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Variable Interest Entities and Joint Ventures | 12 Months Ended
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Dec. 31, 2011
Variable Interest Entities and Joint Ventures [Abstract] |
Variable Interest Entities and Joint Ventures |
3. | Variable Interest Entities and Joint Ventures
Fixed Price Purchase Agreements NVR generally does not engage in the land development business. Instead, the Company typically acquires finished building lots at market prices from various development entities under fixed price purchase agreements. The purchase agreements require deposits that may be forfeited if NVR fails to perform under the agreement. The deposits required under the purchase agreements are in the form of cash or letters of credit in varying amounts, and typically range up to 10% of the aggregate purchase price of the finished lots. NVR believes this lot acquisition strategy reduces the financial requirements and risks associated with direct land ownership and land development. NVR may, at its option, choose for any reason and at any time not to perform under these purchase agreements by delivering notice of its intent not to acquire the finished lots under contract. NVR’s sole legal obligation and economic loss for failure to perform under these purchase agreements is limited to the amount of the deposit pursuant to the liquidated damage provisions contained within the purchase agreements. In other words, if NVR does not perform under a purchase agreement, NVR loses only its deposit. None of the creditors of any of the development entities with which NVR enters fixed price purchase agreements have recourse to the general credit of NVR. NVR generally does not have any specific performance obligations to purchase a certain number or any of the lots, nor does NVR guarantee completion of the development by the developer or guarantee any of the developers’ financial or other liabilities. NVR is not involved in the design or creation of any of the development entities from which the Company purchases lots under fixed price purchase agreements. The developer’s equity holders have the power to direct 100% of the operating activities of the development entity. NVR has no voting rights in any of the development entities. The sole purpose of the development entity’s activities is to generate positive cash flow returns to the equity holders. Further, NVR does not share in any of the profit or loss generated by the project’s development. The profits and losses are passed directly to the developer’s equity holders. The deposit placed by NVR pursuant to the fixed price purchase agreement is deemed to be a variable interest in the respective development entities. Those development entities are deemed to be variable interest entities (“VIE”). Therefore, the development entities with which NVR enters fixed price purchase agreements, including the joint venture limited liability corporations, as discussed below, are evaluated for possible consolidation by NVR. An enterprise must consolidate a VIE when that enterprise has a controlling financial interest in the VIE. An enterprise is deemed to have a controlling financial interest if it has i) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance, and ii) the obligation to absorb losses of the VIE that could be significant to the VIE or the rights to receive benefits from the VIE that could be significant to the VIE. NVR believes the activities that most significantly impact a development entity’s economic performance are the operating activities of the entity. Unless and until a development entity completes finished building lots through the development process to be able to sell, the process of which the development entities’ equity investors bear the full risk, the entity does not earn any revenues. The operating development activities are managed solely by the development entity’s equity investors. The development entities with which NVR contracts to buy finished lots typically select the respective projects, obtain the necessary zoning approvals, obtain the financing required with no support or guarantees from NVR, select who will purchase the finished lots and at what price, and manage the completion of the infrastructure improvements, all for the purpose of generating a cash flow return to the development entity’s equity holders and all independent of NVR. The Company possesses no more than limited protective legal rights through the purchase agreement in the specific finished lots that it is purchasing, and NVR possesses no participative rights in the development entities. Accordingly, NVR does not have the power to direct the activities of a developer that most significantly impact the developer’s economic performance. For this reason, NVR has concluded that it is not the primary beneficiary of the development entities with which the Company enters fixed price purchase agreements, and therefore, NVR does not consolidate any of these VIEs. As of December 31, 2011, NVR controlled approximately 48,200 lots with deposits in cash and letters of credit totaling approximately $202,300 and $3,200, respectively. As noted above, NVR’s sole legal obligation and economic loss for failure to perform under these purchase agreements is limited to the amount of the deposit pursuant to the liquidated damage provisions contained within the purchase agreements and in very limited circumstances, specific performance obligations. NVR’s total risk of loss related to contract land deposits as of December 31, 2011 and 2010 was as follows:
|  | December 31, 2011 |  |  | December 31, 2010 |
Contract land deposits |  | $ | 202,263 |  |  | $ | 174,303 |
Loss reserve on contract land deposits |  |  | (70,333 | ) |  |  | (73,517 | )
Contract land deposits, net |  |  | 131,930 |  |  |  | 100,786 |
Contingent obligations in the form of letters of credit |  |  | 3,228 |  |  |  | 6,610 |
Contingent specific performance obligations (1) |  |  | 8,526 |  |  |  | 1,944 |
Total risk of loss |  | $ | 143,684 |  |  | $ | 109,340 |
(1) | At December 31, 2011 and 2010, the Company was committed to purchase 92 and 43 finished lots under specific performance obligations, respectively.
