LENNAR CORP /NEW/ (LEN) FY 2021 MD&A

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Selected Financial Data" and our audited consolidated financial statements and accompanying notes included elsewhere in this Report. It also should be read in conjunction with the disclosure under “Special Note Regarding Forward-Looking Statements” in Part I of this Form 10-K.

Outlook

While supply chain challenges continued to dominate both the homebuilding and the broader economic narrative in 2021, we were extremely pleased with our performance this year. The demand for housing continues to be strong, while the supply of new and existing homes continues to be constrained. New home construction cannot ramp up quickly enough to fill the void of the underproduction of homes for the past decade, and short supply is likely to remain for some time to come. Even though home prices have moved much higher, overall affordability remains strong as interest rates are still very attractive. Personal savings for deposits are strong and wages seem to be rising faster than monthly payments. However, those higher wages are starting to be reflected in government numbers and, unfortunately, in inflation as well. Millennials are moving out of their parents’ homes and forming families, while large numbers of apartment dwellers are seeking first-time single-family homes. First-time homes are selling at higher prices, and appreciated equity is enabling first-time move-ups. The iBuyer and single-family for rent participants are providing additional liquidity to the marketplace for homes, as they evolve and provide ever more frictionless transactions.

While the housing market remains very strong in all of our major markets, our ability to actually execute and deliver results has been tested by the supply chain challenges for both land and construction, the workforce that is short in numbers while driven to produce more, and the never-ending competition for scarce entitled land assets. The supply chain issues will continue into the first quarter of 2022 and beyond. But we expect that as we enter the second half of the year, we will be less affected by supply chain disruptions, in part because of the greater number of homes we are starting, the lessons learned and incorporated in our Builder of Choice relationships with suppliers and trades, and the simplicity embedded in our Everything's Included® home offerings. We remain focused on orderly, targeted growth, with our sales pace tightly matched with the numbers of homes we can build, which enables price appreciation to offset future cost escalations and therefore maximize margins.

Although there have been some headwinds throughout the year, fiscal 2021 was an extraordinary year for our company. We established an operating plan that included cash flow generation and debt reduction in order to improve returns on capital and equity. We expect our first quarter community count to be about 5% lower than year-end 2021 because of the shortages both of land and construction materials. However, we expect community count to start to increase in the second quarter, and we expect to end 2022 with a low double-digit increase in community count year-over-year. We expect our deliveries for the first quarter of 2022 will be approximately 12,500 homes. We expect our gross margin to be about 26.75%, which reflects the impact of peak lumber prices from last year and less field expense leverage. We have remained focused on our optioned versus owned land strategy. We ended the year with a 3.0 years supply of land owned, compared to a 3.5 years supply of land owned at the same time last year, and our homesites controlled percentage increased to 59% from 39% in the prior year. Among other things, this has enabled us to reduce debt, such that our homebuilding debt-to-total capital ratio improved to 18.3% at year end, from 24.9% in the prior year.

We have articulated a drive and desire to have a strong focus on new technology-driven efficiencies in our core business. We invested in numerous new technologies, while eight prior investments were either sold or went public, which resulted in significant profits for the Company in 2021. Perhaps more importantly, we have invested in companies that have enabled improvement in our core business, while we have benefited both through the investments and through incorporation in our core. We are working to address the issues in supply chain, labor shortages, and production, using innovative technology in innovative ways.

We have continued to work on the structural components and organization of our proposed spin-off company as we focus on the strategy of becoming a pure-play homebuilding company. We have sufficient excess capacity and balance sheet to be able to spin off our well-established ancillary businesses, and we expect to complete a tax-free spin-off by the second or third quarter of 2022. To that end, in November 2021, we took our first significant step to complete the spin-off by formally filing a request for a private letter ruling from the Internal Revenue Service confirming that the spin-off would not result in taxation either to us or to our stockholders. We have concluded that the spin company will be an asset-light asset management business that will have a limited balance sheet. Three core verticals have been identified for the spin, and they are multifamily, single-family for rent, and land strategies. Each of these verticals already has raised third-party capital, and we are active asset managers.

We believe we have never been better positioned financially, organizationally and technologically to thrive and grow in this evolving high demand housing market. While difficulties in the supply chain present challenges for Lennar and the industry, the housing market remains strong, and supply of new and existing homes is very limited. We remain focused on an

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orderly, targeted growth strategy, with our sales pace tightly matched with our pace of production. We focus on gross margin by selling in step with production, while controlling costs, and reducing our SG&A, and therefore driving our net margin. As we look to 2022, we see continued strength in the market and double-digit growth for Lennar.

