problems with ChrootDirectory

I recently compiled/installed openssh version OpenSSH_5.0p1. I'm trying to make use of the ChrootDirectory to restrict a particular user to only be able to use sftp and in their homedir. From what I've read, I should be able to accomplish this by adding something like this to the sshd_config:

Match user jsmith
ForceCommand internal-sftp
ChrootDirectory /space/storage/jsmith

I created user jsmith, with his homedir being /space/storage/jsmith.

I restarted sshd.

When I try to connect as that user, the following is returned:

Connection to closed by remote host.
Connection to closed.

The sshd log has an entry:
Jul 9 21:31:12 happybox sshd[8741]: [ID 800047 local5.crit] fatal: bad ownership or modes for chroot directory "/space/storage/jsmith"

The permissions of /space/storage/jsmith seem ok:

drwxr-xr-x 3 jsmith other 512 Jul 9 21:19 jsmith

The .ssh directory is 700, just like my other users (and myself) who can connect normal.

I thought maybe the "ForceCommand internal-sftp" was giving me problems, so I removed that from the sshd_config to see if I could simply make this user have a shell account chroot'd to his homedir. But, the same error was returned.

If I remove the entries from the sshd_config file, the user can connect fine, but not chrooted.

Are there some specific permissions or entries in my sshd_config that I'm missing?
Any help would be great.