Variable Interest Entities ("VIEs")

9 Months Ended

Sep. 30, 2020

Variable Interest Entity, Reporting Entity Involvement, Maximum Loss Exposure [Abstract]

Variable Interest Entities ("VIEs")

Fixed Price Finished Lot Purchase Agreements (“Lot Purchase Agreements”)

We generally do not engage in the land development business. Instead, we typically acquire finished building lots at market prices from various development entities under Lot Purchase Agreements. The Lot Purchase Agreements require deposits that may be forfeited if we fail to perform under the Lot Purchase Agreements. The deposits required under the Lot 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.

We believe this lot acquisition strategy reduces the financial requirements and risks associated with direct land ownership and land development. We may, at our option, choose for any reason and at any time not to perform under these Lot Purchase Agreements by delivering notice of our intent not to acquire the finished lots under contract. Our sole legal obligation and economic loss for failure to perform under these Lot Purchase Agreements is limited to the amount of the deposit pursuant to the liquidated damage provisions contained within the Lot Purchase Agreements. None of the creditors of any of the development entities with which we enter Lot Purchase Agreements have recourse to our general credit. We generally do not have any specific performance obligations to purchase a certain number or any of the lots, nor do we guarantee completion of the development by the developer or guarantee any of the developers’ financial or other liabilities.

We are not involved in the design or creation of the development entities from which we purchase lots under Lot Purchase Agreements. The developer’s equity holders have the power to direct 100% of the operating activities of the development entity. We have 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 for the equity holders. Further, we do 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 us pursuant to the Lot Purchase Agreement is deemed to be a variable interest in the respective development entities. Those development entities are deemed to be VIEs. Therefore, the development entities with which we enter into Lot Purchase Agreements, including the joint venture limited liability corporations discussed below, are evaluated for possible consolidation by us. 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 VIE 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.

We believe the activities that most significantly impact a development entity’s economic performance are the operating activities of the entity. The development entity’s equity investors bear the full risk during the development process. Unless and until a development entity completes finished building lots through the development process, 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 we contract to buy finished lots typically select the respective projects, obtain the necessary zoning approvals, obtain the financing required with no support or guarantees from us, 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 us. We possess no more than limited protective legal rights through the Lot Purchase Agreement in the specific finished lots that we are purchasing, and we possess no participative rights in the development

entities. Accordingly, we do not have the power to direct the activities of a developer that most significantly impact the developer’s economic performance. For this reason, we have concluded that we are not the primary beneficiary of the development entities with which we enter into Lot Purchase Agreements, and therefore, we do not consolidate any of these VIEs.

As of September 30, 2020, we controlled approximately 100,000 lots under Lot Purchase Agreements with third parties through deposits in cash and letters of credit totaling approximately $434,200 and $6,800, respectively. As noted above, our sole legal obligation and economic loss for failure to perform under these Lot Purchase Agreements is limited to the amount of the deposit pursuant to the liquidated damage provisions contained in the Lot Purchase Agreements. During the first quarter of 2020, we incurred pre-tax charges of approximately $36,400 related to the impairment of deposits under Lot Purchase Agreements ("lot deposits") due primarily to deteriorating market conditions in certain of our markets related to the COVID-19 pandemic. For the three month period ended September 30, 2020, we recorded a net reversal of approximately $4,800 related to previously impaired lot deposits, as market conditions have improved. For the nine months ended September 30, 2020, we incurred net pre-tax lot deposit charges of approximately $32,500. The impairment charges and reversals are recorded in cost of sales on the accompanying condensed consolidated statements of income. Our contract land deposit is shown net of a $58,781 and $27,572 impairment reserve at September 30, 2020 and December 31, 2019, respectively.

In addition, we have certain properties under contract with land owners that are expected to yield approximately 6,300 lots, which are not included in the number of total lots controlled. Some of these properties may require rezoning or other approvals to achieve the expected yield. These properties are controlled with deposits in cash and letters of credit totaling approximately $1,700 and $100, respectively, as of September 30, 2020, of which approximately $1,100 is refundable if certain contractual conditions are not met. We generally expect to assign the raw land contracts to a land developer and simultaneously enter into a Lot Purchase Agreement with the assignee if the project is determined to be feasible.

Our total risk of loss related to contract land deposits as of September 30, 2020 and December 31, 2019 was as follows:


	September 30, 2020		December 31, 2019
Contract land deposits	$	435,886	$	441,423
Loss reserve on contract land deposits	(58,781)		(27,572)
Contract land deposits, net	377,105		413,851
Contingent obligations in the form of letters of credit	6,942		5,606
Total risk of loss	$	384,047	$	419,457