When Oliver T. Carr Jr., Washington's biggest real estate developer, resigned in October from the board of directors of MNC Financial Inc., the area's biggest banking company, he said that he wanted "to pursue other interests."

But Carr's financial interests remain intertwined with the two banks that make up MNC -- American Security Bank and Maryland National Bank.

Carr, who restored the historic Willard Hotel and led the redevelopment of downtown Washington during the 1980s, has borrowed hundreds of millions of dollars from the two banks over the years to finance projects. Sources said that if Carr had not resigned from MNC, problems with some of his loans caused by the commercial real estate market's downward spiral could have made it difficult for him to remain on the board.

Carr's dual role -- as a director overseeing MNC and as a customer borrowing money from the MNC banks -- illustrates a widespread, legal and accepted practice in the banking world. Historically, banks have put major borrowers on their boards not only for their management expertise but also for the business they can bring in as loyal bank customers.

But that dual role carries with it a built-in potential for conflicts of interest, according to banking executives and financial scholars. Some financial experts argue that loans to directors can make individual directors and bank boards less rigorous or objective in their oversight of a bank's management and policy. Experts also question whether banks can be impartial when reviewing a director's application for a loan or dealing with a director who has trouble repaying.

MNC Chairman Alfred Lerner, a Cleveland insurance executive who took control of MNC in early September, said he has a "personal rule" against loans to directors. "I look at loans on a what-if-they-go-bad basis," he said. "From that perspective, insider transactions are not the kind of loans that I want to make."

Lerner said he frowns upon directors who come looking for loans and he worries that loan officers might be "inhibited" in dealing with a troubled loan if the borrower is a board member. Despite his personal feelings on the subject, Lerner said he has never voted against a loan to a bank director and would not ban such loans at MNC.

Carr's dual role as a director and borrower was not an "inherent conflict," but it was "potentially dangerous," Lerner said.

Carr, who is chairman of the company that bears his name, declined to be interviewed for this report. "He doesn't think it is appropriate for him to be commenting on anything he did in his role as a director at the bank," said Carr spokeswoman Joanne Kaplan.

Carr and MNC officials treat details of their relationship as confidential, making it virtually impossible to determine how they dealt with these potential conflicts. But the abrupt change in Carr's posture, from a director supervising the company's top executives to a customer asking for accommodation during difficult times, highlights the sensitive issues that can arise when directors become borrowers.

Officials of Carr's firm, the Oliver Carr Co., said the developer is up to date on all loan payments and expects to stay that way. The company has been negotiating with various lenders, though, to extend payment terms on some loans and to refinance others to raise cash needed to weather the real estate industry's decline, Carr executives said. The institutions with which Carr is negotiating include MNC, sources said.

Last summer, before Carr resigned, bank officials had concluded in internal reviews that the likelihood of future default on Carr loans worth more than $50 million had increased, sources said. Bank officials had rated three Carr loans as, in the bank's formal terminology, "an undue and unwarranted credit risk," sources said. That rating meant the level of risk was increasing "beyond that at which the loan originally would have been granted," according to the official bank definition, sources said.

Robert O. Carr, Oliver Carr's son and president of the Carr Co., said, "We have never received preferential treatment on any transaction based on a personal relationship. ... We've been able to obtain competitive financing because of the strength of us as a borrower, and not because of relationships."

Robert Carr said that American Security has been the company's "lead bank for many years."

"We've done a great number of different transactions that involve all facets of project lending with them," he said. "We've also done business with most of the other major banks in the country and some offshore," he added.

Earlier this year, another local real estate developer, Dominic F. Antonelli Jr., resigned from the board of a bank where he had borrowed millions of dollars. Antonelli had served on the board of Madison National Bank since it was founded in 1963. Now he is asking Madison and other lenders to restructure hundreds of millions of dollars of real estate loans instead of forcing him into bankruptcy.

Unlike Antonelli, the Carr Co. vows that it has the wherewithal to continue meeting its financial obligations. Company executives said the Carr firm is generally in a better position to cope with trying market conditions than its competitors.

