Los Angeles' largest nonprofit AIDS services agency is suing to stop the city from foreclosing on a onetime AIDS hospice that was built with a city housing loan and is now being used as offices for HIV case managers.

The AIDS Healthcare Foundation opened Linn House, its third hospice, on donated land near West Hollywood in 1995. Within two years, lifesaving antiretroviral drugs changed the course of the epidemic, and in 1999 the foundation turned Linn House into offices for social workers and administrators and meeting rooms for support groups.

"When we conceived this facility and built it, people were dying within 30 months of being diagnosed with AIDS," said foundation President Michael Weinstein. "We should be celebrating that this change took place, not punishing the organization that came to the rescue."

But city officials say that the $1.1-million, 40-year loan to build Linn House can't be used for offices or administration.

"The law very clearly requires that the money that was lent to the foundation be used for housing," said Mercedes Marquez, general manager of the city Housing Department.

In the Superior Court lawsuit filed this month, the foundation argued that the city waived its right to enforce the loan contract because it had known about the new use since 2000.

The dispute marks the second time that the foundation has wrangled with government officials over an AIDS hospice. In 2006, it closed the Carl Bean House in the West Adams district of L.A. after protesting funding reductions for patient care imposed by the Los Angeles County Board of Supervisors.

At the time, the foundation had argued that such a facility was still needed, not so much for hospice as for skilled nursing services.

Many longtime AIDS survivors agree.

"The population is aging," said Jim Chud, who was diagnosed in 1985. "There are a whole slew of things that happen after 20 years of infection that seriously debilitate your life. In reality, the population that is going to need skilled nursing facilities is growing."

A study released in December found that 46% of the Los Angeles County nursing homes surveyed would not accept a patient with HIV. Under the direction of UCLA law professor Brad Sears, the director of a think tank on sexual orientation law, two third-year law students posing as hospital discharge planners called 131 L.A. County nursing homes.

According to Marquez, the AIDS Healthcare Foundation could use the Linn House as a nursing facility or as transitional housing and still qualify for the housing loan.

Weinstein said that without a county subsidy, Medi-Cal, the state's healthcare program for the poor, pays too little to sustain such a facility.

mary.engel@latimes.com