At a Senate hearing in February, Sen. Charles H. Percy (R-Ill.) displayed blown-up photographs of a block in the District of Columbia that he termed an example of valuable government property that should be sold to help reduce the national debt.

Percy said that the square of land, now appraised at $13 million, had been on the disposal list for more than seven years and that "in the private sector, it takes an average of six months to move a piece of property, whereas the Federal Government takes years to move the same kind of property."

While Percy said the sales process illustrates how unwarranted government delays have stopped the federal government from earning money on a parcel of unneeded federal property, land sales specialists at the General Services Administration--charged with disposing of the lot -- say the property has been a prime headache. The specialists say the block has been encumbered for a decade by conflicting laws and regulations, congressional inaction and legal jousting.

Today the land is still unsold and its future is before the courts, with no resolution in sight.

Officially known as Square 532, the property, bordered by D and E streets NW, between Third and Fourth streets, has sat virtually idle for 14 years, its only profits generated by $8,500 a month in revenues from Colonial Parking Inc., which leased the lot to park cars in 1976.

Pieced together through official documents and discussions with federal and D.C. officials, its history shows how the rules can make some sales tougher to close than Percy, and those supporting the Reagan administration's proposed five-year, $17 billion land sales plan, may think.

The Federal Home Loan Bank Board acquired Square 532 and adjacent Square 570 on Jan. 17, 1968, for $4,275,000 for a new headquarters site through condemnation procedures. Dilapidated buildings on the two squares were razed. Four years later the Bank Board decided to build its headquarters at a more prestigious location, near the White House, and it declared that it no longer needed Squares 532 and 570.

The Bank Board soon sold Square 570 to the U.S. Tax Court for $2,548,600, and on July 6, 1972, instructed GSA to dispose of Square 532 under the condition that the D.C. government would have the first option to buy it. The District had let the Bank Board know that it wanted to put a $26.5 million, 10-story municipal office building on the square.

Before the city could get Congress to approve $4.4 million to buy the site in August 1975, the Bank Board put the disposal process on hold for nearly two years because of a change in leadership at the agency. When negotiations resumed in June 1977, GSA was forced by regulation to order a new fair-market-value assessment for the property. Such assessments must be made within nine months of a sale agreement.

Harold T. Henson, director of the D.C. Department of General Services, said the city offered $4.4 million, but GSA, considering the new assessment, said it now wanted just over $8 million. It took the city more than a year to decide to proceed, and when it did, it countered with a $7.5 million offer that included a $4.4 million deposit.

"We were forced to reject that offer because of the federal Anti-Deficiency Act, which prohibits contracting for money from the District of Columbia that has not been appropriated by Congress," said Robert J. Irwin, GSA's Washington area real property disposal branch manager. So the city again had to wait for Congress to act. And by the time Congress agreed to the $8.4 million total in August, 1980, Catch-22 intervened again.

"By that time," Irwin said, "we had no choice but to reject their new $8.4 million offer because the appraisal had expired."

On Nov. 19, 1980, GSA regional administrator Walter V. Kallaur wrote Mayor Marion Barry that the latest appraisal showed the property worth $13 million. The city was given 60 days to accept, but failed to respond. GSA, however, did not stick to the deadline. Finally, seven months later--on June 19, 1981 -- Kallaur wrote Barry again with a new deadline: this time, seven days.

In each case, Henson said, routine procedural delays within the city government stalled the process. In that final letter, Kallaur told Barry: "The property will be offered for public sale by invitation for bid." Again, no reply. This time, GSA stuck to its schedule and on June 26 put out a notice that the land was available for public bids. Three days after that, D.C. city administrator Elijah B. Rogers wrote that the city still wanted to build a municipal office building there but it would have to go back to Congress -- again -- for more money.

"We are in a position to start construction of the office building immediately," Rogers told Kallaur.

GSA's position was that this was too late.

"That was an ideal site for an office building," Henson said. "We had our specifications and our plans all drawn up for the building. We were deeply disappointed at the delays built into the system."

GSA officials said they thought the torturous trail ended there and the land would be sold. But when bids were opened on Aug. 28, 1981, the Marine Engineers Beneficial Association (MEBA) Pension Trust Association had submitted the high bid of $8.5 million, well under the latest appraisal obtained by GSA. The District bid $8,402,500. Two other bids were lower.

The three lower bids were rejected and MEBA was told it had the high bid but that the bid was "below our estimated value of the property." Kallaur wrote that "before making a final decision on the bid, we are affording you -- as the high bidder -- an opportunity to increase your bid . . . in the event that you increase your bid, its chances of being accepted will be enhanced."

MEBA upped the bid to $9.6 million. "This is the cute part," said a GSA official. "We rejected their bid as below market value and they sued."

Today, the case is before U.S. District Court Judge Joyce Green, with motions for a summary judgment by MEBA and a motion to dismiss the action by GSA and the Bank Board. There is no court date for future action. Meanwhile, the city decided to put the new municipal building at 14th and U streets NW and forget Square 532.

Neither the Bank Board nor GSA would comment specifically on the court case.

Percy aide Alan B. Mertz, who discovered a thick file of background on Square 532 when he was preparing for the hearing this year, repeated this week that Percy is convinced that high-value, inner-city properties such as this should be sold promptly and the government should find a way to cut through red tape that ensnarls actions for years.

There is one other twist of irony to this case:

The idea, Percy said at the hearing, is to lower the national debt. But since the land actually belonged to the Federal Home Loan Bank Board -- which has authority over its own land -- and not the federal government, that agency will collect any profits from the sale. Thus there is no guarantee nor real expectation that the sale of the land will help reduce the national debt.

"This is one of the most extraordinary cases we've handled," said GSA spokesman Dale Bruce. "This doesn't happen with most property disposals." CAPTION: Map and Picture, Square 532, estimated to be worth $13 million, remains parking lot while bidders for it go to court. By John McDonnell -- The Washington Post