Investments in Unconsolidated Joint Ventures

12 Months Ended

Nov. 30, 2011

Investments in Unconsolidated Joint Ventures [Abstract]

Investments in Unconsolidated Joint Ventures

Note 9.    Investments in Unconsolidated Joint Ventures

The Company has investments in unconsolidated joint ventures that conduct land acquisition, development and/or other homebuilding activities in various markets where the Company’s homebuilding operations are located. The Company’s partners in these unconsolidated joint ventures are unrelated homebuilders, and/or land developers and other real estate entities, or commercial enterprises. The Company enters into these unconsolidated joint ventures primarily to reduce or share market and development risks and to increase the number of its owned and controlled homesites. In some instances, participating in unconsolidated joint ventures has enabled the Company to acquire and develop land that it might not otherwise have had access to due to a project’s size, financing needs, duration of development or other circumstances. While the Company considers its participation in unconsolidated joint ventures as potentially beneficial to its homebuilding activities, it does not view such participation as essential and has unwound its participation in a number of these unconsolidated joint ventures in the past few years.

The Company typically has obtained rights to purchase portions of the land held by the unconsolidated joint ventures in which it participates. When an unconsolidated joint venture sells land to the Company’s homebuilding operations, the Company defers recognition of its share of such unconsolidated joint venture earnings until a home sale is closed and title passes to a homebuyer, at which time the Company accounts for those earnings as a reduction of the cost of purchasing the land from the unconsolidated joint venture.

The Company and its unconsolidated joint venture partners make initial and/or ongoing capital contributions to these unconsolidated joint ventures, typically on a pro rata basis equal to their respective equity interests. The obligations to make capital contributions are governed by each unconsolidated joint venture’s respective operating agreement and related governing documents.

Each unconsolidated joint venture is obligated to maintain financial statements in accordance with GAAP. The Company shares in profits and losses of these unconsolidated joint ventures generally in accordance with its respective equity interests. In some instances, the Company recognizes profits and losses related to its investment in an unconsolidated joint venture that differ from its equity interest in the unconsolidated joint venture. This may arise from impairments recognized by the Company related to its investment that differ from the recognition of impairments by the unconsolidated joint venture with respect to the unconsolidated joint venture’s assets; differences between the Company’s basis in assets it has transferred to the unconsolidated joint venture and the unconsolidated joint venture’s basis in those assets; the deferral of the unconsolidated joint venture’s profits from land sales to the Company; or other items.

With respect to the Company’s investment in unconsolidated joint ventures, its equity in loss of unconsolidated joint ventures included pretax, noncash impairment charges of $53.7 million in 2011 and $38.5 million in 2009. There were no such impairment charges in 2010. In 2011, the impairment charge reflected the write off of the Company’s remaining investment in South Edge. The Company wrote off its remaining investment in South Edge following a court decision in the first quarter of 2011. Due to a bankruptcy-court approved disposition of the land previously owned by South Edge, pursuant to the South Edge Plan, to Inspirada Builders, LLC in the fourth quarter of 2011, South Edge had no assets or liabilities at November 30, 2011.

The following table presents information from the combined condensed statements of operations of the Company’s unconsolidated joint ventures (in thousands):

	Years Ended November 30,
	2011			2010			2009
Revenues	$	230		$	122,200		$	60,790
Construction and land costs		(54	)		(120,010	)		(117,255	)
Other expenses, net		(4,506	)		(19,362	)		(46,432	)
Loss	$	(4,330	)	$	(17,172	)	$	(102,897	)

The following table presents combined condensed balance sheet information for the Company’s unconsolidated joint ventures (in thousands):

	November 30,
	2011		2010
Assets
Cash	$	8,923	$	14,947
Receivables		19,503		147,025
Inventories		368,306		575,632
Other assets		151		51,755
Total assets	$	396,883	$	789,359
Liabilities and equity
Accounts payable and other liabilities	$	96,981	$	113,478
Mortgages and notes payable		—		327,856
Equity		299,902		348,025
Total liabilities and equity	$	396,883	$	789,359

The following tables present information relating to the Company’s investments in unconsolidated joint ventures and the outstanding debt of unconsolidated joint ventures as of the dates specified (dollars in thousands):

	November 30,
	2011		2010
Number of investments in unconsolidated joint ventures:
South Edge (a)		—		1
Other (b)		8		9
Total		8		10
Investments in unconsolidated joint ventures:
South Edge (a)	$	—	$	55,269
Other (b)		127,926		50,314
Total	$	127,926	$	105,583
Outstanding debt of unconsolidated joint ventures:
South Edge (a)	$	—	$	327,856

(a) During the first quarter of 2011, the Company wrote off its remaining investment in South Edge. The Company also recorded an estimate of the probable net payment obligation it would pay to the Administrative Agent (on behalf of the South Edge lenders) related to the Springing Guaranty. The Company updated its estimate in each subsequent quarter of 2011, and paid its obligation in the fourth quarter of 2011 in connection with the South Edge Plan. Therefore, data related to South Edge is not reflected in the table as of November 30, 2011.

(b) The Company’s investments in unconsolidated joint ventures as of November 30, 2011 includes Inspirada Builders, LLC. The Company’s investment of $75.5 million in this unconsolidated joint venture consists of $75.2 million, the estimated fair value as of November 30, 2011 of the Company’s share of the land the venture holds, and a $.3 million initial capital contribution to fund the venture’s operations.

The Company’s unconsolidated joint ventures finance land and inventory investments for a project through a variety of arrangements. To finance their respective land acquisition and development activities, certain of the Company’s unconsolidated joint ventures have obtained loans from third-party lenders that are secured by the underlying property and related project assets. None of the Company’s unconsolidated joint ventures had outstanding debt at November 30, 2011. Of the Company’s unconsolidated joint ventures at November 30, 2010, only South Edge had outstanding debt, which was secured by a lien on South Edge’s assets, with a principal balance of $327.9 million.