Nonetheless, loans to Carr ventures already have cost MNC money. Bank officials' findings that the risk of future default on Carr loans had increased required MNC to put more of its cash -- how much remains unclear -- in reserve to cover potential losses, sources said. The additional reserves damaged the company's bottom line.

MNC, which has an unusually high percentage of its loans devoted to real estate and construction, is struggling to survive the region's real estate bust. The company made real estate lending its top priority in the 1980s. This year, it has lost $241.9 million on hundreds of real estate loans because of defaults and the need to reserve more money. Carr's loans are only a fraction of the problem.

"To whatever degree {directors' loans} haven't been fine, it's peanuts," MNC Chairman Lerner said.

Interests on Both Sides of the Table

MNC has said in annual reports to shareholders that members of its board of directors received no preferential treatment when they did business with the company. And, in their third-quarter review of MNC this year, federal bank examiners said the company has complied with rules requiring equal treatment of loans to directors.

But it is impossible for the public to analyze MNC's loans to directors independently. Banks are not required to disclose directors' loans to the public -- not to the shareholders who can vote directors in or out, and not to the taxpayers who ultimately insure bank deposits.

Although some banks voluntarily issue public reports on loans to directors, MNC executives declined to provide any information about directors' loans.

It is also difficult to determine how a director like Carr performed as a watchdog and policy adviser because minutes of bank board meetings are kept confidential. Carr and other members of the MNC board said it would be wrong for them to discuss what goes on behind the boardroom's closed doors, including the degree to which Carr influenced the company's real estate lending policies.

Carr was not the only MNC director with interests on both sides of the table. Other MNC directors have received loans from the company, sources said.

Builder A. James Clark, an MNC director and the company's second-largest shareholder, has been a partner of Carr and other developers over the years in real estate projects financed by MNC. Clark heads Clark Enterprises Inc., which is the second-largest general contractor in the United States, according to Building Design & Construction Magazine, an industry publication. Clark's subsidiaries, George Hyman Construction Co. and Omni Construction Co., have served as general contractors on projects funded by MNC.

According to D.C. partnership records, Clark's firm owns an interest in one of the Carr buildings for which, sources said, MNC has made additional reserves against potential losses.

Clark declined to be interviewed.

Important Player in Local Banking

Carr, 65, is Washington's leading developer and is known best for the Willard hotel and office complex on Pennsylvania Avenue NW. His projects include the controversial Metropolitan Square building on 15th Street NW, for which he demolished the historic Rhodes Tavern, and the massive International Square building on K Street NW.

He also has been an important player in local banking for more than a decade. He was a director of Riggs Bank from March 1977 to January 1983, when he left after a falling-out with Joseph L. Allbritton, the new Riggs chairman.

During his battle for control of Riggs, Allbritton charged that Riggs failed "to disclose sufficient information for Riggs shareholders to determine whether {loans to directors} compromise the stability of the bank and reflect adversely upon the ethical standards of the Riggs board and management." Loans to Carr totaling $18 million were among those Allbritton questioned.

After leaving Riggs, Carr joined the board of American Security Bank at the recommendation of Clark, who was a director there. Carr and Clark already had a close business relationship: Clark built many of the buildings Carr developed.

Carr also had a close relationship with Riggs Bank's president at the time, Daniel J. Callahan III. Unlike smaller Riggs borrowers who dealt exclusively with loan officers, Carr also discussed his loans directly with Callahan, Riggs sources said.

When Carr moved to American Security in 1983, Callahan went there too. He became vice chairman and later chairman. Carr, Clark and Callahan were part of the same circle of local business leaders. "We're friends," Callahan said. "But I treated them like any other director, and they treated me like I worked for them and the shareholders."

American Security officials, who asked not to be identified, said Carr would call Callahan to discuss his company's borrowing needs. Callahan said no such discussions took place.

Callahan said all of American Security's loans, including loans to directors, go through a system of internal checks and balances before gaining approval. He said Carr's loans were "good loans" when they were approved and bank officials "could not have predicted the downturn in real estate."

"I think we've had a bunch of good directors, and they've served the bank well," Callahan said.

