Continental Illinois National Bank has begun foreclosure proceedings against the developer of the 723-unit McLean Gardens complex, one of the largest condominium conversion projects in the District.

The partnership that owns the complex, led by Arthur Rubloff and Co. of Chicago, defaulted on construction loans held by the bank, and 459 unsold units owned by the partnership will be auctioned off in a block on June 1, according to a legal notice published yesterday. The bank is expected to take control of the units.

McLean Gardens has been embroiled in controversy since the conversion was first announced. It has gone through a number of owners and development plans in the past decade, as tenants bitterly fought the conversion of the moderate-income rental units.

Condominium owners and tenants at McLean Gardens, a low-rise red-brick complex just off upper Wisconsin Avenue, were unsure yesterday whether this is good or bad news for them.

The public notice appears to state that the bank as new owner would have to fulfill the legal obligations of the developer at McLean Gardens, including payment of overdue condo fees owed the unit owners association. But a spokesman for the bank said, "We are not in a position at this time to say" whether the bank would do so.

The spokesman would not comment further. Calls yesterday to Arthur Rubloff officials in Chicago and to McLean Gardens project manager Donald Epner were not returned.

With more developers and individuals here and throughout the country going into default on property, banks increasingly are becoming involved in residential real estate, though both the banks and real estate experts say lenders are not equipped to manage or sell property.

But some of the 263 owners at McLean Gardens who have had disputes with the developer say they believe the bank takeover should be an improvement. Others are merely confused about what it means to them.

"The consensus is . . . well, people feel it's going to get better," said owner Nancy Connor, who has protested various actions taken by the developer during the conversion. "There has been low morale and lots of confusion between the developer and owners." But, she added, any improvement would depend on who Continental Bank brings in to replace current managers.

Tenants who lived at the moderate-income apartments when conversion plans were first announced more than 10 years ago finally reached an agreement with the developer last summer that gave them discounts of about $18,000 from the public sales prices of apartments there or an $18,000 cash payment if they decided to move.

A recent tenant newsletter said that of the 116 involved in the final settlement, 36 had taken the cash and the others had decided to buy. Only 31 of these had settled on their units, however, and the foreclosure may put the others in a sensitive position.

The official view of the tenants group, as outlined in the newsletter, is to be that "any development that helps the project and does not jeopardize our concerns will be welcome." Actually, however, the group fears taking any action that might anger the bank and jeopardize the agreement with the developer, tenants said.

The most recent controversy at the complex involved the developer's request to rezone 9.4 acres of land at the site to build four high-rise buildings, hotly opposed by McLean Gardens residents. The foreclosure notice actually was filed on April 28, though the auction notice was not published until yesterday. This puzzled some owners, who wondered why the developer went through two long zoning hearings in the last two weeks to ask for the controversial change even though the foreclosure action had been taken.

Owners learned that something was wrong a few weeks ago when construction workers stopped renovation at the complex, because the construction company was not getting paid, some owners said.

Then they received notice over the weekend from the developer-controlled board of directors of the condo association that the 263 individual unit owners might be charged a special assessment to make up for the condo fees that the developer had failed to pay on its unsold units, according to owners there.

The notice told them of Continental's intention to foreclose and said this was part of a "nationwide policy toward its residential real estate portfolio."