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

2020,

we did

not

record any impairment losses. The

one

community impaired during the

first

quarter of fiscal

2019

was sold and the purchase offer price was used to determine the fair value and therefore,

discount rate was used. 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.

During the

three

months ended

January 31, 2020

and

2019,

we evaluated inventories of all

383

and

397

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 undiscounted future cash flow analyses during the

three

months ended

January 31, 2020

for

one

of those communities (i.e., it had a projected operating loss or other impairment indicators), with an aggregate carrying value of

$0.6

million. As a result of our undiscounted future cash flow analyses, the community did

not

require a discounted cash flow analysis to be performed and therefore,

impairment loss was recorded for the

three

months ended

January 31, 2020.

We performed undiscounted future cash flow analyses during the

three

months ended

January 31, 2019

for

one

of the

397

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

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

$2.8

million and

$0.7

million for the

three

months ended

January 31, 2020

and

2019,

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, 2020

and

2019

were

1,285

and

1,490,

respectively. The walk-aways were located in the Mid-Atlantic, Midwest and Southeast segments in the

first

quarter of fiscal

2020

and in all segments in the

first

quarter of fiscal

2019.

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

2020,

we did

not

mothball any additional communities, or sell any previously mothballed communities, but we re-activated a portion of

one

previously mothballed community. As of both

January 31, 2020

and

October 31, 2019,

the net book value associated with our

total mothballed communities was

$13.8

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

$138.1

million.

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, 2020

and

October 31, 2019,

inventory of

$48.5

million and

$54.2

million, respectively, was recorded to “Consolidated inventory

not

owned,” with a corresponding amount of

$46.3

million and

$51.2

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, 2020

and

October 31, 2019,

inventory of

$156.7

million and

$136.1

million, respectively, was recorded to “Consolidated inventory

not

owned,” with a corresponding amount of

$105.9

million and

$89.8

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

not

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