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. For the

nine

months ended

July 31, 2017,

our discount rate used for the impairments recorded ranged from

18.3%

19.8%.

For the

nine

months ended

July 31, 2016,

our discount rate used for the impairments recorded ranged from

16.8%

18.5%.

discount rate was used for communities impaired on land held for sale and purchase offer prices were used to determine the fair value of such communities. 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

nine

months ended

July 31, 2017

and

2016,

we evaluated inventories of all

380

and

418

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

nine

months ended

July 31, 2017

and

2016

for

and

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

$82.7

million and

$95.5

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

nine

months ended

July 31, 2017

and

2016,

three

and

communities with an aggregate carrying value of

$45.8

million and

$47.8

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

20%.

As a result of our impairment analysis, we recorded aggregate impairment losses of

$3.2

million and

$7.4

million, in

one

and

seven

communities, respectively, with aggregate pre-impairment values of

$15.9

million and

$37.0

million, respectively, for the

three

and

nine

months ended

July 31, 2017,

respectively. We recorded aggregate impairment losses of

$1.3

million and

$16.4

million, in

two

and

communities, respectively, with an aggregate pre-impairment values of

$5.4

million and

$50.8

million, respectively, for the

three

and

nine

months ended

July 31, 2016,

respectively, which are included in the Condensed Consolidated Statements of Operations on the line entitled “Homebuilding: Inventory impairment loss and land option write-offs” and deducted from inventory. Impairments decreased for the

nine

months ended

July 31, 2017

compared to the same period of the prior year as the impairments recorded for the

nine

months ended

July 31, 2016

were mainly for land held for sale in the Midwest and Northeast. 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 Statements 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

$1.0

million and

$0.2

million for the

three

months ended

July 31, 2017

and

2016,

respectively, and

$1.9

million and

$6.5

million for the

nine

months ended

July 31, 2017

and

2016,

respectively. Such write-offs were primarily located in our Northeast, Mid-Atlantic and Southeast segments for the

first

three

quarters of fiscal

2017

and in all of our segments for the

first

three

quarters of fiscal

2016.

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

July 31, 2017

and

2016

were

1,200

and

1,570,

respectively, and

2,739

and

5,089

during the

nine

months ended

July 31, 2017

and

2016,

respectively.

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

three

quarters of fiscal

2017,

we did

not

mothball any additional communities, but we sold

three

previously mothballed communities and re-activated

two

previously mothballed communities. As of

July 31, 2017

and

October 31, 2016,

the net book value associated with our

and

total mothballed communities was

$61.6

million and

$74.4

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

$239.0

million and

$296.3

million, respectively.

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

July 31, 2017

and

October 31, 2016,

inventory of

$70.9

million and

$79.2

million, respectively, was recorded to “Consolidated inventory

not

owned,” with a corresponding amount of

$62.7

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 land bankers and they provide us an option to purchase back finished lots on a predetermined basis. 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

July 31, 2017

and

October 31, 2016,

inventory of

$67.6

million and

$129.5

million, respectively, was recorded as “Consolidated inventory

not

owned,” with a corresponding amount of

$35.8

million and

$80.5

million (net of debt issuance costs), respectively, recorded to “Liabilities from inventory

not

owned” for the amount of net cash received from the transactions.