Joint Ventures On a limited basis, NVR also obtains finished lots using joint venture limited liability corporations (“JVs”). All JVs are typically structured such that NVR is a non-controlling member and is at risk only for the amount the Company has invested, in addition to any deposits placed under fixed price purchase agreements with the joint venture. NVR is not a borrower, guarantor or obligor on any debt of the JVs, as applicable. The Company enters into a standard fixed price purchase agreement to purchase lots from these JVs, and as a result has a variable interest in these JVs. During the second quarter of 2011, NVR invested $61,250 for a fifty percent (50%) interest in a joint venture entered into with Morgan Stanley Real Estate Investing, which holds the other fifty percent interest. NVR is not contractually committed to making any additional investments in the joint venture, nor will it be a borrower, guarantor or obligor on any debt of the joint venture, as applicable. The joint venture acquired nine separate parcels of land from entities controlled by a single developer that are in various stages of development and all nine parcels are zoned for their intended use. At December 31, 2011, the joint venture controlled approximately 5,500 lots within the nine parcels, of which approximately 2,800 lots were under contract with NVR and approximately 2,700 were not under contract. At December 31, 2011, the Company had an aggregate investment totaling approximately $89,500 in four JVs, including the JV with Morgan Stanley described above, that are expected to produce approximately 6,700 finished lots. In addition, at December 31, 2011, NVR had additional funding commitments in the aggregate totaling $5,000 to one of the four JVs. The Company has determined that it is not the primary beneficiary of three of the JVs because NVR and the other JV partner either share power or the other JV partner has the controlling financial interest. The aggregate investment in these three JVs was approximately $75,300 and is reported in the “Other assets” line item on the accompanying consolidated balance sheets. For the remaining JV, NVR has concluded that it is the primary beneficiary because the Company has the controlling financial interest in the JV. The condensed balance sheets at December 31, 2011 and 2010 of the consolidated JV were as follows:
|  | December 31, 2011 |  |  | December 31, 2010 |
Cash |  | $ | 462 |  |  | $ | 358 |
Restricted cash |  |  | 503 |  |  |  | 501 |
Other assets |  |  | 125 |  |  |  | 126 |
Land under development |  |  | 19,092 |  |  |  | 21,386 |
Total assets |  | $ | 20,182 |  |  | $ | 22,371 |
Debt |  | $ | 4,983 |  |  | $ | 7,592 |
Accrued expenses |  |  | 108 |  |  |  | 59 |
Equity |  |  | 15,091 |  |  |  | 14,720 |
Total liabilities and equity |  | $ | 20,182 |  |  | $ | 22,371 |
At December 31, 2010, the Company had an aggregate investment totaling approximately $37,200 in three JVs, inclusive of the consolidated JV discussed above, and additional funding commitments in the aggregate totaling $5,000 to one of the three JVs. The three JVs were expected to produce approximately 1,100 finished lots. Distributions received from joint ventures are considered operating cash flows within the accompanying statements of cash flows to the extent of NVR’s cumulative share of joint venture income. Any distributions received in excess of that amount are considered a return of capital, and is classified as cash flows from investing activities.

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