Carr and Clark were dominant figures in the boardroom while the bank's emphasis on commercial real estate lending waxed, bank sources said.

In 1986, American Security and Maryland National Bank joined forces to form MNC Financial, a new parent firm. Carr and Clark remained directors of American Security and joined the board of the parent.

Over the next few years, MNC's relationship with Carr and Clark grew in other ways. The bank company leased space in Carr buildings and paid one of Clark's construction firms more than $3.5 million to renovate American Security Bank facilities.

Banks are required to disclose more information about leases, contracts and other business deals with directors than they are about loans to directors. In statements to shareholders, the bank company said the deals with Carr and Clark and unrelated business transactions involving other directors, including George G. Radcliffe, Harry K. Wells, Thomas M. Gibbons, Melvyn J. Estrin, Joseph C. Eanes Jr. and Benjamin R. Civiletti, showed no favoritism.

By the end of 1989, MNC was the leading real estate lender in the Baltimore-Washington region. Thirty percent of MNC's total lending, about $4 billion, was for real estate. A Wall Street analysts' survey this summer said that no U.S. bank had a higher percentage of its loans devoted to real estate development and construction.

But by the middle of this year, the heavy concentration of real estate loans had become an acute problem for MNC and the focus of a contentious battle within the board of directors. Cleveland insurance executive Lerner, MNC's largest shareholder, emerged from the power struggle as MNC chairman. Carr resigned shortly thereafter.

Lerner's ascendancy signaled a shift in attitude as well as influence on the MNC board. Since joining the board in January, Lerner had harshly criticized the bank's real estate lending.

A Quest for Cash

Robert Carr said that Carr's lenders "have no particular risks that they or anybody else ought to be concerned about." He added, "Our banks are not going to suffer a nickel of loss on interest or principal from any loans they have with the Carr Co."

Most of Carr's buildings are fully occupied. The company said it has leased about 95 percent of its 6.4 million square feet of completed office space, and about 60 percent of an additional 1.4 million square feet under construction.

The company also began bracing for leaner times before most of its competitors, with a round of layoffs last fall. The number of employees in Carr's headquarters and regional offices has declined to 139 from a peak of 164 in October 1989.

However, the company aggressively expanded its development agenda in the 1980s, relying on borrowed money. The combination left Carr on a limb, like most developers, when the real estate boom went bust.

The Carr Co. has postponed projects for which it lacks major tenant commitments and it does not plan to begin new construction without advance leases, Robert Carr said. That delays the day when Carr's undeveloped land will begin to generate profits.

At a time when banks are under pressure to reduce their real estate loans, the Carr Co. has been asking banks to extend loans on undeveloped land instead of demanding repayment when the loans come due, according to Terence C. Golden, the company's chief financial officer.

New buildings have taken longer to lease than the company planned, Carr executives said. Moreover, to sign tenants in overbuilt markets, the company has made costly concessions, such as months of free rent and special finishes for tenants' offices.

Carr and its lenders did not provide for all of those concessions in their original development budgets. As a result, the company has been reaching into its own pockets, calling on its private investors and turning to its lenders to cover the shortfalls.

The nature of the real estate business is that developers have relatively little cash on hand. Most of their wealth tends to be tied up in land and buildings.

Developers typically generate cash by selling their property or borrowing against it, a process known as "refinancing." But in the current environment of tight credit and declining property values, it has become much more difficult for developers to convert their property into cash.

Like all developers, Carr will need cash to weather the real estate industry's woes. Golden said the company has given its lenders a plan to raise a "war chest" through refinancings that would cover Carr's loan obligations for the next 2 1/2 years. One of the candidates for financial restructuring is the Willard Hotel, Carr's signature project.

A Maryland National Bank review last spring of Carr Co.'s business projections found that the developer would be "dependent" on refinancings and other borrowing until next April, sources said.

"Every bank in America wants to get every real estate loan paid off today," Golden said. "There's no developer in America, there's no institution that can do that, and what we just tried to do is work with them and deal with the reality and come up with a business plan that gets us there."

Good intentions notwithstanding, the company's ability to meet its goals hinges on forces beyond the developer's control, including overall real estate market conditions.

