Inventory

Major components of inventory were as follows ($000’s omitted):



	June 30, 2017		December 31, 2016
Homes under construction	$	2,464,808	$	1,921,259
Land under development	3,997,728		4,072,109
Raw land	627,628		777,287
	$	7,090,164	$	6,770,655

We capitalize interest cost into inventory during the active development and construction of our communities. In all periods presented, we capitalized all Homebuilding interest costs into inventory because the level of our active inventory exceeded our debt levels. Information related to interest capitalized into inventory is as follows ($000’s omitted):



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Interest in inventory, beginning of period	$	203,828		$	158,653		$	186,097		$	149,498
Interest capitalized	44,949			38,231			89,872			73,515
Interest expensed	(35,927		)	(29,396		)	(63,119		)	(55,525		)
Interest in inventory, end of period	$	212,850		$	167,488		$	212,850		$	167,488

Land option agreements

We enter into land option agreements in order to procure land for the construction of homes in the future. Pursuant to these land option agreements, we generally provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Such contracts enable us to defer acquiring portions of properties owned by third parties or unconsolidated entities until we have determined whether and when to exercise our option, which reduces our financial risks associated with long-term land holdings. Option deposits and pre-acquisition costs (such as environmental testing, surveys, engineering, and entitlement costs) are capitalized if the costs are directly identifiable with the land under option, the costs would be capitalized if we owned the land, and acquisition of the property is probable. Such costs are reflected in other assets and are reclassified to inventory upon taking title to the land. We write off deposits and pre-acquisition costs when it becomes probable that we will not go forward with the project or recover the capitalized costs. Such decisions take into consideration changes in local market conditions, the timing of required land purchases, the availability and best use of necessary incremental capital, and other factors. We record any such write-offs of deposits and pre-acquisition costs within other expense, net.

If an entity holding the land under option is a variable interest entity ("VIE"), our deposit represents a variable interest in that entity. No VIEs required consolidation at either June 30, 2017 or December 31, 2016 because we determined that we were not the VIEs' primary beneficiary. Our maximum exposure to loss related to these VIEs is generally limited to our deposits and pre-acquisition costs under the land option agreements.

The following provides a summary of our interests in land option agreements as of June 30, 2017 and December 31, 2016 ($000’s omitted):



	June 30, 2017				December 31, 2016
	Deposits and Pre-acquisition Costs		Remaining Purchase Price		Deposits and Pre-acquisition Costs		Remaining Purchase Price
Land options with VIEs	$	68,691	$	676,923	$	68,527	$	849,901
Other land options	131,291		1,263,372		126,909		1,252,662
	$	199,982	$	1,940,295	$	195,436	$	2,102,563

Land-related charges

We test inventory for impairment when events and circumstances indicate that the cash flows estimated to be generated by the community are less than its carrying amount. On May 3, 2017, we committed to a plan to sell select non-core and underutilized land parcels following a strategic review of our land portfolio. We determined that we will sell certain currently inactive land parcels, representing approximately 4,600 lots, and work to monetize two small communities representing an additional 400 lots. These land parcels are located in diverse geographic areas and no longer fit into our strategic plans. The land parcels identified for sale include: land requiring significant additional development spend that would not yield suitable returns; land in excess of near-term need; and land entitled for certain product types that are inconsistent with our primary offerings. Actions required to complete the planned sales have been initiated, but the timing of completing the dispositions is unknown. We will seek to redeploy the proceeds and related tax benefits from these dispositions into higher returning projects.

As a consequence of the change in strategy with respect to the future use of these land parcels, we recorded land-related charges totaling $120.5 million in the three months ended June 30, 2017 related to inventory with a pre-impairment carrying value of $161.9 million. We also recorded $5.1 million of write-offs of deposits and pre-acquisition costs related to land option contracts we no longer plan to pursue. In total, we recorded the following land-related charges ($000's omitted):



		Three Months Ended				Six Months Ended
	Statement of Operations Classification	June 30,				June 30,
	Statement of Operations Classification	2017		2016		2017		2016
Land inventory impairments	Home sale cost of revenues	$	31,487	$	—	$	31,487	$	—
Net realizable value adjustments ("NRV") - land held for sale	Land sale cost of revenues	81,006		200		82,886		68
Impairments of unconsolidated entities	Other expense, net	8,017		—		8,017		—
Write-offs of deposits and pre-acquisition costs	Other expense, net	5,063		7,414		6,718		10,454
Total land-related charges		$	125,573	$	7,614	$	129,108	$	10,522

The estimated fair values of these land parcels were based on sales contracts or letters of intent, comparisons to market comparable transactions, estimated future net cash flows discounted for inherent risk associated with each underlying asset, or similar information. The estimated cash flows for certain parcels incorporate estimates related to expected average selling prices, expected sales paces, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. The assumptions used in the valuations are specific to each community tested for impairment and typically do not assume improvements in market conditions in the near term. In certain instances, the determination of fair value requires discounting the estimated cash flows at a rate commensurate with the inherent risks associated with each of the assets and related estimated cash flow streams. The discount rate used in determining each community's fair value depends on the stage of development of the community and other specific factors that increase or decrease the inherent risks associated with the community's cash flow streams, and ranged from 18% to 25%. Our evaluations for impairments are based on our best estimates of the future cash flows for our communities. Due to uncertainties in the estimation process, the significant volatility in demand for new housing, the long life cycles of certain of these communities, and potential changes in our strategy related to certain communities, actual results could differ significantly from such estimates.