4.	Reduction of Inventory to Fair Value

We record impairment losses on inventories related to communities under development and held for future development when events and circumstances indicate that they

may

be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts. If the expected undiscounted cash flows are less than the carrying amount, then the community is written down to its fair value. We estimate the fair value of each impaired community by determining the present value of the estimated future cash flows at a discount rate commensurate with the risk of the respective community. In the

first

quarter of fiscal

2019,

discount rate was used as the

one

community impaired during the quarter was sold and the purchase offer price was used to determine the fair value. Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we

may

need to recognize additional impairments. In the

first

quarter of fiscal

2018,

we did

not

record impairment losses, therefore,

discount rate was used for impairments.

During the

three

months ended

January 31, 2019

and

2018,

we evaluated inventories of all

397

and

387

communities under development and held for future development or sale, respectively, for impairment indicators through preparation and review of detailed budgets or other market indicators of impairment. We performed a detailed impairment calculation during the

three

months ended

January 31, 2019

for

one

of those communities (i.e., it had a projected operating loss or other impairment indicators). As discussed above, the community was sold and the purchase price was used to determine the fair value. As a result of our impairment analysis, we recorded an impairment loss for the

one

community of less than

$0.1

million (the pre-impairment value was

$6.3

million) for the

three

months ended

January 31, 2019,

which is included in the Condensed Consolidated Statement of Operations on the line entitled “Homebuilding: Inventory impairment loss and land option write-offs” and deducted from inventory. The pre-impairment value represents the carrying value, net of prior period impairments, if any, at the time of recording the impairment. During the

three

months ended

January 31, 2018,

we did

not

find any indicators of impairment and therefore did

not

perform any detailed impairment calculations.

The Condensed Consolidated Statement of Operations line entitled “Homebuilding: Inventory impairment loss and land option write-offs” also includes write-offs of options and approval, engineering and capitalized interest costs that we record when we redesign communities and/or abandon certain engineering costs and we do

not

exercise options in various locations because the communities' pro forma profitability is

not

projected to produce adequate returns on investment commensurate with the risk. Total aggregate write-offs related to these items were

$0.7

million and

$0.4

million for the

three

months ended

January 31, 2019

and

2018,

respectively. Occasionally, these write-offs are offset by recovered deposits (sometimes through legal action) that had been written off in a prior period as walk-away costs. Historically, these recoveries have

not

been significant in comparison to the total costs written off. The number of lots walked away from during the

three

months ended

January 31, 2019

and

2018

were

1,490

and

627,

respectively. The walk-aways were located in all segments in the

first

quarter of fiscal

2019

and located in all segments except the Southeast in the

first

quarter of fiscal

2018.

We decide to mothball (or stop development on) certain communities when we determine that the current performance does

not

justify further investment at the time. When we decide to mothball a community, the inventory is reclassified on our Condensed Consolidated Balance Sheets from “Sold and unsold homes and lots under development” to “Land and land options held for future development or sale.” During the

first

quarter of fiscal

2019,

we did

not

mothball any additional communities, but sold

two

previously mothballed communities and re-activated

two

previously mothballed communities. As of

January 31, 2019

and

October 31, 2018,

the net book value associated with our

and

total mothballed communities was

$14.1

million and

$24.5

million, respectively, which was net of impairment charges recorded in prior periods of

$146.9

million and

$186.1

million, respectively.

From time to time we enter into option agreements that include specific performance requirements whereby we are required to purchase a minimum number of lots. Because of our obligation to purchase these lots, for accounting purposes in accordance with Accounting Standards Codification (“ASC”)

360

38,

we are required to record this inventory on our Condensed Consolidated Balance Sheets. As of

January 31, 2019

and

October 31, 2018,

we had

specific performance options.

We sell and lease back certain of our model homes with the right to participate in the potential profit when each home is sold to a

third

party at the end of the respective lease. As a result of our continued involvement, for accounting purposes in accordance with ASC

606

68,

these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our Condensed Consolidated Balance Sheets, at

January 31, 2019

and

October 31, 2018,

inventory of

$58.5

million and

$50.5

million, respectively, was recorded to “Consolidated inventory

not

owned,” with a corresponding amount of

$51.4

million and

$43.9

million (net of debt issuance costs), respectively, recorded to “Liabilities from inventory

not

owned” for the amount of net cash received from the transactions.

We have land banking arrangements, whereby we sell our land parcels to the land bankers and they provide us an option to purchase back finished lots on a predetermined schedule. Because of our options to repurchase these parcels, for accounting purposes, in accordance with ASC

606

70,

these transactions are considered a financing rather than a sale. For purposes of our Condensed Consolidated Balance Sheets, at

January 31, 2019

and

October 31, 2018,

inventory of

$54.1

million and

$37.4

million, respectively, was recorded to “Consolidated inventory

not

owned,” with a corresponding amount of

$30.7

million and

$19.5

million (net of debt issuance costs), respectively, recorded to “Liabilities from inventory

not

owned” for the amount of net cash received from the transactions.