In certain instances, the Company and/or its partner(s) in an unconsolidated joint venture have provided completion and/or carve-out guarantees to the unconsolidated joint venture’s lenders. A completion guaranty refers to the physical completion of improvements for a project and/or the obligation to contribute equity to an unconsolidated joint venture to enable it to fund its completion obligations. The Company’s potential responsibility under its completion guarantees, if triggered, is highly dependent on the facts of a particular case. A carve-out guaranty generally refers to the payment of losses a lender suffers due to certain bad acts or omissions by an unconsolidated joint venture or its partners, such as fraud or misappropriation, or due to environmental liabilities arising with respect to the relevant project. The Company does not believe it currently has exposure with respect to any of its completion or carve-out guarantees.

In addition to completion and carve-out guarantees, the Company provided the Springing Guaranty to the Administrative Agent in connection with secured loans made to South Edge. On February 3, 2011, a bankruptcy court entered an order for relief on the Petition filed against South Edge and appointed a Chapter 11 trustee for South Edge. Although the Company believed that there were potential offsets or defenses to prevent or minimize the enforcement of the Springing Guaranty, as a result of the February 3, 2011 order for relief on the Petition, the Company considered it probable, based on the terms of the Springing Guaranty, that it became responsible to pay certain amounts to the Administrative Agent related to the Springing Guaranty. Therefore, beginning in the first quarter of 2011, the Company’s consolidated financial statements reflected a net payment obligation, representing the Company’s estimate of the probable amount that it would pay to the Administrative Agent (on behalf of the South Edge lenders) related to the Springing Guaranty and to pay for certain fees, expenses and charges and for certain allowed general unsecured claims in the South Edge bankruptcy case. This estimate was evaluated at the end of each subsequent quarterly period and updated to reflect the Company’s belief of its probable net payment obligation at the time. In connection with the South Edge Plan and the resolution of other matters surrounding South Edge, the Company made payments of $251.9 million in the fourth quarter of 2011, including a payment to the Administrative Agent, which satisfied the respective liens of the Administrative Agent and most of the South Edge lenders on the land South Edge owned. As a result of consummating the South Edge Plan and (a) taking into account accruals the Company had previously established through inventory impairments with respect to the Company’s estimated losses related to its share of the land previously owned by South Edge anticipated to be acquired in connection with the South Edge Plan and (b) factoring in an offset for the estimated fair value of such South Edge land (as discussed below), the Company recognized a loss on loan guaranty charge of $30.8 million in its consolidated statements of operations for the year ended November 30, 2011. This charge was in addition to the joint venture impairment charge of $53.7 million that the Company recognized in 2011 to write off its remaining investment in South Edge.

Based on the terms of the South Edge Plan, the land previously owned by South Edge, including the Company’s share that consists of approximately 600 developable acres, was acquired by Inspirada Builders, LLC. The Company estimated the fair value of its share of the land to be $75.2 million at November 30, 2011. The Company calculated this estimated fair value using a present value methodology and assumed that it would develop the land, build and sell homes on most of the land, and sell the remainder of the developed land. This fair value estimate at November 30, 2011 reflected the Company’s expectations of the price it would receive for its share of the land in the land’s then-current state in an orderly (not a forced) transaction under then-prevailing market conditions. The Company’s fair value estimate was corroborated by a third-party appraisal conducted in the fourth quarter of 2011.

The Company’s fair value estimate reflected judgments and key assumptions concerning (a) housing market supply and demand conditions, including estimates of average selling prices; (b) estimates of potential future home sales and cancellation rates; (c) anticipated entitlements and development plans for the land; (d) anticipated land development, construction and overhead costs to be incurred; and (e) a risk-free rate of return and an expected risk premium, in each case in relation to an expected 15-year life for the project.

Among the key assumptions used in the present value methodology were the anticipated appreciation in revenues and costs over the expected life of the project. For revenues, the Company applied an annual appreciation factor of 5% to the average selling prices, based on current market activity, for its homes to be delivered at the project to estimate the average selling prices of homes expected to be sold during the relevant 15-year period. This appreciation factor reflected the following considerations: that average selling prices in the southern Nevada market will increase over the period within a range of long-term historical trends; that average selling prices will rebound from the current depressed levels; that negative media coverage of the bankruptcy process and of other legal and development matters involving South Edge have depressed selling prices at the project relative to the Company’s experience at communities located nearby; that the project is a premium master planned community in the land-constrained southern Nevada market, factors that are anticipated to increase the average selling prices of homes at the project at a rate greater than other homes in the area over the life of the project; and that the nature of the project in the southern Nevada market and the size of the Company’s share of the South Edge land can be leveraged to effectively manage home sales and pricing strategies to maximize revenues and profits. The following appreciation considerations were applied to costs: a factor of 10% was applied to the cost estimates for the development work expected to be completed over the life of the project, representing the potential cost increases and other uncertainties inherent in estimating development costs; and a factor of 1% was applied to home construction costs for anticipated inflation of such costs, taking into account historical trends and current market conditions. In addition, incremental increases in overhead costs that would be incurred in connection with the sale of each home were assessed as a function of the 5% appreciation factor applied to the average selling prices. These revenue and cost appreciation factors were determined using judgment and assumptions believed to be appropriate based on the information known to the Company at the time. Due to the judgment and assumptions applied in the fair value estimation process at November 30, 2011, it is possible that actual results could differ substantially from those estimated.

The Company believes that it will realize the value of its share of the land previously owned by South Edge and anticipates that it will acquire its share of the land from Inspirada Builders, LLC through a future distribution of the land.