Inventory

9 Months Ended

Sep. 30, 2019

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



	September 30, 2019		December 31, 2018
Homes under construction	$	3,144,251	$	2,630,158
Land under development	4,254,048		4,129,225
Raw land	431,760		493,970
	$	7,830,059	$	7,253,353

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						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Interest in inventory, beginning of period	$	234,709		$	243,627		$	227,495		$	226,611
Interest capitalized	39,893			42,743			123,924			130,474
Interest expensed	(46,040		)	(43,583		)	(122,857		)	(114,298		)
Interest in inventory, end of period	$	228,562		$	242,787		$	228,562		$	242,787

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 September 30, 2019 or December 31, 2018 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 September 30, 2019 and December 31, 2018 ($000’s omitted):



	September 30, 2019				December 31, 2018
	Deposits and Pre-acquisition Costs		Remaining Purchase Price		Deposits and Pre-acquisition Costs		Remaining Purchase Price
Land options with VIEs	$	120,490	$	1,238,526	$	90,717	$	1,079,507
Other land options	167,067		2,017,422		127,851		1,522,903
	$	287,557	$	3,255,948	$	218,568	$	2,602,410

Land-related charges

We recorded the following land-related charges ($000's omitted):



		Three Months Ended				Nine Months Ended
		September 30,				September 30,
	Statement of Operations Classification	2019		2018		2019		2018
Land impairments	Home sale cost of revenues	$	5,919	$	3,502	$	6,007	$	4,054
Net realizable value ("NRV") adjustments - land held for sale	Land sale cost of revenues	2,366		1,494		3,654		2,521
Write-offs of deposits and pre-acquisition costs	Other expense, net	2,455		3,136		7,888		7,398
		$	10,740	$	8,132	$	17,549	$	13,973

Land impairments relate to communities that are either active or that we intend to eventually open and build out. On a quarterly basis, we review each of our land positions and perform detailed impairment calculations for communities that display indicators of potential impairment. We determine the fair value of a community's inventory using a combination of discounted cash flow models and market comparable transactions, where available. These estimated cash flows are significantly impacted by 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 cash flow models are specific to each community and typically do not assume improvements in market conditions in the near term. 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. Accordingly, determining the fair value of a community's inventory involves a number of variables, many of which are interrelated. The table below summarizes certain quantitative unobservable inputs utilized in determining the fair value of impaired communities during the nine months ended September 30, 2019 and 2018 ($000's omitted):



	Communities Impaired	Fair Value of Communities Impaired, Net of Impairment Charges		Impairment Charges		Average Selling Price	Quarterly Sales Pace (homes)	Discount Rate
2019	2	$	2,610	$	6,007	$466 to $550	1 to 3	12% to 14%
2018	2	$	5,809	$	4,054	$512 to $586	3 to 4	12	%

As explained in Note 1, we periodically elect to sell parcels of land to third parties in the event such assets no longer fit into our strategic operating plans or are zoned for commercial or other development. NRVs occur when circumstances indicate that the carrying value of land held for sale will not be fully recovered.

Our evaluations for impairments, NRVs, and pre-acquisition costs 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 our communities, and potential changes in our strategy related to certain communities, actual results could differ significantly from such estimates.