10.

Capitalization of Interest

We follow the practice of capitalizing interest to inventories owned during the period of development and to investments in unconsolidated homebuilding and land development joint ventures in accordance with ASC Topic 835,

Interest

("ASC 835"). Homebuilding interest capitalized as a cost of inventories owned is included in cost of sales as related units or lots are sold. Interest capitalized to investments in unconsolidated homebuilding and land development joint ventures is included as a reduction of income from unconsolidated joint ventures when the related homes or lots are sold to third parties. Interest capitalized to investments in unconsolidated land development joint ventures is transferred to inventories owned if the underlying lots are purchased by us. To the extent our debt exceeds our qualified assets as defined in ASC 835, we expense a portion of the interest incurred by us. Qualified assets represent projects that are actively selling or under development as well as investments in homebuilding and land development unconsolidated joint ventures. During the six months ended June 30, 2016 and 2015, our qualified assets exceeded our debt, and as a result, all of our homebuilding interest incurred during the six months ended June 30, 2016 and 2015 was capitalized in accordance with ASC 835.

The following is a summary of homebuilding interest capitalized to inventories owned and investments in unconsolidated joint ventures, amortized to cost of sales and income (loss) from unconsolidated joint ventures and expensed as interest expense, for the three and six months ended June 30, 2016 and 2015:

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(Dollars in thousands)						(Dollars in thousands)

Total interest incurred (1)	$	55,610		$	41,857		$	118,335		$	83,660
Less: Interest capitalized to inventories owned (1)		(54,564	)		(41,508	)		(116,409	)		(82,909	)
Less: Interest capitalized to investments in unconsolidated joint ventures		(1,046	)		(349	)		(1,926	)		(751	)
Interest expense	$	―		$	―		$	―		$	―

Interest previously capitalized to inventories owned, included in cost of home sales	$	40,528		$	35,051		$	70,731		$	57,446
Interest previously capitalized to inventories owned, included in cost of land sales	$	1,302		$	1,512		$	1,481		$	1,755
Interest previously capitalized to investments in unconsolidated joint ventures, included in income (loss) from unconsolidated joint ventures		―			―			―			―
Interest capitalized in ending inventories owned (2)	$	350,210		$	299,315		$	350,210		$	299,315
Interest capitalized as a percentage of inventories owned		5.5	%		8.3	%		5.5	%		8.3	%
Interest capitalized in ending investments in unconsolidated joint ventures (2)	$	4,313		$	1,416		$	4,313		$	1,416
Interest capitalized as a percentage of investments in unconsolidated joint ventures		2.9	%		2.3	%		2.9	%		2.3	%

(1)

Total interest incurred and interest capitalized to inventories owned during the six months ended June 30, 2016 includes a $9 million increase related to the valuation of the 1.625% convertible senior notes that was completed during the 2016 first quarter. Please see Note 3 for further discussion.

(2)

During the three and six months ended June 30, 2016, in connection with lot purchases from our joint ventures, $0.6 million of capitalized interest was transferred from investments in unconsolidated joint ventures to inventories owned.