The company is currently making a profit, Golden said. He declined to say how much money the company has made over the past year, but predicted that it would earn $8.9 million over the next 2 1/2 years.

Carr spokeswoman Kaplan said the company had $14 million in cash on hand as of Nov. 1 and a net worth "just under $100 million." That is significantly less than what the company said it was worth last year. An April 1989 financial statement Carr submitted to banks said the company had a net worth of $135.7 million, sources said.

The decline reflects lower property values and "a much more conservative approach" to accounting at the development firm, one source said.

In October 1989, before the steepest decline in Washington area real estate values, Oliver Carr, who owns 99.6 percent of the Carr Co., reported a personal net worth of $135.7 million, virtually the same as the company's.

Maryland National Bank still was citing the 1989 financial statements when it reviewed Carr's loans this summer, even though market conditions had worsened significantly since the statements were prepared, sources said.

Maryland National rated eight Carr loans as worse than average on a scale that measures the risk that loans will result in losses to the bank, sources said. The loans were for undeveloped land, the Commercial National Bank Building in downtown Washington, and two Carr restaurants: the McPherson Grill and the Occidental.

Three of the Carr loans on Maryland National's books were rated "an undue and unwarranted credit risk," sources said. According to the bank's loan policy manual, the rating means the risk was "increasing beyond that at which the loan originally would have been granted," sources said.

It is unclear how those loans are rated today. MNC sources said most of MNC's real estate loans have received worse ratings since federal regulators examined the banks' operations during July, August and September.

The largest of the criticized loans to Carr was a $50 million construction loan issued in 1987 for the Commercial National Bank Building at 700 14th St. NW, sources said. American Security Bank issued the loan and shared it with other banks.

American Security director Clark's firm, Clark Enterprises, has a 10 percent stake in the development, and his Omni Construction served as general contractor on the project.

The building was completed in February 1989, but slow leasing and extra concessions to tenants pushed costs above the original budget by about $5.1 million, sources said.

Carr's partnership, Square 223 Associates, was called upon to cover the deficit over a period of eight months, sources said. When the loan was reviewed during the summer, Carr was expected to find another lender to replace the American Security loan by the end of the year. Carr spokeswoman Kaplan said last week the firm is aiming to complete a deal in February.

Projects Still Sources of Uncertainty

Carr made a breakthrough last month when a Dutch pension fund put up $90 million to refinance an office building at 700 13th St. NW. Like the Commercial National Bank Building, 700 13th St. suffered from slow leasing and unforeseen rent concessions.

The original lender on this property, First National Bank of Chicago, had helped the developer cover cost overruns when the building did not break even as scheduled in May, according to First National Vice President William Rice Jr. Before the Dutch pension fund stepped in, First National had lent the Carr Co. and its partners another $6.7 million to help it meet payments on its original $44 million loan and to fund continuing project shortfalls, Rice said.

Several other Carr developments remain sources of uncertainty for the developer and its lenders, including:

Ballston Plaza III, an office building at 1100 N. Glebe Rd. in Arlington that was completed this fall. Maryland National Bank funded the project with a $53 million loan. Eastman Kodak Co. tentatively has agreed to lease more than a sixth of the building.

The terms of the lease, Carr's first at Ballston Plaza III, would not meet the standards set in the project budget, Robert Carr said. Goldman, Sachs & Co., a New York investment bank, tried unsuccessfully to find additional investors for the development, sources said.

Liberty Place, an office building under construction at the corner of Indiana Avenue and Seventh Street NW. Clark Enterprises owns about 6 percent of the project, and one of Clark's companies is the builder.

American Security lent a Carr partnership $19.7 million to acquire the land. Then, in September 1989, American Security and a Japanese bank jointly issued a $50 million loan to fund the project to completion. Carr has yet to sign an office tenant for the building.

Lincoln Place, a delayed downtown development. A Carr partnership has borrowed $27 million from American Security Bank to acquire the site, on the east side of 11th Street NW between E and F streets. Robert Carr said the project will not proceed until a tenant signs a substantial lease. Bank director Clark and his Clark Enterprises have a 16 percent stake in the project.