A Bank Bet on Condos, but Buyers Want Out

Javier Miglin may walk away from an ,000 down payment on a condominium with water views in Miami. Randal Mills may give up a 0,000 deposit on a 15th floor condo on the Strip in Las Vegas. And in San Diego, Jeanette Graham would just like to meet the neighbors.

When Jeanette Graham bought her apartment last year, she was able to negotiate a reduction in homeowner’s fees and other sweeteners. Now buyers are offered even better incentives.

The three seemingly unrelated predicaments have a common thread that leads to Chicago, and Corus Bankshares, which financed the construction of each condominium development involved.

Whether buyers like Mr. Miglin and Mr. Mills close on their condos will be a crucial indicator for Corus. Many condo projects that started during the real estate boom are just being completed, and developers must begin repaying construction loans taken out before the market turned sour. If buyers do not close, and developers struggle, lenders like Corus may be left holding the bag.

"We're at the riskiest point of the condo lending cycle as these projects are being completed," Jefferson L. Harralson, a bank analyst at Keefe, Bruyette & Woods, said. "In the coming weeks and months, we're going to find out what the demand for these condos really is."

Real estate clearly was a different story when Corus started concentrating on lending to condo projects a few years ago. The bank bet heavily that thousands of buyers, many hoping to turn a quick profit, would snap them up.

Today, developers owe Corus billion, .7 billion of which, or 92 percent, is in condominiums. Of that, about 25 percent of them are in projects in the Miami area and 9 percent are in Las Vegas, according to regulatory filings. More than .15 billion of its outstanding loans are due by the end of this year. Nationwide, the number of condos completed this year will be up 45 percent - 232,933 vs. 160,239 - from 2006, according to data tracked by Marcus & Millichap Real Estate Investment Services, a real estate investment brokerage based in Encino, Calif.

But sales have fallen 12 percent through August, Marcus & Millichap said. And recent trends in Las Vegas and Miami, where at least six Corus-financed projects will be finished by next summer, are worse.

In the three-month period from June through August, sales fell 46 percent in Las Vegas and 29 percent in Miami from the year-earlier period, Marcus & Millichap said.

"Up until this point, Corus has been relatively unscathed with essentially one foreclosure," said Peyton N. Green, a senior analyst in the Nashville office of the FTN Midwest Securities Corporation. That foreclosure, involving a condo conversion in Naples, Fla., resulted in a write-off of million.

But the company's stock price reflects the gloomy outlook, having fallen 36 percent in the past 12 months, to .61 a share yesterday. Mr. Green, who has a neutral rating on Corus's shares, said about one-third of the shares have been sold short, a strategy used by speculators to profit from falling stock prices.

While most banks do not have the exposure to the condo market that Corus has, Mr. Harralson said they still face risk. Banks typically allocate an average of 15 percent of their loans to construction and the rest to consumer loans, business loans and other real estate.

Corus warned in its last quarterly filing that "a surge in buyer cancellations could be especially painful, particularly if a substantial percentage of a given project's presale buyers did not close."

Still, the Corus Bank president, Robert J. Glickman, remained optimistic. So far, he said in an e-mail message, developers have used many successful strategies "to ensure that buyers come to the closing table."

"Good developers - those that are diligent, successful - need to keep up the buyers' interest and desire to close," he said.

That optimism raises warning signs with analysts like Jack McCabe, a real estate consultant in Deerfield Beach, Fla. He has been hired by hedge funds and other investors to study 8 of 12 projects in Miami that Corus has financed and advise them on their progress.

"In this market downturn, even the most successful developers with the best projects and the best geographic locations are going to take hits," Mr. McCabe said. "Mr. Glickman's comments are eagerly overoptimistic and do not match the severity of this downturn."