Annual report pursuant to Section 13 and 15(d)

Variable Interest Entities and Consolidated Real Estate Not Owned

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Variable Interest Entities and Consolidated Real Estate Not Owned
 12 Months Ended
Dec. 31, 2012
Variable Interest Entities and Consolidated Real Estate Not Owned [Abstract]  
VARIABLE INTEREST ENTITIES AND CONSOLIDATED REAL ESTATE NOT OWNED
NOTE 3 — VARIABLE INTEREST ENTITIES AND CONSOLIDATED REAL ESTATE NOT OWNED
We enter into purchase and option agreements for land or lots as part of the normal course of business. These purchase and option agreements enable us to acquire properties at one or multiple future dates at pre-determined prices. We believe these acquisition structures reduce our financial risk associated with land acquisitions and holdings and allow us to better maximize our cash position.
Based on the provisions of the relevant accounting guidance, we have concluded that when we enter into a purchase agreement to acquire land or lots from an entity, a variable interest entity, or “VIE”, may be created. We evaluate all option and purchase agreements for land to determine whether they are a VIE. ASC 810, Consolidations, requires that for each VIE, we assess whether we are the primary beneficiary and, if we are, we consolidate the VIE in our financial statements and reflect such assets and liabilities as “Real estate not owned.” The liabilities related to consolidated VIEs are excluded from our debt covenant calculations.
In order to determine if we are the primary beneficiary, we must first assess whether we have the ability to control the activities of the VIE that most significantly impact its economic performance. Such activities include, but are not limited to, the ability to determine the budget and scope of land development work, if any; the ability to control financing decisions for the VIE; the ability to acquire additional land into the VIE or dispose of land in the VIE not under contract with Meritage; and the ability to change or amend the existing option contract with the VIE. If we are not determined to control such activities, we are not considered the primary beneficiary of the VIE. If we do have the ability to control such activities, we will continue our analysis by determining if we are also expected to absorb a potentially significant amount of the VIE’s losses or, if no party absorbs the majority of such losses, if we will benefit from a potentially significant amount of the VIE’s expected gains.
In substantially all cases, creditors of the entities with which we have option agreements have no recourse against us and the maximum exposure to loss in our option agreements is limited to non-refundable option deposits and any capitalized pre-acquisition costs. Often, we are at risk for items over budget related to land development on property we have under option if we are the land developer. In these cases, we have contracted to complete development at a fixed cost on behalf of the land owner and any budget savings or shortfalls are borne by us. Some of our option deposits may be refundable to us if certain contractual conditions are not performed by the party selling the lots.
The table below presents a summary of our lots under option at December 31, 2012 (dollars in thousands):
 
 
 
Number
of Lots
 
Purchase
Price
 
Option/
Earnest  Money
Deposits–Cash
 
 
Purchase and option contracts recorded on balance sheet as real estate not owned
 
—

 
$
—

 
$
—

 
 
Purchase and option contracts not recorded on balance sheet — non-refundable deposits, committed (1)
 
2,471

 
115,902

 
9,442

 
 
Purchase and option contracts not recorded on balance sheet —refundable deposits, committed
 
850

 
21,870

 
2,934

 
 
Total committed (on and off balance sheet)
 
3,321

 
137,772

 
12,376

 
 
Total purchase and option contracts not recorded on balance sheet — refundable deposits, uncommitted (2)
 
1,514

 
46,128

 
1,975

 
 
Total lots under contract or option
 
4,835

 
183,900

 
14,351

 
 
Total option contracts not recorded on balance sheet
 
4,835

 
$
183,900

 
$
14,351

 
(3)
 
(1)
Deposits are non-refundable except if certain contractual conditions are not performed by the selling party.
(2)
Deposits are refundable at our sole discretion. We have not completed our acquisition evaluation process and we have not internally committed to purchase these lots.
(3)
Amount is reflected in our consolidated balance sheet in the line item “Deposits on real estate under option or contract” as of December 31, 2012.
Generally, our options to purchase lots remain effective so long as we purchase a pre-established minimum number of lots each month or quarter, as determined by the respective agreement. Although the pre-established number is typically structured to approximate our expected rate of home construction starts, during a weakened homebuilding market, we may purchase lots at an absorption level that exceeds our sales and home starts pace needed to meet the pre-established minimum number of lots or restructure our original contract to terms that more accurately reflect our revised sales pace expectations.