Inventory

The components of our owned inventory are as follows as of September 30, 2019 and September 30, 2018:



in thousands	September 30, 2019		September 30, 2018
Homes under construction	$	507,542	$	476,752
Development projects in progress	738,201		907,793
Land held for future development	28,531		83,173
Land held for sale	12,662		7,781
Capitalized interest	136,565		144,645
Model homes	80,747		72,140
Total owned inventory	$	1,504,248	$	1,692,284

Homes under construction include homes in various stages of construction and homes substantially finished and ready for delivery, including the allocated underlying lot costs. We had 238 (with a cost of $82.2 million) and 240 (with a cost of $84.8 million) substantially completed homes that were not subject to a sales contract (spec homes) as of September 30, 2019 and 2018, respectively.

Development projects in progress consist principally of land acquisition, land development and other common costs. These land related costs are allocated to individual lots on a pro-rata basis, and the lot costs are transferred to homes under construction when home construction begins for the respective lots. 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 includes land and lots that do not fit within our homebuilding programs and strategic plans in certain markets, and land is classified as held for sale once certain criteria are met (refer to Note 2). These assets are recorded at the lower of the carrying value or fair value less costs to sell.

The amount of interest we are able to capitalize depends on 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 (see Note 6 for additional information on capitalized interest).

Total owned inventory by reportable segment is presented in the table below as of September 30, 2019 and September 30, 2018:



in thousands	Projects in Progress ^(a)		Land Held for Future Development		Land Held for Sale		Total Owned Inventory
September 30, 2019
West Segment	$	723,094	$	3,483	$	5,160	$	731,737
East Segment	228,937		14,077		4,104		247,118
Southeast Segment	318,737		10,971		3,398		333,106
Corporate and unallocated ^(b)	192,287		—		—		192,287
Total	$	1,463,055	$	28,531	$	12,662	$	1,504,248
September 30, 2018
West Segment	$	763,453	$	58,125	$	—	$	821,578
East Segment	280,761		14,077		4,580		299,418
Southeast Segment	358,126		10,971		3,177		372,274
Corporate and unallocated ^(b)	198,990		—		24		199,014
Total	$	1,601,330	$	83,173	$	7,781	$	1,692,284

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

^(b)Projects in progress amount includes capitalized interest and indirect costs that are maintained within our Corporate and unallocated segment. Land held for sale amount includes parcels held by our discontinued operations.

Inventory Impairments

When conducting our community level review for the recoverability of inventory related to projects in progress, we establish a quarterly “watch list” comprised of communities that carry profit margins in backlog or in our forecast that are below a minimum threshold of profitability, as well as recent closings that have gross margins less than a specified 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 ten homes remaining to close are subjected to additional financial and operational review that considers the competitive environment and other factors contributing to gross 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, it may be 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 assets may not be recoverable, a formal impairment analysis is performed. The formal impairment analysis consists of both qualitative considerations and quantitative analyses reflecting market and asset specific information.

As of September 30, 2019, we identified two communities through our watch list process based on the specified threshold, taking into consideration the remaining lots left to close. We performed further evaluation and determined the low profitability levels were temporary in nature. As such, no additional quantitative analysis (cash flow run out) was deemed necessary.

As of September 30, 2018, we identified four communities on our watch list as having potential indicators of impairment. Based on our evaluation performed, we determined it was necessary to subject two of the four communities to additional quantitative analysis. This additional analysis led to an impairment charge of $1.0 million for one of these communities, principally due to a reduction in price taken that is other than temporary based on the competitive and market dynamics.

The table below presents, by reportable segment, details of the impairment charges taken on projects in progress for the periods presented:



$ in thousands	Results of Discounted Cash Flow Analyses Prepared
Segment	# of Communities Impaired	# of Lots Impaired	Impairment Charge		Estimated Fair Value of Impaired Inventory at Time of Impairment
Year Ended September 30, 2019
West	9	839	$	92,912	$	69,449
Southeast	1	15	858		1,367
Corporate and unallocated ^(a)	—	—	16,260		14,166
Total	10	854	$	110,030	$	84,982
Year Ended September 30, 2018
Southeast	1	25	$	793	$	1,312
Corporate and unallocated ^(a)	—	—	212		—
Total	1	25	$	1,005	$	1,312
Year Ended September 30, 2017
West	1	46	$	1,625	$	3,791
Corporate and unallocated ^(a)	—	—	68		—
Total	1	46	$	1,693	$	3,791

^(a) Amount represents the capitalized interest and indirect costs that were impaired. Capitalized interest and indirect costs are maintained within our Corporate and unallocated segment.

