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(This story, in slightly different form, originally appeared in ALM’s Daily Business Review.)

MIAMI-Commercial real estate veterans predict the sale of loans held by failed lender Corus Bank could further batter South Florida’s new condo market, ushering in a deeper price correction needed before the condo market can begin a road to recovery.

The Miami area has one of the nation’s largest concentrations of condo projects financed by Corus–about $1 billion. If the buyer of the Chicago-based bank forecloses on the nonperforming loans and unloads the underlying condo units at fire-sale prices, it could drive the value of South Florida condos to new lows, experts predict.

“This is going to establish really one of the biggest blocks of properties in South Florida. That is going to establish a new [price] basis and is going to reset the whole market to a new realistic [level],” says Steve Russo, a former Wachovia Bank real estate executive and founder of investment advisory firm CREF Group in Fort Lauderdale.

“It’s going to be a catalyst to bring prices down–kind of give us a much needed reset on values,” adds Jaret Turkell, an associate director with Holliday Fenoglio Fowler in Coral Gables.

“It is better to get it over with, set a new base for the market and pave the way for recovery,” says Brad Hunter, Metrostudy’s chief economist and national director of consulting. “Ultimately, most of these condos are going to have to sell for well below half of the peak pricing.”

A group led by Starwood Capital Group won the bidding for the remnants of Corus that regulators seized Sept. 11. Corus had a $5.4-billion commercial real estate loan portfolio as of March 31, including $997 million to condominiums in South Florida, according to company filings. How low Starwood can go on pricing largely depends on how much it pays for Corus’ assets.

Market veterans who have lived through other real estate disasters hope Starwood doesn’t dump condos onto the market as the Resolution Trust Corp. did when it liquidated the assets of insolvent thrifts during the savings and loan crisis of the late 1980s and early 1990s. “It prolonged the recession,” says Michael Cannon, managing director of Integra Realty Resources. “It doesn’t make prudent sense.”

The Federal Deposit Insurance Corp. has already sold Corus’ deposits to MB Financial. The FDIC requested bids for Corus’ assets last month, and attracted bids from The Related Cos. in New York, Crescent Heights in Miami and Colony Capital in Santa Monica, CA.

Starwood Capital’s group includes billionaire investor Wilbur Ross, who was part of the group that bought Coral Gables-based BankUnited after the FDIC seized the failed bank in May. Experts predict the winning bidder could take control of the Corus condo loans at 30 cents on the dollar, which could mean steep discounts on projects or individual units.

That could devastate competing developers, many barely just hanging on,and private owners, most of whom are already underwater. “If a condo is selling for $150 or $175 a foot, your condo across the street is affected by that,” Turkell says. “There is going to be a trickle-down effect.”

Some developers can’t slash prices to compete because their construction lenders have put limits on how low a unit can sell for. Developers need lender approval to lower prices below the limit, known as release prices.

At least eight Miami-Dade condo towers were built with Corus financing. The lender provided more than $1.2 billion over the past five years to build more than 2,800 condos, according to Miami-Dade County property records.

In many cases, Corus provided construction loans at higher fees and interest rates in exchange for not requiring personal or corporate guarantees from the borrowers, CREF’s Russo says. Now many of its developer-clients are having trouble selling condos and repaying loans.

Many of the loans are coming due or are already delinquent. Most condo construction loans mature two to three years after the money is dispersed. In South Florida, most of Corus’ loans closed between 2004 and 2006.

In the case of Paramount Bay, just north of downtown Miami, Corus lent an affiliate of Boca Raton-based PRC $216 million to build the 346-unit project in December 2006. The loan will come due in December, but closings at Paramount have yet to begin. PRC president and CEO Dan Kodsi isn’t worried about who will end up owning the loan on his project and the looming deadline.

“We are going to work with whoever the lender is,” Kodsi says. “The conversations today are more about lenders and developers working together for the best outcome for all parties. We kind of reach that point where these deadlines don’t matter as much.”

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