Inventory

The components of our owned inventory are as follows as of December 31, 2015 and September 30, 2015:



(In thousands)	December 31, 2015		September 30, 2015
Homes under construction	$	386,409	$	377,281
Development projects in progress	808,223		809,900
Land held for future development	271,321		270,990
Land held for sale	54,546		44,555
Capitalized interest	132,462		123,457
Model homes	76,976		71,407
Total owned inventory	$	1,729,937	$	1,697,590

Homes under construction include homes substantially finished and ready for delivery and homes in various stages of construction. We had 172 (with a cost of $48.7 million) and 128 (with a cost of $40.1 million) substantially completed homes that were not subject to a sales contract (spec homes) as of December 31, 2015 and September 30, 2015, respectively. Development projects in progress consist principally of land and land improvement costs. Certain of the fully developed lots in this category are reserved by a customer deposit or sales contract. Land held for future development consists of communities for which construction and development activities are expected to occur in the future or have been idled, and are stated at cost unless facts and circumstances indicate that the carrying value of the assets may not be recoverable. All applicable interest and real estate taxes on land held for future development are expensed as incurred. Land held for sale is recorded at the lower of the carrying value or fair value less costs to sell. The amount of interest we are able to capitalize is dependent upon our qualified inventory balance, which considers the status of our inventory holdings. Our qualified inventory balance includes the majority of our homes under construction and development projects in progress, but excludes land held for future development and land held for sale (refer to Note 6 for additional information on capitalized interest).

Total owned inventory, by reportable segment, is presented in the table below as of December 31, 2015 and September 30, 2015:



(In thousands)	Projects in Progress ^(a)			Land Held for Future Development		Land Held for Sale		Total Owned Inventory
December 31, 2015
West Segment	$	598,776		$	231,119	$	6,571	$	836,466
East Segment	349,678			29,280		30,279		409,237
Southeast Segment	274,772			10,922		16,597		302,291
Corporate and unallocated	180,844		^(b)	—		1,099		181,943
Total	$	1,404,070		$	271,321	$	54,546	$	1,729,937
September 30, 2015
West Segment	$	583,210		$	230,778	$	6,941	$	820,929
East Segment	353,054			29,280		30,927		413,261
Southeast Segment	277,351			10,932		5,587		293,870
Corporate and unallocated	168,430		^(b)	—		1,100		169,530
Total	$	1,382,045		$	270,990	$	44,555	$	1,697,590

^(a)Projects in progress include homes under construction, development projects in progress, capitalized interest and model home categories from the preceding table.

^(b)Includes capitalized interest and indirect costs that are maintained within Corporate and unallocated.

Inventory Impairments. When conducting our community level review for the recoverability of our inventory related to projects in progress, we establish a quarterly “watch list” of communities that carry profit margins in backlog and in our forecast that are below a minimum threshold of profitability, as well as recent closings that have gross margins less than a specific threshold. Each community is first evaluated qualitatively to determine if there are temporary factors driving the low profitability levels. Following our qualitative evaluation, communities with more than 10 homes remaining to close are subjected to substantial additional financial and operational analyses and review that consider the competitive environment and other factors contributing to profit margins below our watch list threshold. Our assumptions about future home sales prices and absorption rates require significant judgment because the residential homebuilding industry is cyclical and is highly sensitive to changes in economic conditions. For certain communities, we determine that it is prudent to reduce sales prices or further increase sales incentives in response to a variety of factors, including competitive market conditions in those specific submarkets for the product and locations of these communities. For communities where the current competitive and market dynamics indicate that these factors may be other than temporary, which may call into question the recoverability of our investment, a formal impairment analysis is performed. The formal impairment analysis consists of both qualitative competitive market analyses and a quantitative analysis reflecting market and asset specific information. Market deterioration that exceeds our initial estimates may lead us to incur impairment charges on previously impaired homebuilding assets in addition to homebuilding assets not currently impaired but for which indicators of impairment may arise if markets deteriorate.

For the quarter ended December 31, 2015, there were no communities on our watch list that required further analysis to be performed after considering the number of lots remaining in each community and certain other qualitative factors. For the quarter ended December 31, 2014, two communities in our West segment were on our quarterly watch list that required additional consideration. However, after additional financial and operational review, we determined that the factors contributing to profit margins below our threshold were temporary in nature, and therefore, these communities were not subjected to further analysis, including any undiscounted cash flow analysis. Accordingly, there were no impairments recorded during the three months ended December 31, 2015 or 2014 based upon the procedures we performed.

Impairments on land held for sale generally represent write downs of these properties to net realizable value, less estimated costs to sell, and are based on current market conditions and our review of recent comparable transactions. Our assumptions about land sales prices require significant judgment because the real estate market is highly sensitive to changes in economic conditions. We calculate the estimated fair values of land held for sale based on current market conditions and assumptions made by management, which may differ materially from actual results and may result in additional impairments if market conditions deteriorate.

From time-to-time, we also determine that the proper course of action with respect to a community is to not exercise an option and to write-off the deposit securing the option takedown and the related pre-acquisition costs, as applicable. In determining whether to abandon lots or lot option contracts, our evaluation is primarily based upon the expected cash flows from the property. Additionally, in certain limited instances, we are forced to abandon lots due to permitting or other regulatory issues that do not allow us to build on that lot. If we intend to abandon or walk away from a property, we record a charge to earnings for the deposit amount and any related capitalized costs in the period such decision is made. Abandonment charges generally relate to our decision to abandon lots or not exercise certain option contracts that are not projected to produce adequate results, no longer fit with our long-term strategic plan, or, in limited circumstances, are not suitable for building due to regulatory or environmental restrictions that are enacted.

We did not have any land held for sale inventory impairments, nor did we have any abandonment charges, during the three months ended December 31, 2014. The following table presents, by reportable homebuilding segment, our land held for sale inventory impairments and abandonment charges for the three months ended December 31, 2015:




	Three Months Ended December 31,
(In thousands)	2015
Land Held for Sale:
East	$	197
Southeast	371
Total impairment charges on land held for sale	$	568
Abandonments:
Southeast	$	788
Total impairment and abandonment charges	$	1,356

Lot Option Agreements and Variable Interest Entities (VIEs). As previously discussed, we also have access to land inventory through lot option contracts, which generally enable us to defer acquiring portions of properties owned by third parties and unconsolidated entities until we have determined whether to exercise our lot option. A majority of our lot option contracts require a non-refundable cash deposit or irrevocable letter of credit based on a percentage of the purchase price of the land for the right to acquire lots during a specified period of time at a specified price. Under lot option contracts, purchase of the properties is contingent upon satisfaction of certain requirements by us and the sellers. Our liability under option contracts is generally limited to forfeiture of the non-refundable deposits, letters of credit and other non-refundable amounts incurred. We expect to exercise, subject to market conditions and seller satisfaction of contract terms, most of our remaining option contracts. Various factors, some of which are beyond our control, such as market conditions, weather conditions and the timing of the completion of development activities, will have a significant impact on the timing of option exercises or whether lot options will be exercised at all.

The following table provides a summary of our interests in lot option agreements as of December 31, 2015 and September 30, 2015:



(In thousands)	Deposits & Non-refundable Pre-acquisition Costs Incurred		Remaining Obligation
As of December 31, 2015
Unconsolidated lot option agreements	$	65,552	$	421,098
As of September 30, 2015
Unconsolidated lot option agreements	$	51,475	$	420,070