A heavily favored ballot initiative is expected to turn this community into what some are calling the nation's "first gay city."

Residents of West Hollywood, an unincorporated area of Los Angeles County east of Beverly Hills and long known for its Sunset Strip, will vote Tuesday on whether to incorporate as a city.

There are 36,000 people living in West Hollywood's 1.9 square miles. No precise figures exist on how many are homosexual, but estimates range from 20 to 40 percent. Only 17 percent of the area's 20,000 registered voters are Republicans; 20 of 40 candidates battling for places on the proposed five-member City Council are acknowledged homosexuals.

The nightclubs along Sunset Boulevard that once were a movie-colony playground have given way to punk-rock discos. Male prostitutes ply their trade along Santa Monica Boulevard, which is lined with homosexual-owned businesses as diverse as leather bars and a pet store.

Some are calling West Hollywood a "Camelot on the horizon" for homosexuals, but many people here see it becoming a Camelot for renters.

Perhaps more important to passage of the "cityhood" measure than the number of homosexuals is the percentage of renters: 80 percent of West Hollywood residents do not own homes. Also, 23 percent are elderly people, many of whom have fixed incomes.

Sheldon Andelson, perhaps California's most politically powerful homosexual activist, has a law practice in West Hollywood, though he doesn't live here. He is also chairman of the Bank of Los Angeles and owns a West Hollywood restaurant.

"I don't think cityhood is a gay issue for the residents," Andelson said recently. "The media has sort of focused on that angle, the glitzy angle. But, for the residents, the issues are rent control and local control of government."

Financier Severyn Ashkenazy strongly opposes cityhood. He agrees with Andelson that rent control is the issue likely to induce voters to approve incorporation.

Rent controls in West Hollywood had been scheduled to end next year. But less than a week before Tuesday's election, the Los Angeles County Board of Supervisors voted to extend them indefinitely. The supervisors' action had been urged by area developers and landlords who like the idea of cityhood even less than they like rent control, and hope that the extension will blunt ballot-measure support.

Steve Smith, a homosexual candidate for the proposed City Council, is warning residents that supervisors could end rent control as easily as they extended it. A self-described "mainstream liberal," Smith has taken a leave of absence from his job with California Assembly Speaker Willie L. Brown Jr. to run for office.

With endorsements from the Democratic County Central Committee and the AFL-CIO, Smith has spent between $35,100 and $40,000 on his campaign. His brochure would do a congressional candidate proud: photographs of Smith with Walter F. Mondale, his party's presidential nominee, and with California's senior U.S. senator, Democrat Alan Cranston, and a quote from Sen. Edward M. Kennedy (D-Mass.): "Steve Smith . . . a leader in this city and in this community. I value Steve as a friend."

But Smith, better organized than most of his rivals, says he has no idea if he will win. "When you've got 40 people, and no one has run for office before and there's not even a city yet, there's no way to know what's going to happen," he said.

The ballot initiative has drawn national press attention. "The question is not whether we're going to be a city," council candidate Ron Stone, who spearheaded the cityhood drive, told the Associated Press. "Everyone has taken that for granted. The question is what kind of city are we going to be?"

Ashkenazy is worried about what might happen. "I think it could become an unbalanced community, and the gay community may become the most vocal," he said. "It could polarize. The predominant number of candidates are avowed homosexuals. This is not what some people want in a government."

Andelson says the notion of substantial migration into West Hollywood by homosexuals is "ridiculous. . . . . It's like saying that if you elect a black mayor of Los Angeles, all the blacks in the South will move to L.A. It's a racist myth. That's the worst kind of homophobia."