The developers of Jade Ocean, a luxury high-rise condo near Miami Beach set to be completed in 2009, claim they've already sold 98% of the building's units -- a seemingly astounding feat given that many housing experts expect the Miami condo market to implode before the project is even finished.

Of course, the reality is that this "pre-construction sales" number at Jade Ocean carries little meaning. It's a phrase that previously impressed people but carries little meaning in present-day Miami -- which is increasingly looking like the Netherlands in the aftermath of the Tulip Craze more than 300 years ago.

At the forefront of a looming crisis in the market is Corus Bankshares ( CORS), a Chicago-based bank that has been one of the largest construction lenders for Miami condos in recent years.

Skeptics say that buyers for Miami projects like Jade Ocean -- the largest of the Florida condo projects for which Corus has provided financing -- will have left the market in droves by the time the buildings are actually finished. Buyers will walk away from their 20%-down deposits because of rapidly falling prices and a huge inventory overhang that will only get worse in the market, several industry experts say.

The problem specifically with Jade and several other projects Corus has lent to is that they are being built late into the game, and the rules of play have changed rapidly since the heady days when speculators would snap up any unit available.

"Miami is Corus' largest market and sales have slowed down, and there are a number of units coming online for the next year or so," says Ronald Peterson, an analyst with Stern Agee who rates Corus neutral. "It is believed that a lot of people who signed preconstruction were largely investors and the concern is, do they walk away, do they close on loans?"

So far, Corus' results have been only slightly affected by the real estate slowdown, but the next few years could bring a world of pain. That has sent Corus' stock down about 35% this year to around $15. Moreover, 55% of the stock's float is being sold short, meaning investors are betting on a decline in the stock's value.

A Flop for Flippers

About 95% of Corus' $8 billion of loan commitments are for condo construction or conversion projects. And 25% of those are located in the greater Miami region. Corus also has large exposure to California and Las Vegas.

To be clear, Corus likely will not have problems at all of its Florida projects. Mike Morgan, a South Florida real estate agent and consultant to hedge funds, says the riskiest projects for Corus are the ones that have not been delivered yet.

These include Jade Ocean, the Ivy at Riverfront and the Mint at Riverfront. The projects are all located in different parts of Miami, and Corus has committed to lend $610 million total for the three projects. New York-based iStar Financial ( SFI) was a co-lender on the Jade Ocean project.

The three projects are suffering from less-desirable locations and the fact that they are being built late in the Miami housing cycle, Morgan says. He estimates that condo flippers have made up 90% of the buyers at the projects Corus has lent to in Miami.

"These flippers are now under water in most Corus buildings based on what they paid and where the market is today," he says. "But the market is getting worse."

Moreover, the flippers will have a tough time getting a mortgage now that lending standards for major mortgage providers like Countrywide Financial ( CFC) have tightened, he adds.

"I don't know anyone that is loaning on these condos to investors," Morgan says. "If it is not your primary residence, you have a problem."

A Corus representative did not return a call seeking comment for this article, while iStar declined to comment. Brian Brodeur, a Corus senior vice president who worked on the Jane Ocean deal, also declined to comment.

'Really in Trouble'

Over the last 10 years, Corus has recorded only $16 million of charge-offs related to condo loans, with the bulk coming in the second quarter of this year on one condo project in Naples, Fla.

However, in its most recent quarterly report, filed in late July, the bank acknowledged that "a surge in buyer cancellations could be especially painful for Corus, particularly if a substantial percentage of a given project's pre-sale buyers did not close."

Buyer cancellations in the Miami market will only get worse, says Jack McCabe, head of McCabe Research and Consulting. He expects walk-aways from new condo projects and deposits will reach 30% to 50% of sales through 2008 in the South Florida counties of Miami-Dade, Broward and Palm Beach.

"Corus is really in trouble," McCabe says. "The walk-away rate we are going to see is on more-expensive condos, primarily half a million dollars and above," where Corus has large exposure, he says.

For its part, Corus has said it is partially cushioned by the fact that its initial loan exposures target about 55% to 65% of a condo project's gross sellout value (the original sales prices on a contract, not closing, basis).

Morgan finds fault with Corus' claim. If prices collapse, all bets are off, he says.

"I am predicting condos in less-desirable areas will sell for 25 cents on the dollar. Corus has several properties that will fail," Morgan says.

A major problem in evaluating Miami pricing is that so few projects have actually closed for sale. Lenders who underwrote condo projects relied on sellout values that were provided to them by the aggressive developers, McCabe says.

Litmus Test

One major litmus test for Jade Ocean and other projects set to finish construction in coming years is One Bal Harbour, a project that homebuilder WCI Communities ( WCI) is planning to finish by October.

Sales at One Bal Harbour began in late 2003. WCI told investors on its conference call that half of the units were sold to investors, and it expects default rates will be between 8% and 10% at the site. Several market watchers say those default rates are conservative.

WCI also said Miami Beach, where One Bal Harbour is located, is a better market than the rest of Miami. Prices will average about $750 per square foot.

Jade Ocean, in contrast, is located about a mile from Bal Harbour in the area known as Sunny Isles, Fla. -- which does not have golf courses or as a nice a beach as Bal Harbour. Nonetheless, Jade Ocean is asking for an average of $900 per square foot for the units, with some as high as $1,400 per square foot.

Alex Barron, an analyst who covers WCI and other homebuilders for Agency Trading Group, wonders how Jade Ocean can possibly find buyers at higher prices than Bal Harbour, where he expects the default rate to be 25%.

"Jade Ocean is so ridiculously expensive," Barron says. "It will be one huge blowup. It is so far out into the future."

The developer of the project disagrees. Edgardo Defortuna, the president of Fortune International, says the company was very careful to screen against speculators buying at the property. His wife was the director of sales.

"We didn't sell more than one unit to any given buyer," he says. "We specifically told them this was an end-user building."

Defortuna also says that his company has been aggressive in targeting foreign buyers who are benefiting from the cheap dollar. In addition, he points to the required 20%-down deposits on contracts as an assurance that buyers will close.

"I don't think sophisticated buyers will easily walk away from 20% deposits," Defortuna says. "If I had to bet on any building closing, it would be this closing."

Of course, developers tend to be an optimistic bunch in sunny Florida.

"All of these developers are saying that things are going to be good, because we haven't had many closings yet," Morgan, the consultant, says. "This project will definitely bomb."