Results of Operations

Overview

Our net earnings attributable to Lennar were $4.4 billion, or $14.27 per diluted share ($14.28 per basic share) in 2021 and $2.5 billion, or $7.85 per diluted share ($7.88 per basic share) in 2020.

Financial information relating to our operations was as follows:

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2021 versus 2020

Revenues from home sales increased 22% in the year ended November 30, 2021 to $25.3 billion from $20.8 billion in the year ended November 30, 2020. Revenues were higher primarily due to a 13% increase in the number of home deliveries and an 8% increase in the average sales price. New home deliveries increased to 59,825 homes in the year ended November 30, 2021 from 52,925 homes in the year ended November 30, 2020 as a result of an increase in home deliveries in all our homebuilding segments. The average sales price of homes delivered was $424,000 in the year ended November 30, 2021, compared to $395,000 in the year ended November 30, 2020 as a result of price appreciation in all of our homebuilding segments as a result of the current market conditions.

Gross margins on home sales were $6.8 billion, or 26.8%, in the year ended November 30, 2021, compared to $4.7 billion, or 22.8%, in the year ended November 30, 2020. The gross margin percentage on home sales increased primarily as a result of price appreciation as the increase in revenues per square foot outpaced the increase in costs per square foot.

Selling, general and administrative expenses were $1.8 billion in the year ended November 30, 2021, compared to $1.7 billion in the year ended November 30, 2020. As a percentage of revenues from home sales, selling, general and administrative expenses improved to 7.1% in the year ended November 30, 2021, from 8.1% in the year ended November 30, 2020, primarily due to a decrease in broker commissions and benefits of the Company's technology efforts.

Operating earnings for our Financial Services segment were $491.0 million ($490.4 million net of noncontrolling interests) in the year ended November 30, 2021, compared to $481.0 million ($495.0 million net of noncontrolling interests) in the year ended November 30, 2020. The year ended November 30, 2020 included a $61.4 million gain on the deconsolidation of a previously consolidated entity. Excluding this fiscal 2020 gain, the improvement in operating earnings during the year ended November 30, 2021 was primarily due to an increase in volume and margin in our title businesses, partially offset by lower mortgage net margins driven by a more competitive mortgage market.

Operating earnings for our Multifamily segment were $21.5 million in the year ended November 30, 2021, compared to $22.7 million in the year ended November 30, 2020. Operating earnings for our Lennar Other segment were $733.0 million in the year ended November 30, 2021, compared to an operating loss of $10.3 million in the year ended November 30, 2020. The operating earnings for the year ended November 30, 2021 were primarily due to mark to market gains on our strategic technology investments that went public during the year and the sale of our solar business.

During the year ended November 30, 2021, we retired $1.15 billion aggregate principal amount of senior notes which included $600 million aggregate principal amount of our 4.125% senior notes due January 2022 at par, retired early, at a

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premium, $250 million aggregate principal amount of our 5.375% senior notes due October 2022 and $300 million aggregate principal amount of our 6.25% senior notes due December 2021.

For the years ended November 30, 2021 and 2020, we had a tax provision of $1.4 billion and $656.2 million, respectively, which resulted in an overall effective income tax rate of 23.5% and 21.0%, respectively. The overall effective income tax rate was lower in 2020 primarily due to the retroactive extension of the new energy efficient home tax credit during the first quarter of 2020.

Homebuilding Segments

At November 30, 2021, our homebuilding operating segments and Homebuilding Other consisted of homebuilding divisions located in:

East: Florida, New Jersey, Pennsylvania and South Carolina

Central: Georgia, Illinois, Indiana, Maryland, Minnesota, North Carolina, Tennessee and Virginia

Texas: Texas

West: Arizona, California, Colorado, Idaho, Nevada, Oregon, Utah and Washington

Other: Urban divisions and other homebuilding related investments primarily in California, including FivePoint

The following tables set forth selected financial and operational information related to our homebuilding operations for the years indicated:

Selected Financial and Operational Data

(1)Net margins on sales of homes include selling, general and administrative expenses.

(2)Negative gross and net margins were due to period costs in Urban divisions that impact costs of homes sold without sufficient sales of homes revenues to offset those costs.

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Summary of Homebuilding Data

Deliveries:

Of the total homes delivered listed above, 95 homes with a dollar value of $31.6 million and an average sales price of $332,000 represent home deliveries from unconsolidated entities for the year ended November 30, 2021, compared to 112 home deliveries with a dollar value of $36.1 million and an average sales price of $322,000 for the year ended November 30, 2020.

