Historically, most of the successful commercial projects were the best planned. That trend isn't changing.

So, you think you may want to borrow money for a commercial real estate project when the market improves a little more. You know the rules are likely to change, because you keep reading about it in print or online. You keep hearing businesspeople talk about how hard it is to borrow money today. Conversely, you see advertisements by local banks, telling you they are making loans just as they always have.

A most confusing picture if I ever saw one.

I think a little history will help us as come up with a reasonable answer to the question “Will I be able to borrow money for my project?”

In 1980, a new piece of federal legislation called the Depository Institution Deregulation and Monetary Control Act (DIDMCA) was passed. In essence, it allowed banks to be free to set their own direction relative to interest rates and mergers with other banks. This began the process of consolidation in banking that has reduced the number of banks nationwide to approximately 8,000 from about 15,000. In 1989, another important piece of legislation was passed, the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), which, among other things, established appraisal standards for banks. When you borrow money for a real estate loan today, your application must be accompanied by an appraisal as mandated by FIRREA. The final piece of legislation is the Federal Deposit Insurance Corporation Improvement Act (FDICIA), passed in 1991, which created some mandatory guidelines for bank operations, such as a uniform definition of capital. These three acts provided structure to the banking environment we operate in today.

With financial reform on the top of everyone’s mind today, it’s clear we can expect more of what these three pieces of legislation have in them — rules.  All these rules are intended to minimize risk to the bank’s borrowers, the bank’s depositors or the bank itself. If we take this a step further, banks clearly didn’t manage risk for either their borrowers or themselves in the past several years as effectively as they will need to in the future if our economy is to function successfully.

For commercial real estate loans, this translates into several potential changes. First, it is foreseeable that larger or better-defined equity participation by a project’s sponsor will be required. The days of “appraised value” equity are likely over.

Second, the primary source of repayment will need to be more thoroughly documented (speculative transactions will not be considered) through instruments such as written agreements and escrows. For example, it may become necessary for all proposed tenants to provide financial information to a lender before a construction project will be approved. Activities like sales contract flipping will not be allowed.

Next, a secondary source of repayment will need to be in place. And someone will ask, as they have in the past, “What happens if our collateral value goes down?” I think it is safe to say that, at last, we may have all learned the lesson that real estate values can, and do, go down from time to time. Finally, bankers are likely to ask whether the potential borrower has a relationship with the bank, including deposits.

That last question is to help the bank manage its risks. Banks will have stronger concentration limits for loan groups like raw land, acquisition and development loans, and construction loans. They will want to reserve the availability of these types of credit for their relationship customers. As stated previously, a “relationship customer” is one who has more business with the bank than just a loan.

The banking regulators will be scrutinizing all this more closely. With the criticism leveled at them for their role in the financial crisis, it seems likely that they will become more proactive.

None of this, in my view, will keep good real estate deals from getting done. In our market-based economy, it has always been about better projects getting done, better-operated banks gaining market share and a more diversified economy being more stable. As I look back over the last 35 years in banking and think about the successes and failures of various projects, one thing stands out: The vast majority of successful projects were the best planned.

So, if you want to borrow money for a project, be prepared, which includes talking to your relationship banker early on in the planning process. This will make your banker happy and maybe result in an approval for the loan you want.

Editor's note: Dennis Ward is president and CEO of Federal Trust Bank, with branches in Orange, Seminole, Volusia, Lake and Flagler counties. His 35 years of experience include serving as group president and CEO of Regions Bank and holding several senior-level positions with other banks.

John and Randy Burden, son and father, are planning to make Old Florida National Bank a household name across metro Orlando.

While many companies — OK, most companies — were stuck somewhere between neutral and reverse last year, Old Florida National Bank found open road. With the January arrival of three-decade banking veteran Randy Burden as chairman and CEO, the federally chartered, locally owned and managed independent bank changed its name from Orlando National Bank. Three months later, the bank had raised $50 million through a stock offering and increased deposits by another $50 million. Since April, Old Florida National Bank (www.oldfnb.com), founded in 1982, has grown from two to seven locations across metro Orlando. Also, in October, John Burden, 33, the son of Randy Burden, was named president. Previously executive vice president, senior lender, he replaced veteran John Christman, who became chief operating officer.

Not exactly a year of idling.

Just before the eventful year came to a close, FM sat down with father and son. Focused on achievements, challenges and plans, they peeked in the rearview mirror as well as peered ahead.

Fund raising. At a time when money was tight, seemingly regardless of industry sector, you were able to raise pretty big dollars. How?

