The Folger Library, which this week gave a two-year reprieve to the Folger Theatre, owns potentially valuable rental properties on Capitol Hill that are unoccupied and in some cases deteriorating. The library says it would cost $1.5 million to rehabilitate them.

There is no connection between the property expenses and the attempt to close the theater, according to Robert J. McKean, a trustee of Amherst College, which administers the library. Six weeks ago, library director Werner L. Gundersheimer announced that the theater would close at the end of June because the annual theater deficits (which have ranged from $40,968 to $493,000 and averaged $150,000 a year over 15 years) were too high and too unpredictable for the library's budget.

Yesterday Gundersheimer said the library would contribute $300,000 over the next two years to the theater, and take steps to make it financially independent of the library.

McKean said the deteriorating properties had been a problem for "maybe eight or nine years," but hadn't been dealt with because the library had other priorities, such as the $8.5 million addition completed in 1983 that was financed through a building fund campaign.

"There are only so many dollars to go around," McKean said. "Quite a few of them have been pumped into that theater. There have been all kinds of hard choices to make, all of them no fun."

Gundersheimer said yesterday that the buildings, located opposite the library on Third and East Capitol streets SE, are empty because they do not meet D.C. housing code standards. The trustees decided last fall to empty them while deciding their future, he added. McKean said he hoped to convene the Amherst Board of Trustees' properties and building subcommittee before the April meeting of the trustees to discuss the problem.

"It's a tremendous potential asset that is a considerable current liability," Gundersheimer said yesterday. "The challenge we face is to turn that liability into an asset." He said that the library needs money for increasing staff salaries (which are about $10,000 and are blamed for a 30 percent annual staff turnover), acquisitions and research fellowships.

The trustees do not intend to sell the buildings, Gundersheimer said, but want to keep them primarily residential -- some used by the library for offices and scholars' housing, and others rented at competitive rates. Rents for one-bedroom apartments on Capitol Hill are generally about $450 to $650, depending on size and condition; scarcer two-bedroom units may rent for up to $1,000. The Folger now charges less than $300 for its apartments, and $28 per day for the guest rooms.

There are other financial problems with the properties. According to city tax records, the library owes more than $107,000 in taxes for 1984 on the 13 properties, which include the building the Folger Theatre uses for offices and its costume shop. Library business manager Richard Goodman said the library has applied for an exemption as a nonprofit institution for 11 of the properties, and has paid the tax -- more than $8,700 -- on two others. He said the library will pay the remaining taxes, plus interest and penalties, if the exemption is denied. The main library building, assessed by the city at $7.7 million, is tax-exempt because the institution itself is nonprofit and educational.

Goodman said the library spent $150,000 on the buildings last year for routine maintenance. Goodman has not calculated potential lost revenue on the empty buildings; McKean said the rents were so low "it's not any great loss."

One property, an apartment building at 12 Third St. SE, is the subject of a case currently under appeal with the Rental Housing Commission. The Folger has submitted a "hardship petition" under the rent control laws to increase the rent of the only full-time tenant in the building, David Cooper, from $240 to $1,000 a month. Cooper has contested the proposed increase.

The largest Folger-owned building is at 311 East Capitol St. SE, where only one tenant remains in a 13-unit building that used to house several actors from the Folger theater company. The tenant is Judy Edelhoff, who has lived there with her daughter since 1979, when she worked for the library. She left the library a year ago, when it discontinued the catalogue sales department, which she ran, and now works at the National Archives. Her two-bedroom apartment costs $230 a month.

Edelhoff said she had received a letter late last summer asking her to leave, but she had not responded. Since then, she said, she has been "harassed" by phone calls, unscheduled visits by trustees when she was not there, a lack of heat or hot water for several weeks this winter and frozen pipes. She has been offered a $1,000-a-month, one-bedroom apartment, she said, and the Folger offered to subsidize it for a year if she relinquished all "rehabitation" rights. "It was absurd," she said. "A one-bedroom apartment isn't suitable, and I couldn't begin to afford $1,000 a month."

Goodman said he offered a cash payment equal to about $9,000, or the amount the library would have subsidized the $1,000 apartment, if Edelhoff had moved and relinquished her rights to move back after the building was renovated. He said Edelhoff has ignored his letters and his efforts to repair a smoke alarm in her apartment.

