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

2017,

our discount rate used for impairments recorded ranged from

18.3%

19.8%.

In the

first

quarter of fiscal

2016,

discount rate was used as the

six

communities impaired during the quarter were land held for sale for which purchase offer prices were used to determine the fair value. 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,

2017

and

2016,

we evaluated inventories of all

390

and

512

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 detailed impairment calculations during the

three

months ended

January

31,

2017

and

2016

for

six

and

eleven

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

$13.8

million and

$46.2

million, respectively. Of those communities tested for impairment during the

three

months ended

January

31,

2017

and

2016,

one

and

four

communities with an aggregate carrying value of

$1.2

million and

$17.3

million, respectively, had undiscounted future cash flow that only exceeded the carrying amount by less than

20%.

As a result of our impairment analysis, we recorded impairment losses for the

three

months ended

January

31,

2017

and

2016,

which are 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, of

$2.7

million for

five

communities, with a pre-impairment value of

$12.6

million, and

$9.7

million for

six

communities which were held for sale mainly in the Midwest, with a pre-impairment value of

$28.7

million, respectively. The pre-impairment value represents the carrying value, net of prior period impairments, if any, at the time of recording the impairment.

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

$0.5

million and

$2.0

million for the

three

months ended

January

31,

2017

and

2016,

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,

2017

and

2016

were

1,061

and

1,256,

respectively. The walk-aways were located in all segments except the Southwest and West in the

first

quarter of fiscal

2017,

and in all segments except the West, with the majority in the Southeast, Mid-Atlantic and Northeast

, in the

first

quarter of fiscal

2016.

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

2017,

we did

not

mothball any additional communities, or re-activate any previously mothballed communities, but we sold

one

previously mothballed community. As of

January

31,

2017

and

October

31,

2016,

the net book value associated with our

and

total mothballed communities was

$69.3

million and

$74.4

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

$268.0

million and

$296.3

million, respectively.

From time to time we enter into option agreements that include specific performance requirements, whereby we are required to purchase a minimum number of lots. Because of our obligation to purchase these lots, for accounting purposes in accordance with Accounting Standards Codification (“ASC”)

360

38,

we are required to record this inventory on our Condensed Consolidated Balance Sheets. As of

January

31,

2017

and

October

31,

2016,

we had

specific performance options.

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

360

38,

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,

2017

and

October

31,

2016,

inventory of

$75.5

million and

$79.2

million, respectively, was recorded to “Consolidated inventory not owned,” with a corresponding amount of

$66.3

million and

$69.7

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

360

38,

these transactions are considered a financing rather than a sale. For purposes of our Condensed Consolidated Balance Sheets, at

January

31,

2017

and

October

31,

2016,

inventory of

$96.1

million and

$129.5

million, respectively, was recorded to “Consolidated inventory not owned,” with a corresponding amount of

$58.1

million and

0.5

million (net of debt issuance costs), respectively, recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.