Randy Burden: “We knew we needed to raise a significant amount of capital because the market dictates today that you have a generous amount of capital to prepare for all circumstances. And the kind of bank we wanted to build was not your normal community bank. We’re interested in building a bigger-than-normal community bank. … The plan was to talk to as many people as we could who have been former shareholders of ours and directors [at previous banks I’ve been involved in]. We had a cocktail party at the University Club [in Winter Park]. We didn’t send out any invitations; it was world of mouth. We ended up with 470-something people at the reception, and some people couldn’t get in [because of capacity]. Most of those 470 people have ended up being shareholders. To date, we’ve raised $57 million in total capital. … [Since May], we have grown from just over $100 million to about $350 million [including $280 million in deposits] in total assets.”

John Burden: “It came from the community. There were a lot of former shareholders, but there’s also a ton of new shareholders. That’s probably the difference in this bank. … It was a community-supported deal.”

Which was most challenging, and why — raising money, building deposits or expanding physically?

JB: “Raising money. Banks aren’t looked upon very favorably in the marketplace. So, even though we have what we think is a great plan, and we know we have some great folks who work here, you still have ‘raising money for a bank.’”

RB: “Every day banks are closing. There’s doubt about what’s going on in the economy. It was quite a task. But we’re very pleased with the results.”

Randy, in the past, you’ve been quoted as saying, “This is a good time to build a bank.” The timing seems odd, given the poor economy. Why is now a good time?

RB: “Because capital is such a rare commodity today, and liquidity is king in the banks, the banks that can’t raise capital have liquidity problems. They have to shrink in order to increase their capital size and hold on to their liquidity. It’s a matter of survival more than anything else. … The opportunity is there because we have the capital and we have the liquidity, so we can accommodate loans for good local customers. We’re getting to look at people [customers for loans] we’ve never had a chance to look at before. That’s why I think it’s a good time to build a bank.”

JB: “There are other market opportunities on top of that. There are great people [bankers] available to us. We’ve taken more people than we normally do because these are people we want to build a bank. They were available. We didn’t want to lose them, so we took them.”

In this environment, what are you looking for from potential borrowers?

JB: “We’re looking for operating companies — businesses that manufacture, warehouse, provide goods and services. We’re looking to give them operating lines of credit. If they’re going to own instead of rent, we’ll finance their building for them. We’re also looking to bank the community from a retail standpoint, as well.”

RB: “The biggest advantage, I’d say, is that most of our lending relationships over our careers have been more structured toward the commercial and industrial sectors versus the real estate sector. Everybody has done real estate in Florida, and we’ve done real estate, but we had the fortunate capability of understanding cash flow lending on operating companies.”

Is this a true statement: For savvy businesses, in general, when the economy is poor, opportunities are good?

RB: “Everybody always says that. And the opportunity is there. The opportunity is there if you can adjust your operations to the economy. What most people are saying is that the values today are the lowest they’ve been in years, so you should take advantage of that. But the only way you can take advantage of that is if you’ve got the cash or if you’ve got the ability to borrow. Most of the borrowers that we’re looking at have put themselves in that kind of position [with cash or able to borrow]. Or, they’ve adjusted their operation to the economic times. … If you’re capital intensive and the market turns down as fast as this one did, it’s very difficult to adjust in a short period of time to your new operating revenues. They can do it over a period to time, if they have time to do it. But most of [those who] have been successful are able to adjust fast. It is amazing how many people do have cash out there. People are just not employing it; they’re waiting to see what’s going to happen.”

Randy, you reassembled a group of bankers who have worked with you at other institutions over the past 20 years. Has that been the key to growth – that experience?

RB: “Our situation represents the best of the old and the best of the new. My son represents the new. I think we’ve assembled the best young group of bankers, and he’s been largely responsible for that. And we’ve got some of the most experienced older people on the other side, including my team. We don’t have the energy level they [the younger bankers] do; they’re working nonstop and asking for more. They’ve really energized the process. That’s a very big plus, and they’ve made a huge difference.”

John, with the transition to president, what are your priorities?

JB: [2009] was a year of transition — raising the money, getting the people. [This] year is to make money. … The whole goal [now] is to increase profitability. … We also want to keep the positive momentum going. We built the foundation. Now, we want to build the house.”

John, what do you bring to the table?

JB: “What I bring is a lot of energy and enthusiasm. I’m a hard worker. … I think the biggest thing about all of these guys, who are younger than what you would normally see at a bank, is that we’re all real passionate about banking.”

In general, with succession planning at any company, particularly with “family” businesses, there are pitfalls. How have you been able to overcome those hurdles?

JB: “Because we’re such a close family, when we come to work, it’s work. We’re here to do a job; it’s what we do. We work very closely together, obviously. But it’s not an issue.”

