The tiny Calvert County town of Chesapeake Beach is seeking a federal grant to help finance a $40 million hotel and convention center, but not for its own back yard.

The executive-style waterfront complex would be built 27 miles away in Anne Arundel County.

Through a byzantine arrangement, the community of 1,500 has applied for $8 million to $10 million in Housing and Urban Development funds.

Normally such grants go for projects within a town, but Chesapeake Beach wants to turn money-lender, farming the grant back out at 8 to 9 percent interest to private developers of the big project up the coast in Bay Ridge, near Annapolis.

HUD officials say the odd scheme has a respectable chance of approval. It was devised by a financial consulting firm looking for ways to finance a 354-room hotel at Bay Ridge Inn and Beach, a popular swimming and picnicking spot on Annapolis Neck four miles from the state capitol.

The money would come through an Urban Development Action Grant (UDAG) available to "distressed" communities, a designation for which Chesapeake Beach qualified, because of its fading tax base and population, when it applied last month, though it has since been removed from the list.

The fact that the hotel would be not only in another community, but in another county, does not rule out approval, said HUD officials, because the project could help the town's tax situation and provide jobs.

Chesapeake Beach Mayor Buster Fortier said he was approached six weeks ago by representatives of Matt-5, a Northern Virginia financial consulting firm, about fashioning a money package for construction of the hotel, which Fortier said would be a Marriott. "They came looking for us because we were the only town in the area eligible" for the HUD funds, he said.

"We're acting as the host city," said Fortier. "It's a roundabout way for the hotel people to get the money." As lender, Chesapeake Beach would be in for a huge financial bonus as the grant money and interest was repaid to the town over seven to nine years, Fortier said. (An $8 million grant, repaid at 8 per cent interest over sven years, would generate $2.5 million interest, giving the town a total of $10.5 million.)

Ben Wills, who owns Bay Ridge Beach and Inn and who applied for a zoning change three years ago to accommodate hotel development on the 33-acre site, said the application was filed without his approval. "This is very premature," he said.

But Charles Halm, economic development specialist in HUD's Baltimore office, said that while the Chesapeake Beach application must compete for approval with requests from small communities across the nation, its chances are boosted by the fact that "generally there hasn't been a lot of competition for small-city UDAGs."

Halm said that among factors HUD considers when appraising UDAG projects are how many jobs will be generated and who will get them, and whether the project will improve the town's tax base.

Fortier said Chesapeake Beach residents would get priority for construction and hotel jobs. Since the hotel would be far from Chesapeake Beach, the stickier issue concerns how the town's tax base would benefit. But Fortier said the application calls for developers to make an initial payment to the town in lieu of taxes, and the town would use funds accrued as the loan is repaid to finance commercial and industrial projects within Chesapeake Beach.

Halm said using UDAG funds for a development outside the jurisdiction seeking the grant is not unheard of. "The key is, would the project impact positively on the community that applies?"

He said hotel projects are common recipients of UDAG funds because they provide jobs for low-income people and have an immediate effect on tax bases.

He said the Hyatt-Regency Hotel on Baltimore's Inner Harbor was financed in part with UDAG money.

Because Chesapeake Beach is seeking the funds, rather than Anne Arundel County or Bay Ridge, public hearings on the proposal were held 27 miles down the road, where no objections were raised, according to Fortier. There has been no public notice about the plan in the Annapolis area.

Tom Osborne, deputy director of planning in Anne Arundel County, said the plan to develop Bay Ridge Beach has been dormant for years.

He said rezoning for commercial development on 24 of the 33 acres was approved in 1980, at the behest of Wills, who reportedly was considering a hotel/convention center.

Public hearings were held and there was no significant opposition, said Osborne.

Wills said today he was distressed by Matt-5's decision to forge ahead with the application. "I've tried to keep good relations with our civic organizations," he said. "Matt-5 jumped the gun and they shouldn't have."

A Matt-5 official declined to comment. Marriott spokesman Gordon Lambourne said the hotel chain is "looking at several sites in and around the Annapolis area but has made no commitments at this time." Asked if Bay Ridge was among them, Lambourne said, "I have no idea."

And while Fortier was exuberant about the prospect of millions of dollars raining down on his little outpost in Calvert County, one Chesapeake Beach official said he had reservations, at least at first.

"My initial reaction was the whole thing was ludicrous," said Town Councilman Gerald Donovan, "but then the federal guy came in and said it could work out, so who's going to turn down $8 million?"

Donovan said he understood the UDAG program for small communities wound up last year with $144 million in unspent funds. The HUD official who visited Chesapeake Beach "didn't say, 'We've got to get rid of the money,' " said Donovan, "but he did say it, if you know what I mean."