori Reserve, the aim would be to preserve the character of the area. Most of the land was leased to a forestry company.
Ngai Te Rangi iwi chairman Charlie Tawhiao said the decision was good news. He was impressed by the courage of the council to get to this point in an election year. "They are making decisions on matters of principle rather than political mileage."
Mr Tawhiao said it had been wrong for the land to be taken unilaterally for one purpose and then to be used for another purpose without offering it back to the original Maori owners first.
He said the return would be a "bumpy ride" through the public consultation process because a lot of people would need to be convinced about the facts and legal implications of land taken under the Public Works Act.
Mr Tawhiao said the intention was to retain as much of the land in its current state for as long as possible. "Only island people will fight for the retention of the character of the island."
Katikati/Waihi Beach councillor Mike Williams said there was a huge amount of work and consultation to be done before a final decision was made.
"Some people will say 'absolutely no way', but they said that about Mauao as well, and look how that turned out."
Matakana Island:
* Permanent population: 225 people
* Hapu: Ngai Tuwhiwhia, Ngai Tamawhariua, Te Whanau a Tauwhao, Te Ngare, Ngati Tauaiti
* Employment: Mostly agriculture, horticulture and forestry
