The D.C. government is arranging for a nonprofit city-funded corporation to buy the Harambee House hotel in an effort to rescue from financial collapse what was once seen as a model of black entrepreneurship.

The city and the corporation would spend a miniumum of $4.3 million to pay off over time the mortgage on the property, using a combination of private investment and public funds that are normally spent on aid to minority businessmen and to build or rehabilitate low- and moderate-income housing in a city already desperatelly short of affordable housing.

The city began negotiations to buy the hotel about a month ago following a suggestion by James O. Gibson, an assistant city administrator in the Barry cabinet and a stockholder and former president of the company that manages the hotel, that city officials explore ways to help save it from foreclosure.

Gibson said he expects to lose his $10,000 investment in the management company, which he and others say will probably fold when and if the sale takes place.

Since Gibson's suggestion, Mayor Marion Barry has talked with federal officials and members of the D.C. Development Corporation, the nonprofit agency involved, to assure them of his support for the project, seen as a cornerstone of efforts to rebuild the blighted Georgia Aveneue area where it is located.

At the same time, city officials, including city Housing Director Robert L. Moore, have worked long hours to hammer out financial arrangements with the federal government, which holds the mortgage, to save the hotel located across from a junkyard and surrounded by fast-food restaurants and a gasoline station.

"We don't want to see it close," said Moore. "D.C. residents deserve that hotel. It's the only minority-owned hotel in the city." Harambee Hotel is owned by a minority-run nonprofit corporation.

Located just below Howard University, the Harmabee House has been plagued by problems almost from its inception. Conceived by Ed Murphy, a flamboyant city restaurateur, it was envisioned as a hotel that would serve individuals and groups expected to flock to the revitalized inner city as tourism and the convention business picked up.

But the reality swiftly overtook the dream. Construction cost overruns plagued the project early on -- problems that officials of the hotel management corporation set up by Murphy later said they could not overcome after they took charge. The hotel's financial footing was undermined further by the general reluctance of some needing hotel rooms to stay at a place surrounded by a grim picture of inner-city decay.

The hotel that opened two years ago sports today a picture of Murphy, wearing a suit, in its lobby and offers 160 rooms that cost an average of $40 a night. There is an indoor heated pool and an exercise room, and some of the rooms have jacuzzi baths.

Many of the hotel's problems were foreseen by real estate experts years ago. They privately predicted that its location on a deteriorated strip full of boarded-up row houses and storefronts, its lack of parking facilities and small size would prohibit the hotel from ever realizing the dream of its creator. The most commonly held opinion at the time was that it would eventually end up as a Howard University dormitory.

In fact, one of the options the Commerce Department's Economic Development Administration (the federal agency holding the mortgage) is currently considering is a plan by Howard University to use the hotel as a training laboratory in conjunction with a proposed graduate hotel management program. But Commerce Department and city officials hope that the city's development corporation will be the eventual owner.

Discussions between the parties this week were "encouraging . . . all the way around," according to a Commerce Department spokesman.

James Haynes, chairman of the development corporation's board of directors, said his organization must still examine financial statements and audit reports before the sale can be completed. But he and Moore said that the corporation expects to sign a contract to buy the hotel at 2225 Georgia Ave. NW for about $4.3 million within the next two weeks. Closing would probably occur within the following 90 days.

The need for speedy assistance to the Harambee House became apparent last month when Ed Murphy and Walker A. Williams, the two top officials of Murph's Hotel Corp., walked into EDA offices and said they couldn't find the outside investors they needed to keep the hotel open and no longer could manage the facility, federal officials said.

The corporation owed more than half a million dollars to creditors and to the city for such things as unpaid taxes and professional fees. Economic Development Administration (EDA officials pointed out. In addition, neither the $4.3 million mortgage on the hotel, nor the $2.4 million EDA loaned to the hotel corporation to operate the hotel, have been repaid.

The obtaining of outside investment had been a crucial part of an agreement between hotel corporation officials and EDA last year and allowed the hotel to continue to operate despite its financial problems as long as certain conditions were met.

But Williams, who has been president of Murph's Hotel Corp. for about a year, said that when investigations into the hotel's problems appeared in news accounts last year, investors who already had made financial commitments to the hotel backed out.

"I finally painfully admitted to myself that I couldn't get around that," Williams said.

Gibson said his concern for the survival of the hotel and the revitalization of the Georgia Avenue corridor led him to suggest to Barry aides Ivanhoe Donaldson and Courtland Cox and to Murph's officials about two months ago that they should analyze the economic situation of the hotel and talk together about a reorganization. He said he was involved in the initial discussion of a possible reorganization, but since then hasn't participated.

The saving of the hotel would be one step in what Moore views as a massive rebuilding of Georgia Avenue from R Street north past Howard University. The infamous junkyard directly across the avenue from the Harambee House entrance would be replced as part of the project.

Moore said that once the hotel is bought, he expects an immediate financial infusion of $450,000 from two outside investors, $250,000 from the Commerce Department and $250,000 from city community development funds -- all in the form of loans, he said.

Haynes, who also is an attorney, said that if the D.C. Development Corporation buys the hotel, new corporate officers will be brought in, though he added that he hopes to find some role for Murphy and Williams to play.

Haynes said that at some point the hotel might be sold to another minority business enterprise. But he expected the D.C. Development Corporation to remain involved, if only to own the land on which the hotel is built.