Impairments on land held for sale generally represent write downs of these properties to net realizable value and are based on current market conditions and our review of recent comparable transactions. Our assumptions related to land sales prices require significant judgment because the real estate market is highly sensitive to changes in economic conditions, and our estimates of sale prices could differ significantly from actual results.

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 those lots. 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.

The following table presents, by reportable segment, our total impairment and abandonment charges for the periods presented:



	Fiscal Year Ended September 30,
in thousands	2019		2018		2017
Projects in Progress:
West	$	92,912	$	—	$	1,625
Southeast	858		793		—
Corporate and unallocated ^(a)	16,260		212		68
Total impairment charges on projects in progress	$	110,030	$	1,005	$	1,693
Land Held for Sale:
West ^(b)	$	37,963	$	—	$	94
East	—		168		470
Southeast	—		3,218		—
Corporate and unallocated ^(a)	625		2,108		—
Total impairment charges on land held for sale	$	38,588	$	5,494	$	564
Abandonments:
East	$	—	$	—	$	188
Total abandonments charges	$	—	$	—	$	188
Total continuing operations	$	148,618	$	6,499	$	2,445
Discontinued Operations:
Land Held for Sale	$	—	$	450	$	—
Total discontinued operations	$	—	$	450	$	—
Total impairment and abandonment charges	$	148,618	$	6,949	$	2,445

^(a) Amount represents the capitalized interest and indirect costs that were impaired. Capitalized interest and indirect costs are maintained within our Corporate and unallocated segment.

^(b)Land held for sale impairments during the year ended September 30, 2019 related to six communities representing 732 lots in California that were impaired in the second quarter of fiscal 2019. Two of these parcels were sold in the fourth quarter of fiscal 2019 for amounts approximately equal to their carrying costs. While steps to initiate planned sales of our remaining land held for sale assets have been taken, the timing of completion of such asset dispositions is unknown.

Valuation assumptions for communities tested for impairment are specific to each community. For projects in progress impaired during the periods presented, we determined the fair value of each community by discounting its estimated future cash flows at a rate commensurate with the risks inherent in the project. The discount rate used depends on the development stage and expected duration of the project, local market conditions, and other specific factors. The estimated future cash flows for each community were determined based on the expected pace of closings and average sales price of the community less expected costs for land acquisition and land development, direct construction, overhead, and interest. We determined the fair value of land held for sale assets impaired during the periods presented based on sales contracts, letters of intent, and recent comparable land sale transactions, as applicable. The assumptions used in the determination of fair value of both projects in progress and land held for sale communities are based on factors known to us at the time such estimates are made and our expectations of future operations and market conditions. Should the estimates or expectations used in determining estimated fair values deteriorate in the future, we may be required to recognize additional impairment charges and write-offs related to these assets, and such amounts could be material.

The table below presents the ranges or values of significant quantitative unobservable inputs we used in determining the fair value of the communities impaired during the periods presented:



		Fiscal Year Ended September 30,
Unobservable Inputs		2019	2018			2017
Average selling price (in thousands)	$	350 - 615	$	356		$	405
Closings per community per month		1 - 4	1 - 6			1 - 4
Discount rate		14.7% - 16.8%	15.11		%	12.83		%

Lot Option Agreements and Variable Interest Entities (VIE)

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. The 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 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 September 30, 2019 and September 30, 2018:



in thousands	Deposits & Non-refundable Pre-acquisition Costs Incurred		Remaining Obligation
As of September 30, 2019
Unconsolidated lot option agreements	$	78,202	$	389,705
As of September 30, 2018
Unconsolidated lot option agreements	$	72,191	$	383,150