The Montgomery County Housing Opportunity Commission has given the initial go-ahead to a developer proposing to buy and rehabilitate with tax-exempt financing the Falkland Apartments in Silver Spring.

The action came despite opposition from tenants who contend they could buy the project themselves and keep rents lower than those proposed by the developer.

The proposal raises public-policy concerns over the best use of tax-exempt financing. Other local jurisdictions, including the cities of Rockville and Alexandria, have recently struggled with similar decisions, raising the ire of tenants who see public agencies approving subsidies for projects that displace them.

The Falkland Apartments, a 40-year-old, garden-apartment complex of 479 units near the Silver Spring Metrorail stop, sits on land considered to be prime commercial real estate. For years, Montgomery County's prominent Blair family, which owns the complex, has been talking with developers eager to buy.

The tenants -- whose incomes range roughly from $15,000 to $70,000 -- say that if the Falkland is sold for commercial development or converted to condominiums, they will have a difficult time finding similar affordable rentals in Silver Spring.

In their efforts to save the complex over the last several years, they have tried nearly every tactic imaginable, from seeking a historic designation to offering to buy the complex themselves. The complex is considered by some to be one of the area's best examples of early garden-apartment architecture and was the first FHA-insured garden apartment complex in Maryland.

In the process, the tenants say, they have become about as sophisticated and organized as any tenant group in the county. If they can't win a tenant fight, they say, no one can.

Actions taken by the housing commission last week, however, indicate that the HOC is seriously considering approving $28 million in tax-exempt financing for a plan that would include an expensive rehabilitation and higher rents, and result in displacement of nearly 50 percent of the tenants.

HOC Executive Director Bernard Tetreault said the commission signed an inducement agreement with developer Crow, Terwilliger and Michaux Inc., a local subsidiary of Dallas-based Trammell Crow, that "encourages" the developer to go ahead with a detailed analysis of the proposed project.

The inducement agreement does not commit the HOC to float the bonds for the project but does allow the developer to include the cost of the detailed analysis in the total package to be financed if the project is approved. The commission is expected to hold a public hearing on the proposal and vote sometime later this spring.

Federal law requires that for rental housing projects financed through the sale of tax-exempt bonds, 20 percent of the units must be set aside for low- and moderate-income tenants at rents that are no more than 30 percent of an annual income that is 80 percent of the area's median income. The project must also be kept rental for at least 10 years.

Under the proposal by Crow, Terwilliger and Michaux, 90 units would be available for families at 50 percent of the Washington metropolitan area's median income of $36,600. In addition, 35 more units would be priced at levels affordable for families at 65 percent of the area's median income. Crow, Terwilliger and Michaux has also agreed to keep the entire complex rental for 15 years, as required by the HOC for any project.

"Based on the numbers the developer has provided so far, and they are in the preliminary stage of their analysis, we think that if we had pushed any farther it would have made the project un-economic," said Tetreault, who negotiated with the developer to reach the compromise. "This takes care of the in-place tenants at the Falkland that need help, and it is more than required by the commission's guidelines."

According to a preliminary survey done by the HOC, rents at the complex today range from $350 to $459 for a one-bedroom, $434 to $690 for a two-bedroom and $618 to $725 for a three-bedroom. All those rents include utilities.

Under Crow, Terwilliger and Michaux's proposal, rents for the 90 units set aside for families with incomes that are 50 percent of the area median would be $385 for a one-bedroom, $425 for a two-bedroom and $465 for a three-bedroom, not including utilities. For the 35 units priced for families at incomes that are 65 percent of the median income, rents would be $476 for a one-bedroom, $535 for a two-bedroom and $595 for a three-bedroom, not including utilities.

The 325 market rate units would be priced from $460 to $550 for a one-bedroom, $560 to $610 for a two-bedroom and $670 to $840 for a three-bedroom. Twenty-nine units that are next to a small commercial establishment would be demolished.

The proposal includes extensive rehabilitation of all the units, at a per-unit cost roughly equal to the per unit purchase price of $18,000.

Tetreault said that he doubted whether the tenants could have come up with a plan to buy the apartment complex themselves that would have resulted in lower rents, even if they had sought tax-exempt financing.

"If they came in with lower rental rates, the whole project might have trouble getting bonded ," said Tetreault. "They might have been able to cut the cost of the rehabilitation, but it would have been slight and would not have affected rents much." Tetreault said that an architect on the HOC staff had done a review of the apartments and found that most of the renovations were necessary rather than amenity additions.

Sharon Sherrill, president of the Falkland Tenants Association, however, said that her members do not understand the public purpose of subsidizing an expensive rehabilitation that may not last for more than 15 years, particularly if many of the tenants would have to move unless willing to pay 40 or 50 percent of their incomes on rent.

"It seems to us that the county is getting a very small return for its investment," said Sherrill. "If the buildings are demolished 15 years from now the rehab will be wasted, and if the buildings are converted to condo after the 15 years are up, then we don't think the county should subsidize a rehabilitation for a conversion."

Sherrill said that the housing commission's concerns that the developer might give up the project if pushed to make too many concessions should not be an issue in the decision to finance the project with tax-exempt funds.

"The financial and technical resources are available in this county to assist us to put together a plan to purchase the Falkland," said Sherrill. "We've been at this for four and a half years, and every time we attempt to preserve this community, the county steps in our way. It's as if there's an unwritten rule that the developer should be served first."

If a developer is seeking to buy an apartment complex in Montgomery County the tenants technically have the right to match the developer's bid. But under the statute, the developer is given the option to agree to keep the complex rental for three years first. If he does, the tenants do not get to exercise their right of first refusal.

"In actuality the statute doesn't work for the tenant," said Sherrill. "I think there should be some questions raised about the position of tenant groups in situations like this one. This is not the first time a rental complex has come under development pressure in Montgomery County, and with the Metrorail extension, this is not the last time it will happen."

Catherine Hare, Maryland development director for Crow, Terwilliger and Michaux, said that the purpose of the county's housing policy is retention of rental stock, not to allow tenants to make a windfall by purchasing their units and converting them to condominiums themselves.

"According to our figures, we are going to be helping everyone presently at the Falkland whose income falls below 65 percent of the median income, which comes to $23,790 a year for a family of three," said Hare. "And fulfilling the county's policy by preserving the rental stock for 15 years.

"We got into this because we are interested in rehabilitating and keeping as rentals older apartment complexes. Sure, we hope that in the future the land will have value, but 15 years is a long time, and we can't say right now what we will do with the complex at that time."