New Orders (1):

Of the total new orders listed above, 136 homes with a dollar value of $48.8 million and an average sales price of $359,000 represent new orders from unconsolidated entities for the year ended November 30, 2021, compared to 119 new orders with a dollar value of $37.3 million and an average sales price of $314,000 for the year ended November 30, 2020.

(1)New orders represent the number of new sales contracts executed with homebuyers, net of cancellations, during the years ended November 30, 2021 and 2020.

Backlog:

Of the total homes in backlog listed above, 79 homes with a backlog dollar value of $28.6 million and an average sales price of $363,000 represent the backlog from unconsolidated entities at November 30, 2021, compared to 38 homes with a backlog dollar value of $11.5 million and an average sales price of $302,000 at November 30, 2020.

(1)During the year ended November 30, 2021, we acquired 232 homes in backlog.

Backlog represents the number of homes under sales contracts. Homes are sold using sales contracts, which are generally accompanied by sales deposits. In some instances, purchasers are permitted to cancel sales if they fail to qualify for financing or under certain other circumstances. We do not recognize revenue on homes under sales contracts until the sales are closed and title passes to the new homeowners.

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Homebuilding East: Revenues from home sales increased in 2021 compared to 2020, primarily due to an increase in the number of home deliveries in all the states of the segment except for Pennsylvania and an increase in the average sales price in all the states of the segment. The increase in the number of home deliveries was primarily due to higher demand as the number of deliveries per active community increased. The decrease in the number of home deliveries in Pennsylvania was primarily due to a decrease in the number of communities as a result of the timing of opening and closing of communities. The increase in the average sales price of homes delivered was primarily due to favorable market conditions. Gross margin percentage on home sales for the year ended November 30, 2021 increased compared to the same period last year primarily due to price appreciation as the increase in revenues per square foot of homes delivered outpaced the increase in costs per square foot.

Homebuilding Central: Revenues from home sales increased in 2021 compared to 2020, primarily due to an increase in the number of home deliveries in all the states of the segment and an increase in the average sales price in all the states of the segment, except in Virginia. The increase in the number of deliveries was primarily due to higher demand as the number of deliveries per active community increased. The increase in the average sales price of homes delivered was primarily due to favorable market conditions. The decrease in the average sales price of homes delivered in Virginia was primarily driven by a change in product mix due to a higher percentage of deliveries in lower-priced communities. Gross margin percentage on home sales for the year ended November 30, 2021 increased compared to the same period last year primarily due to price appreciation as the increase in revenues per square foot of homes delivered outpaced the increase in costs per square foot.

Homebuilding Texas: Revenues from home sales increased in 2021 compared to 2020, primarily due to an increase in the number of home deliveries and an increase in the average sales price. The increase in the number of deliveries was primarily due to higher demand as the number of deliveries per active community increased. The increase in the average sales price of homes delivered was primarily due to favorable market conditions. Gross margin percentage on home sales for the year ended November 30, 2021 increased compared to the same period last year primarily due to price appreciation as the increase in revenues per square foot of homes delivered outpaced the increase in costs per square foot.

Homebuilding West: Revenues from home sales increased in 2021 compared to 2020, primarily due to an increase in the number of home deliveries and average sales price in all the states of the segment. The increase in the number of deliveries was primarily due to higher demand as the number of deliveries per active community increased. The increase in the average sales price of homes delivered was primarily due to favorable market conditions. Gross margin percentage on home sales for the year ended November 30, 2021 increased compared to the same period last year primarily due to price appreciation as the increase in revenues per square foot of homes delivered outpaced the increase in costs per square foot.

Financial Services Segment

Our Financial Services reportable segment primarily provides mortgage financing, title and closing services primarily for buyers of our homes, as well as property and casualty insurance. The segment also originates and sells into securitizations commercial mortgage loans through its LMF Commercial business. Our Financial Services segment sells substantially all of the residential loans it originates within a short period in the secondary mortgage market, the majority of which are sold on a servicing released, non-recourse basis. After the loans are sold, we retain potential liability for possible claims by purchasers that we breached certain limited industry-standard representations and warranties in the loan sale agreements.

The following table sets forth selected financial and operational information related to the residential mortgage and title activities of our Financial Services:

At November 30, 2021 and 2020, the carrying value of Financial Services' commercial mortgage-backed securities ("CMBS") was $157.8 million and $164.2 million, respectively. Details of these securities and related debt are within Note 2 of the Notes to Consolidated Financial Statements.

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LMF Commercial

LMF Commercial originates and sells into securitizations first mortgage loans, which are secured by income producing commercial properties. LMF Commercial originated commercial loans as follows:

Multifamily Segment

We have been actively involved, primarily through unconsolidated entities, in the development, construction and property management of multifamily rental properties. Our Multifamily segment focuses on developing a geographically diversified portfolio of institutional quality multifamily rental properties in select U.S. markets.

