The jury in the first trial failed to reach a verdict and Coley was convicted following a retrial and sentenced to life in prison without parole.
Coley's fight to overturn the verdict was aided by Mike Bender, a police detective in Simi Valley, California, who expressed concerns about the case as far back as 1989.
Gradually a raft of inconsistencies in the prosecution case emerged. One witness timed the commotion in the apartment as taking place when Cole had a cast-iron alibi.
It was also established that the witness who said she saw Coley's truck could not have had a clear view of the vehicle from her window.
Conclusive proof of his innocence was provided when long-forgotten DNA evidence taken at the crime scene was found in storage and re-examined.
None of the DNA matched that of Coley.
Coley, who had no previous convictions, was described as a model prisoner studying for a bachelor's degree during his incarceration.
The compensation will be paid by the city of Simi Valley.
"While no amount of money can make up for what happened to Mr Coley, settling this case is the right thing to do for Mr Coley and our community," said Simi Valley City Manager, Eric Levitt.
"The monetary cost of going to trial would be astronomical and it would be irresponsible for us to move forward in that direction."