RB: “The one thing we both feel very strongly about is that when you invest in [our] bank, it’s our obligation to do the best we can to make sure we get the best return for you. Every person in this bank is more interested in shareholder value than they are a job. We want to drive shareholder value up. That’s what we work on every day. That’s what he does, and that’s what I do. We may disagree on certain approaches. But we know where we want to go. … What good bankers do is help build a community. That’s what we’re interested in doing.”

Such a leadership transition at any company, in general, isn’t easy — correct?

RB: “When you sit down and talk about the plan, you have to get all the people involved. In our particular instance, John Christman was involved in our decision on what to do. … You get the buy-in of everybody involved, including the past president. Make him understand his role and function in what you’re trying to do. … It’s not an easy thing to do, but you have to understand where you want to go, how you’re planning on getting there and who is the best person to drive that train.”

What would have to happen in 2010 to make the year a success?

RB: “Success would be continued modest growth, no more surprises on the loan side, an economy that gradually improves, seeing our customer[EWP1] s get more stable and a general attitude about the economy that’s positive versus the negative one that’s out there today. … I want every bank to be successful, and I want every customer to be successful.”

JB: “I want people to start making some money.”

They are not so different from me and you.

They need cash. Though not formally employed, they do have fruitful careers. Like other businesspeople, they spend their days figuring out creative ways to get paid for their services. They work all over the world, travel, meet interesting people and close deals over coffee. Every day offers new, challenging, exciting opportunities.

Their goal is to get you to provide them with personal information.

Trust is a key component of doing business, but so is skepticism. Today, we can engage in business all over the world without ever meeting the vendors in person. That’s good and bad. These long-distance transactions can provide excellent opportunities for businesspeople, as well as for criminals.

Members of our international services team are frequently contacted by clients who are in uncomfortable situations with their customers or vendors. In one instance, our client was a broker involved in international real estate. He’d been referred to us by a longstanding client who knew that our team frequently assists international clients in purchasing property in the United States by providing advice regarding structural alternatives and U.S. income tax and estate tax implications.

The broker was working with a potential buyer who was searching for multiunit residential rental properties in Florida.

Over the course of a few months, the broker and the international buyer developed a working relationship and established a certain degree of trust. When they finally found a suitable property and the broker requested a deposit, the international buyer asked for assistance in getting the money into the United States. Specifically, he requested the use of the broker’s account, explaining a number of reasons for the difficulty in getting his funds out of his home country, China. The two had established a collegial and professional business relationship, so the request for assistance seemed harmless. However, before continuing with the transaction, the broker wisely asked our international group if we had seen situations similar to his. We immediately advised against moving forward on the deal.

In another situation, a different real estate broker had a customer who sent more money than was required for the closing. Once the buyer sent the funds to the escrow account, the buyer immediately instructed the broker to wire the overpayment to another entity. We advised the client not to refund the additional funds but rather contact their attorney.

In this common scam, the overpayment amount is supposed to be sent by the broker before the funds are cleared from the buyer. The bank later notifies the broker that the entire amount was a fraudulent transaction, and the overpayment amount that was already sent cannot be recovered because the broker did not wait for the original transfer amount to properly clear.

According to www.snopes.com, a Web site devoted to confirming or debunking rumors and urban legends, these are variations of a scam that has been circulating since the 1920s. And, although the scam has been around since before the dawn of the Internet, it continues to ensnare the unsuspecting.

In previous versions of these schemes, you might have received a letter, fax or e-mail requesting assistance in getting a large sum of money out of a foreign country, often from a person in a nation experiencing political unrest. Sometimes, the person claimed ties to religious organizations or nonprofit groups; often they had an unsuspected but “legitimate” windfall and simply needed help moving funds out of the country. The common thread is that in return for the use of your bank account, you are promised a percentage of the money.

The scams our clients were subject to are unique in that the criminals patiently took the time to present themselves as “legitimate” business contacts. They gradually built relationships and gained the trust of an accommodating professional. The request to use the bank account of the potential victim came long after the relationship was established. In similar scenarios, when the transaction was about to take place, political turmoil or the chaos of the financial institutions in the client’s country would threaten to derail an otherwise lucrative transaction. Often the client offers a financial incentive — perhaps better terms in the deal or a bonus — for the use of a stateside bank account.

In the cases above, the brokers could have lost funds, but they could have also been included in a fraud investigation. Had they proceeded, their situation would have qualified as a money-laundering scheme, and although our brokers were innocent victims, they could have been held legally responsible.

We would all like to believe we are too smart to be taken. Yet, these new angles on an old trick should serve as a reminder to reexamine how carefully we perform due diligence in our transactions. This may be the right time to review your due-diligence process as a whole. There are a number of lessons to be learned from this story, but the most important is this, and there is no gray area here: Never provide your bank account for someone else to use.

Editor’s note: Laura Olivieri is an international services tax manager with LarsonAllen LLP. She can be reached at lolivieri@larsonallen.com.