The U.S. Department of Housing and Urban Development is investigating why the District's housing department awarded a $3.5-million contract without competitive bidding to finance the renovation of a Northeast Washington office building for its own use.

Federal officials said the money, part of the federal community development grant funds that the city receives each year, can be used for government office space, but they are questioning the awarding of the construction contract for the renovation without competitive bidding.

"We're asking for all the details to determine whether they followed the [federal] procurement procedures," which call for taking competitive bids before awarding most contracts above $10,000, said James Fletcher, HUD's director of community planning and development.

The Leapley Construction Co., an Edgewater, Md., firm, was hired to do the construction work on the three-story brick warehouse at 21 M St. NE. City housing director Robert L. Moore said the construction contract was not put out for bids to save time so the contractor could work with the architect, Robert J. Nash and Associate, in the preparation of drawings for the renovation.

Last year, when housing officials faced a doubling of rent at their downtown offices and the need for new offices quickly, they decided to use some of the community development money as part of an unusual and complicated arrangement to obtain new office space.

"It [the new building] will reduce a tremendous amount of expenses," Moore said. "If we stayed here [at 1325 G St. NW] the money [spent for renovating the building] would be sucked up into rent payments at a time when our community development funds are going down." he said.

Since federal and not city dollars were used for the renovation, the housing department told neither the City Council nor the congressional appropriations committees which oversee the city's buget about the office building.

"It takes a very long time" to go through the city's budget procedure, Moore said in explaining why the shortcut was used. "And Congress has come down on whether it's cost efficient to build another government office building. I think this makes eminently good sense."

"I think it is an innovative approach," said D.C. Mayor Marion Barry, applauding the department for helping the city reduce the cost of the office space it rents.

City Council Chairman Arrington Dixon said the council would ask for details about the project. "There seems to be some rationale for it," Dixon said, but added, "I would be concerned about such an undertaking without some councilmanic review."

In September 1979, when the department first heard that the rent on its privately owned office space at 1325 G might increase, Moore said he decided it was a good time to finally combine his fragmented department of 1,200 employes that is now scattered in six different locations around the city under one roof at the converted warehouse. The warehouse is in the midst of a dreary area off North Capitol Street, in an area devoid of stores and restaurants.

The Redevelopment Land Agency, the city's urban renewal agency and an independent arm of the house department, sold the warehouse for $100,000 to the D.C. Development Corporation (DCDC), a quasipublic agency that is also an arm of the housing department, Moore said.

The housing department then loaned DCDC $3.5 million in community development funds to convert the three-story brick warehouse into office space that the department and DCDC hope to occupy by March, Moore said.

DCDC secured the mortgage on the building last June with Walker and Dunlop, a mortgage banking firm, at a 13.5 percent interest rate. Moore said Walker and Dunlop was also paid $37,000 to guarantee that the interest rate would not increase.

When the housing department and DCDC occupy the building, DCDC will pay back the community development funds, Moore said, and then they will be used for more traditional development projects.

The housing department usually spends federal community development funds to fix up public housing projects, for making loans to low- and moderate-income tenants to purchase their apartment buildings and avoid displacement, or for helping poorer families buy their first home. The department can use up to 20 percent of the funds for office space.

The department now pays $925,696 to rent space on G Street, and nearly $100,000 more to rent space in other buildings, brining the department's annual rent bill to more than $1 million, according to the city's Department of General Services, which leases all space used by city offices.

Prior to September, the department also rented offices at 1341 G St. NW, but moved out and doubled up in other space to save nearly $390,000 a year when the rent went up, Moore said.

When 21 M Street is completed, the city will pay an annual rent of $892,941, plus an estimated $350,000 to $385,000 a year for utilities, for a total of $1.2 million.

Moore also justified the new building by saying that after the mortgage is paid off in 10 years, it would become the property of the city government.

DCDC, which currently rents at 1420 New York Ave. NW, will technically charge itself $58,958 in rent at the new building.

Michael Crescenzo, executive director of a community organization that helps tenants buy their apartment buildings, praised the department's move to one-stop shopping.

"If they were all in one place, it would be easier for us to deal with," he said, explaining that he and his staff must now visit housing offices in four different locations to obtain all the approvals needed in a tenant conversion.

But some city employes, particularly those located in the G Street office, are complaining that the move will take them away from downtown, the Metro subway and good transportation. Because of the dearth of public services near the 21 M St. address, the new building will contain a cafeteria and parking lot for 150 cars.

Moore said the department will purchase no new furniture for the building. "It will be well done but spartan," he said.

The budget for the building includes a $35,123 profit for DCDC.