Officials of the Pennsylvania Avenue Development Corp., the agency set up by Congress to spruce up "America's Main Street," yesterday criticized the idea of two out-of-town companies' taking control of the big Market Square project after a local firm had been granted the development rights.

Western Development Corp., which in 1984 won the right to develop the office-residential complex on Pennsylvania Avenue between Seventh and Ninth streets NW, asked the agency's permission to bring in the two wealthy companies -- Trammell Crow Co. of Dallas, the nation's biggest developer, and the Dutch Institutional Holding Co., the U.S. arm of Holland's largest pension fund -- to take over the project and finance it.

But faced with objections from another Dallas developer who vaguely threatened a lawsuit, PADC's board voted 7 to 2 to delay a decision. In a contentious two-hour session, a number of board members raised several objections to Western's proposal, including that the quasi-public agency should not grant development rights to a foreign firm.

PADC Chairman Henry A. Berliner Jr. said the agency's message to Western officials is that they should "go back to the drawing board" to arrange a transaction in which the Western group -- as the agency's designated developer of the site -- retains control.

Berliner said that with or without the change, he is confident the $200 million development will be built on schedule. Real estate industry officials have said it appears Western has confronted problems in developing the site, but Western has denied any problems and agency officials said Western has been meeting its deadlines.

Top Western official Richard Kramer did confirm real estate industry officials' reports that Western has been trying to find a Market Square partner for more than two years.

Most developers say the Market Square deal is risky because the agency is requiring that 225 residences be built there. Development industry officials agree that a housing market in that neighborhood is speculative.

Kramer said that including Trammell Crow and the Dutch investors ensures that the project "will be implemented," in part because of the new investors' "expanded financial strength."

Under the transaction outlined by Kramer, the Texas and Holland backers would pay Western and their current partners for their costs in developing the project so far, plus about $8 million that would be held in escrow by PADC until completion of the project. That $8 million essentially would be profit to the current Western group, agency officials said.

Trammell Crow and the Dutch group would also agree to provide the $200 million to develop the site. Kramer said that that is desirable because the newcomers could arrange loans at below-market rates, and that construction could proceed in one phase instead of two.

Western officials and their current partners would retain a 30 percent share of the project, while the Dutch outfit would have 50 percent and Trammell Crow 20 percent.

One of Trammell Crow's bitterest rivals, Lincoln Property Co. -- which also is based in Dallas and is the nation's second-biggest developer -- opposed the plan.

In the 1984 competition, Lincoln was runner-up to Western, and Lincoln partner William Janes said yesterday "both fairness and law" should prompt the agency to give the project to Lincoln rather than granting control to groups that did not compete. Janes also suggested Lincoln would sue to stop a switch.

Lincoln has negotiated to become Western's partner in the deal, but the talks fell through, Kramer said. Western's attorney David Schwartz said that a switch is legal. He added that because the Western group already has bought the site from the agency, Lincoln "has no right to expect to have that property confiscated."

Board member Michael Gardner said that he would be "troubled" by a proposal to shift control to new partners. "The competitive process that took place in 1984 is being ignored," he said.

Board member Carl Shipley said that the agency should avoid choosing a foreign group over a domestic one, and that the agency, not Western, should be choosing the partners.