The District government has not yet finalized negotiations with the Department of Housing and Urban Development for release of a $554,000 Urban Development Action Grant awarded to the city over two years ago.

The grant is one of only a handful of UDAGs the District has won through this highly competive federal program. A subsidiary of a Maryland savings and loan and a local construction firm were to receive the grant as a loan from the city government to help pay the costs of converting an old warehouse at 14th and U streets NW into office space.

UDAGs are grants to local governments, which then lend the money to help development projects in urban areas that have trouble attracting private investment. When the loan is paid back, the city is supposed to lend out the principal again for another project. City officials said at the time of the grant award that they hoped the renovation of the warehouse, known as the Bennett Building, would complement the municipal office building now under construction at the intersection of 14th and U and help bring commercial activity back to the area.

The 1968 riots following the assassination of civil rights leader Dr. Martin Luther King started at 14th and U, and the destruction that followed transformed the corner from a crossroads for middle-class black Washington into a notorious hub synonymous with drug trafficking and other illicit activities.

In the application submitted by the city to HUD for the UDAG money, the project was cited as crucial to the redevelopment of the area. Renovation of the 29,325-square-foot building is expected to generate 50 construction jobs and, when completed, 117 permanent jobs.

Of the 117 jobs, the city estimated that only 50 would be relocating from other parts of the city and that the rest would be new . The city estimated that 60 to 70 percent of the workers in the Bennett Building would be minorities and that 40 percent would be low- to moderate-income people. The city also projected a total increased tax contribution of $148,835 a year from the businesses expected to locate there.

So far, however, the UDAG award has done little to help revitalize 14th and U. The municipal office building is six months late and still not complete and the Bennett Building stands vacant. The only activity since the grant award has been some minor demolition inside the building.

Kwasi Holman, chief of the city office for business and economic development, would not say what had held up the UDAG negotiations. He did say, however, that the city had reached an agreement with the developer, Duro Construction Co., and the lender, First Maryland Financial Services Corp., a division of First Maryland Savings and Loan.

Holman said an amendment to the application was sent to the HUD area office two months ago and that the city expects to get final approval sometime this summer.

The city allowed the grant to languish for nearly a year after it was awarded because responsibility for the UDAG program was being transferred from the city's housing office to the Office for Business and Economic Development.

In February 1984, Holman said there had "not been any delays" once the project came to his office.

Charles Gueli, president of Duro Construction, however, blamed the city in part for the "long time it took to finalize the negotiations between HUD and the city, and the city and the private investors."

A source close to the negotiations, who asked not to be named, said that one of the problems holding up the approval was that HUD had requested First Maryland to increase its investment in the project from $1.7 million to $2 million, which created problems for the lender.

"They had some problems with MSSIC," the Maryland Savings-Share Insurance Corp., said the source, referring to the now-defunct private firm that insured most of the Maryland state thrifts. MSSIC was abolished by the Maryland General Assembly in May after allegations of mismanagement at several Maryland S&Ls created a crisis that pushed MSSIC into insolvency.

Gueli, however, denied that the problems stemmed from anything to do with First Maryland.

"There were no problems with the lender," said Gueli. "The financing for this has been in place for two years. It was bureaucratic delays in working out the details."

Gueli said the increased contribution from the private investors was necessary because inflation during the two-year delay and problems discovered through demolition have increased the costs of the project.

The value of the property has escalated sharply over the last 11 years. For many years The Society of St. Vincent DePaul owned the warehouse and ran a used-furniture business there. In 1974, the society sold the building and parking lot to Rocco Lupino for $64,570, according to records filed with the D.C. Recorder of Deeds.

In 1977, Lupino sold the property to Emerson C. Marion for $85,000 and, seven months later, Marion sold it for $150,000 to Robert B. Miller, a real estate entrepreneur.

On July 17, 1980, Miller sold the property for $365,000 to a partnership he headed. On the same day, he received a $273,750 mortgage from First Maryland, the deed records show. Miller made the original application for the UDAG grant in 1981 but, two years later, defaulted on his loan. The bank foreclosed and took over the UDAG proposal.

Gueli said last year that, because of the delay on the municipal office building, the delay on his project had not hurt him that much. He has planned to market his building, at about $15 a square foot, to businesses related to the city offices across the street. Holman said the city expects to open the new municipal building for business in early 1986.

"The project is under way and I'm going to start reconstruction in the next few months," said Gueli. CAPTION: Picture, HUD awarded the $554,000 action grant two years ago to help renovate this old warehouse at 14th and U streets NW. BY RICH LIPSKI-- The Washington Post