The District of Columbia and 26 states have been selected to take part in a $25-million project to build or rehabilitate community homes for chronically ill metal outpatients.

The pilot project is being funded by the U.S. Department of Housing and Urban Development [HUD]. Under the program, HUD will provide loans to private, nonprofit groups for 991/2 percent of the costs of renovating or constructing group homes or apartments. The homes and apartments must be used to permanently house adults who suffer from chronic mental problems.

"We'er going to be concentrating on placement slots for St. Elizabeths resident," said Albert P. Russo, director of the Department of Human Resources.

St. Elizabeths is the District's public mental hospital, which is administered by the U.S. Department of Health, Education and Welfare.

Russo said attempts also will be made to include mentally retarded residents from Forest Haven, the cityrun institution in Laurel, Md., in the program, providing federal officials interpret the project broadly enough to cover persons with multiple mental handicaps.

Joseph Davitt, grants manager for the D.C. Mental Health Administration, said contractors funded under the program will be given 30- to 40- year mortgages on the property. In addition, HUD will provide federal rent subsidies for every building it sponsors.

In the District, where the cost of purchasing or renovating housing can run $100,000 or more, Davitt said the program would allow a private contractor to purchase a $100,000 home by paying only half of one percent [or $500] of the cost of the housing.

He said the city hopes to develop space for 64 persons in group homes and apartment units through the project.

Under the HUD guidelines, the number of occupants in a group home would be limited to no more than 12 people. The number of occupants in an apartment complex would be limited to 20 persons per complex, according to the project guidelines.

If possible, however, Davitt said the city would like to limit the number of people who would live in a group home to eight.

To qualify for the project, applicants must submit detailed organizational plans that include a definition of the group to be served, an outline of program goals and planning, an assessment of community services available, staffing and budget requirements and zoning, licensing and community requirement needed to open the home.

On monday, from 9 a.m. to 10:30 a.m. city officials will meet to discuss the project with interested applicants. The meeting will be in Room 840A of the Mental Health Administration building, 1875 Connecticut Ave. NW. Applications are available in Room 819 of the MHA buildiing.

The deadline for applications is 5 p.m. Friday, Aug. 3. All proposals will be reviewed by District officals who will forward them to HUD on Aug. 17. HUD is expected to announce its final selections Sept. 21

The amount of money to be received by each state will be determined by the proposals HUD aproves from each state.

The pilot project was created by HUD in response to nationwide criticism involving mental patients who have been released from state hospitals to what federal mental health officials have described as isolated, unsafe rooming and boarding houses in the community.

In 1977, a General Accounting Office report criticized the hospitals for placing thousands of mental patients in such facilities without first creating adequate community support services, such as safe housing.

The consequences of such ill-planning were tragically illustrated in April when 10 elderly, mental outpatients from St Elizabeths Hospital died in a fire at a foster car home on Lamont Street NW.

The multi-story home had a city license to house 51 people even though it lacked a fire escape, smoke detectors or working fire extinguishers.

Following the Lamont Street fire, St Elizabeths officals called a 30-day halt to moving patients to community programs until city officials had a chance to inspect approximately 560 group homes -- many of them unlicensed -- for health and safety violations.