The Pennsylvania Avenue Development Corp., committed to putting housing in downtown, outlined plans yesterday to put apartments in the old Lansburgh's department store and has tentatively approved an ambitious office and residential project along E Street NW.

PADC officials said they plan to launch a competition for the development rights to renovate the historic department store on Seventh Street NW, and two adjoining historic buildings, as part of an office-retail complex that would include at least 225 residential units.

In a related development on May 28, the PADC paid $3.7 million for the old S.S. Kresge Co. store next door to the Lansburgh's building, for inclusion in the site, according to Lusk, a real estate information service. A real estate partnership had purchased the store for $2 million eight months earlier.

PADC officials said federal law requires them to pay a price set by appraisers, and that had been done.

The PADC on Wednesday granted preliminary approval to a group of developers who have proposed a housing-retail-office project -- to be called Market Square North -- that would occupy almost the entire block between Eighth, Ninth, D and E streets NW. The group includes local businessman Kingdon Gould and Potomac Capitol Investment Corp., the real estate subsidiary of the Potomac Electric Power Co. The block now contains several stores, a parking lot and a Pepco power substation.

PADC has promised to build at least 1,200 apartment or condominiums downtown on the eastern end of Pennsylvania Avenue below Ninth Street. Construction of two earlier developments that will include the first housing units are scheduled to begin in several months.

Some developers have expressed skepticism about the prospects for marketing housing in an area surrounded by fraying storefronts and federal offices that are empty at night, but PADC officials remain optimistic.

"We want to create the beginnings of a neighborhood," said James Rich, PADC's director of development.

"It's an interesting challenge. It's achievable."

"It's an exciting project, and we're looking forward to working on it," said Pepco spokeswoman Nancy Moses.

But she added that the developer would ask PADC officials about the best way to build the residential units "with the minimum amount of risk."

In its first master plans in the 1970s, PADC promised to build 5,000 residential units in the old downtown north of Pennsylvania Avenue, but has lowered its projections in recent years in the face of developers who preferred building office space, which is more lucrative because of its higher rents.

In the Lansburgh's project, PADC would allow 20,000 square feet of retail space and up to about 235,000 square feet of offices. But developers must set aside some space for artists and build 225 residential units.

The residences would be built largely along the Eighth Street portion of Lansburgh's. The store started operations in downtown in 1863 and closed 90 years later. For the past several years, the D.C. government has leased the building, used half for city offices and subleased the rest to artists for studios and galleries.

PADC also is offering to pay a developer $75,000 for every residential unit above the required 225, up to a maxmimum of 112 extra units. In addition, the agency is offering a $500,000 payment to a developer for abiding by historic building guidelines.

PADC's asking price for Lanburgh's and its neighbors will be $10.5 million, so a developer building the maximum number of extra units could pay as little as $1.6 million for the entire site, PADC officials said.

Rich said that $75,000 a unit was "an incentive that is necessary to make it reasonable for a developer" to build more housing.

A block south of Lansburgh's, construction is scheduled to begin soon on the $150 million Market Square development bounded by Pennsylvania Avenue and Seventh, Ninth and D streets.

It will include office buildings, retail space and 225 condominium units. Western Development Corp. won a PADC competition in 1984 to build that project.

The Westminster Investing Corp., a subsidiary of B.F. Saul Co., has constructed offices at 601 Pennsylvania Ave., and is to begin construction of a hotel and 196 residential units next to the office building in a few months.

Besides the Lansburgh's project, PADC said two other nearby buildings will set aside specified amounts of space for artists and arts groups as a result of months of negotiations between city and PADC officials, developers and artists.

Arts activists have complained that the new projects and rising rents in the area were driving them out of a small arts colony that has developed along Seventh Street between D and E streets. PADC Chairman Henry A. Berliner Jr. said officials are making "a serious and intense effort" to keep the arts in the area.

"The District and PADC are interested in using the arts as a beginning ingredient to make this neighborhood work," Rich said.

PADC officials said they will advertise this summer for developers for the Lanburgh's site and will make a selection next year.