A Fairfax County government authority helped finance what its owners call "the biggest retail furniture store in the metropolitan area" even though Virginia law expressly bars the agency from arranging such transactions for retailers.

The controversial action, by the Fairfax County Economic Development Authority, resulted in a $1 million saving for the Marlo Furniture Co. chain, allowing it to finance construction of the huge furniture store with the proceeds of a $5.8 million county-sanctioned, low-interest loan.

It has troubled both state officials and Northern Virginia legislators as an example of the freedom with which local development authorities are dispensing low-interest loans. "We're going around the state telling local authorities, 'Go slow, or you're going to kill the goose that laid the golden egg,'" says William C. Sims, a high official in the Virginia's industrial development agency.

The loans were created by Congress as a device to spur industrialization in economically depressed areas, but in Virginia they've been used for everything from supermarkets to race car tracks, and golf courses.

Thanks to the Fairfax authority's action, the Marlo chain was able to obtain an interest rate of 6 1/4 percent on money it borrowed for its new building. The reason: The interest the lenders make from the loan is exempt from both federal and state income taxes. That enables a bank to offer such a loan at rates well below the prevailing commercial rate and still make a profit on the transaction.

Banking officials have said that such "tax-free" loans typically are offered at discounts of 2 to 5 percent under prevailing rates. Marlo saved $1 million on its 20-year loan of $5.8 million, thanks to a spread of two percent that was prevalent at the time it arranged its financing.

Officials of the Fairfax authority have defended their action, saying they had accepted Marlo's calculations that retail operations would take up only 15.7 percent of the 200,000-square-foot building, located off Shirley Highway near the Capital Beltway.

The financing arrangement has troubled some of the region's legislators who approved the law creating the development authority. State Sen. Adelard L. Brault, dean of the Northern Virginia delegations, calls the Marlo financing "contrary to the intent of the law. The intent of the law was to keep bonds from being used for retail stores."

Since Virginia law permits the authority to assist projects that have "incidental retail functions, the authority board believed Marlo met the state standard. What the authority chose to gloss over was how Marlo had arrived at that precentage.

Marlo reached its percentage by counting the library-like stacks used to store furniture as part of the building's square footage. When the stacks are excluded, the building's 346 furniture showrooms account for almost 48 percent of its floor area -- three times the amount Marlo indicated in its application.

Authority spokesman Gerald H. Buchanan says the agency cannot be held responsible for what has happened between the time that the application was approved in March 1979, and the opening of the building this fall. "What they have done since the bond was approved, we don't know," he said. "You can't pin them down."

"There was nothing devious about what we did," said Marlo chairman Louis L. Glickfield, who acknowledges that his firm would never have built the facility, which employs about 214 workers, without the low-interest loan. "Everything is on the public record."

Some of the region's legislators who approved the law creating the development authority, however, profess concern about the transaction. State Sen. Adelard L. Brault, dean of the Northern Virginia delegation, calls the Marlo financing "contrary to the intent of the law. The intent of the law was to keep bonds from being used for retail stores."

Earle C. Williams, who headed the Fairfax authority's board when it approved the Marlo building, admits to being troubled by it. "I sort of cringed," he said, when the chain began an advertising campaign that boasted of the building being the largest retail store in the area.

Still, Williams, chairman of BDM Corp., a large consulting firm, defends the authority's action. "The thing that tilted me was, they [Marlo] said they would build their corporate headquarters there," he said. Until the Virginia store opened, the chain had listed a similar warehouse in Prince George's County as its headquarters.

"This is a national headquarters for a regional chain," says Thomas O. Lawson, the authority's lawyer. He describes the retail operations at the Fairfax store as "incidental to the entire operation. It is also a distribution center for the company's stores and for other stores. In addition, there are also [furniture] assembly operations."

Lawson said the state law prohibiting the Fairfax authority from issuing bonds for retail operations can be "liberally construed" by the agency. He said the authority's commissioners "were concerned" when they got Marlo's application in 1978, but at the same time, he said, "I don't think it [the decision to approve the bond] was a close call."

The Fairfax authority is the only one in the state that is prohibited by law from approving industrial bonds for retail operations. Former authority chairman Williams said the authority requested the limitation "because we did not feel that attracting retail business was the real purpose of industrial revenue bonds. Retail business automatically follows people. We wanted to use bonds to attract other kinds of business."

The Fairfax authority attracted attention recently when it approved a $7 million tax-free loan for Richard A. Viguerie, the direct-mail wizard of the New Right who plans to build a new corporate headquarters in the county.

In that case, some of the commissioners expressed concern about the authority indirectly subsidizing a politically active organization. But authority executive director David A. Edwards said the misgivings gave way to other concerns. "It was felt they [the Viguerie company] were not revolutionary. It was not as extreme as the Ku Klux Klan. It was in the realm of established political philosophy."