A two-unit town house at 10 Third St. SE, which could rent for at least $1,500 a month, has also been vacant since August. Neal Manne, who rented the upper two floors of the house, said the library's request that he vacate the property coincided with his wish to buy a house, so he agreed to leave. When Manne left he was paying $808 a month plus utilities.

"Most of this renovation work involves plaster damage, and it is easier and more efficient to vacate the properties while the work is done so that people's possessions aren't soiled," Goodman said.

The unit Manne lived in is in good shape, but the basement apartment has water damage that could have affected the electrical system, according to Goodman, who showed a reporter the properties yesterday.

Another town house, at 18 Third St. SE, was rehabilitated years ago to house the library director and his family, but has been vacant since former director O.B. Hardison moved out last year. Gundersheimer, who was appointed last July after serving 12 years as a professor of history at the University of Pennsylvania, chose not to live in the house.

"My wife is an artist and illustrator of children's books," he said. "And she needs studio space. Also, we wanted to live in a place where we'd have permanent neighbors on either side." The director's house is between two Folger-owned houses used for visiting scholars. Gundersheimer, who has two sons in college, said he looked for a house on Capitol Hill but finally settled on a place in the Woodley-Cathedral area. He is living in another Folger-owned apartment until his house is ready.

A 12-room town house at 313 East Capitol St. SE has been vacant for several years. It is leaky and needs extensive plaster work. The house is now being used for costume storage for the theater.

Two buildings, at 16 and 20 Third St. SE, are being used to house scholars; the four apartments at 14 Third St. SE are occupied -- one by a theater employe, another by a library employe. Another Folger-owned building at 22 Third St. SE is in the third year of a five-year lease to Appalachian State University, which uses it to house professors and graduate students.

David Cooper, who has lived at 12 Third St. SE since 1977, contends that it is unfair for the library to claim hardship while leaving other apartments in his building empty. A central issue concerns the number of units in the building, which in turn affects the validity of the Certificate of Occupancy (currently for three units), and the potential income the library has from renting them.

Cooper claims there are now six apartments in the building because the renovated third floor has been divided into four separate units with a common kitchen. A visit showed that each room on the third floor has a lock. A sole short-term tenant has been living on the third floor, paying $150 a month; another moved in this week.

Hearing examiner Carl Bradford has twice ruled that the house contains only three units. "It doesn't matter how we divide one floor," said Goodman.

Cooper said that when he moved in, "my apartment was in terrible shape -- the floors were a wreck, plaster was falling down, the refrigerator was an old gas one -- and I spent a lot of time and money fixing it up. In return, the rent was cheap."

Cooper said he does not object to paying more rent, but he and Goodman clashed on the length of the lease and the rate at which the rent would escalate. He claimed the library has spent more on legal fees than it can ever hope to make from his rent. Goodman said the fees were a necessary expense because under the current rent control laws the library cannot raise other rents until the Cooper matter is resolved.

The library was founded in 1930 by Henry Clay Folger to house his collection of Shakespeare First Folios and rare books, and to increase knowledge of the Bard. Folger, the first president of Standard Oil, spent so much cash on his book collection that he didn't feel able to buy a house until he was over 70.

He died two weeks after the cornerstone of the library was laid, leaving his estate to his alma mater, Amherst. Since Folger's death the collection of books has tripled and the activities of the library have mushroomed. Once a lonely haven for a few scholars, the reading room was used by 825 people last year, and is considered one of the preeminent research facilities in the field.

Shakespeare accounts for only 15 percent of the research, which now encompasses the entire Renaissance, the Reformation, intellectual history, literature and a wealth of other subjects. There is also a collection of paintings, sculpture, theater costumes and playbills, films, music and what Gundersheimer called "tsatskes." The library also has a conservationist who preserves the rare books with state-of-the-art techniques.

There is currently no money for resident scholars, but Gundersheimer said he has recently gotten pledges to fund two. Another $175,000 endowment will finance short-term fellowships this summer.

There are also public programs, including poetry readings, lectures, seminars on Shakespeare for English teachers, a recitation contest for junior high and high school students, concerts and a community celebration of the Bard's birthday that attracted 3,000 people last year.

A reader must produce references before being allowed to use the reading room, which is wood paneled in the style of the great English colleges. Tea is served every afternoon by uniformed maids. "You may think that's just quaint," said a spokeswoman, Alexandra Acosta. "But that's where some of the best ideas get talked about."