The government-funded D.C. Development Corp. has waived its requirement that eight choice Victorian homes in the Shaw area be set aside for low-income tenants for at least 20 years and instead has sold the homes to developers who plan to convert them to condominiums in five years.

Developer David Clark and Luther H. Hodges Jr., head of The National Bank of Washington, purchased the homes earlier this month for nearly $1.7 million.

Clark said he persuaded DCDC to reduce its tenant occupancy requirement from 20 to 5 years because "we wanted to have maximum flexibility" to allow the sale of the 20 apartment units in the homes in five years.

In addition, DCDC exempted Clark and Hodges from its requirement that purchasers of the homes reside in them.

DCDC is a nonprofit independent corporation that operates as a home loan and rehabilitation arm of the city's housing department.

Clark said he became interested in the Shaw properties after the Montrose Corp., a real estate firm of which he is a coowner, contracted with DCDC to sell the homes. He said the prices seemed reasonable and the only "concession" he asked was to relax the 20-year rule.

A DCDC official said the agency also had to obtain approval from the U.S. Department of Housing and Urban Development to sell the eight homes to Clark and Hodges because they were investors and would not live in the homes.

DCDC turned away investors under its original plan and apparently did not advertise when it changed its requirements to allow non-owner occupants to buy the homes.

The eight homes are closely grouped in a 15-block area of Shaw, once a shabby central city neighborhood but now a a popular location for black and white middle class professionals because of its closeness to downtown. Its blocks are lined with distinctive large homes that once could be bought at bargain prices.

The city originally had planned to sell 10 turn-of-the-century homes to owners who would live in one of the apartments and rent the others for 20 years to tenants who qualified for federal housing subsidies. But those plans fell victim to soaring interest rates that hit just as the homes, ranging from $149,580 to $242,850, were ready for sale.

"The interest rates and the prices cut out a lot of people," Beaton said, and the carrying costs "killed us," causing the agency to lose an estimated $50,000, he said.

DCDC sold two of the houses this summer under the original plan and these purchasers signed agreements pledging to rent the apartments in the houses to tenants generally earning less than $24,000 a year (for a family of four) for 20 years. If these terms are violated, DCDC could foreclose on a $30,000 to $35,000 lien placed against the properties, according to documents DCDC filed at the city's Recorder of Deeds office.

The same liens were placed against the eight homes bought by Clark and Hodges, but they remain effect for only five years, according to the documents.

Beaton, who signed the agreements for all 10 homes, denied he had made any concessions to Clark and Hodges. "It's the same arrangement for all of them," he said.

Beaton at first said his agency had earned money from the sales but later acknowledged it lost an estimated $50,000, because the agency was paying two percentage points above the prime lending rate on $1.3 million it borrowed to gut the homes, renovate them and equip them with dishwashers, air-conditioning, carpeting, garbage disposals and exposed interior brick walls. DCDC was paying interest on the loan during the 18 months the properties went unsold.

DCDC fell behind last fall in its payments to the lender, American Security Bank, and city housing director Robert L. Moore said his department gave the agency an interest-free loan of $50,000 to make the delinquent payments.

"They were sitting out there with a prime-plus-two interest rate, and the clock was running," Moore said.

American Security stepped in and offered to make mortgage money available to prospective buyers at a below-market interest rate of 13.5 percent if DCDC promised to keep the interest payments on the construction loan current, Moore said.

Bank officials would not comment on their role in the financing.

Moore and Beaton said city funds would not be used to make up the loss. But a source familiar with DCDC's activities said, "If DCDC lost money, the department lost money, because all their money comes from the housing department."

Clark, who renovated the Iowa apartment building on 13th Street NW near Logan Circle and has built new townhouses across N Street from the Iowa, said he purchased the Shaw homes because "they offered a good investment opportunity . . . . I have a great deal of confidence in the inner city."

Hodges, who also serves as chairman of the mayor's Downtown Advisory Committee, echoed Clark. "The city represents a great economic opportunity long-term and it appeared to me to be a good investment."