Originally, our Multifamily segment focused on building multifamily properties and selling them shortly after they were completed. However, more recently we have focused on creating and participating in ventures that build multifamily properties with the intention of retaining them after they are completed.

The following tables provide information related to our investment in the Multifamily segment:

The Multifamily segment includes Multifamily Venture Fund I (the "LMV I") and Multifamily Venture Fund II LP (the "LMV II"), which are long-term multifamily development investment vehicles involved in the development, construction and ownership of class-A multifamily rental properties. Details of each as of and during the year ended November 30, 2021 are included below:

Our Multifamily segment had equity investments in unconsolidated entities. The details of the Multifamily segment's equity investments in unconsolidated entities and the development activities as of November 30, 2021 were as follows:

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As of November 30, 2021, our Multifamily segment also had a pipeline of potential future projects, which were under contract or had letters of intent, totaling approximately $8.5 billion in anticipated development costs across a number of states that will be developed primarily by unconsolidated entities.

Despite widespread reductions in economic activity due to the COVID-19 pandemic, the properties in which the Multifamily segment has investments did not, overall, experience significant increases in vacancies or in delinquent rent payments to date.

Lennar Other Segment

Our Lennar Other segment includes fund investments we retained subsequent to the sale of the Rialto investment and asset management platform as well as strategic investments in technology companies that are looking to improve the homebuilding and financial services industries to better serve homebuyers and homeowners and increase efficiencies. As of November 30, 2021 and 2020, our balance sheet had $1.5 billion and $521.7 million, respectively, of assets in the Lennar Other segment, which included investments in unconsolidated entities of $346.3 million and $387.1 million, respectively. The increase in assets during the year ended November 30, 2021 was due to an increase in the value of our strategic technology investments in equity securities, primarily managed by our LENX subsidiary. This increase was largely related to our strategic investments in Opendoor, Hippo, and SmartRent. For the years ended November 30, 2020 and 2019, there were no mark to market gains on our strategic investments in technology companies. During the year ended November 30, 2021, we completed the sale of our residential solar business to Sunnova for shares in Sunnova. The following is a detail of Lennar Other realized and unrealized gains (losses):

At November 30, 2021 and 2020, the carrying value of Lennar Other's commercial mortgage-backed securities ("CMBS") was $41.7 million and $53.5 million, respectively. These securities were purchased at discount rates ranging from 33% to 55% with coupon rates ranging from 2.8% to 3.4%, stated and assumed final distribution dates between September 2025 and October 2026, and stated maturity dates between November 2049 and March 2059. We review changes in estimated cash flows periodically to determine if an other-than-temporary impairment has occurred on our CMBS. Based on management’s assessment, no impairment charges were recorded during the years ended November 30, 2021 and 2020. We classify these securities as held-for-sale at November 30, 2021 and 2020.

Financial Condition and Capital Resources

At November 30, 2021, we had cash and cash equivalents and restricted cash related to our homebuilding, financial services, multifamily and other operations of $3.0 billion, compared to $2.9 billion at November 30, 2020.

We finance all of our activities including homebuilding, financial services, multifamily, other and general operating needs primarily with cash generated from our operations, debt issuances and investor funds as well as cash borrowed under our warehouse lines of credit and our unsecured revolving credit facility (the "Credit Facility"). At November 30, 2021, we had $2.7 billion of Homebuilding cash and cash equivalents and no outstanding borrowings under our $2.5 billion revolving credit facility, thereby providing $5.2 billion of available capacity.

Operating Cash Flow Activities

During 2021 and 2020, cash provided by operating activities totaled $2.5 billion and $4.2 billion, respectively. During 2021, cash provided by operating activities was positively impacted by our net earnings, net of Lennar Other unrealized/realized gains of $681 million primarily due to mark to market gains on strategic investments that went public during the year ended November 30, 2021 (Opendoor, Hippo and SmartRent) and the sale of our solar business to Sunnova. In addition, there was an increase in accounts payable and other liabilities of $881 million, partially offset by an increase in inventories due to strategic land purchases, land development and construction costs of $2.0 billion and an increase in receivables of $290 million.

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During 2020, cash provided by operating activities was positively impacted by our net earnings, a decrease in inventories of $781 million, an increase in accounts payable and other liabilities of $266 million and a decrease in loans held-for-sale of $177 million primarily related to the sale of loans originated by Financial Services.

Investing Cash Flow Activities

During 2021 and 2020, cash used in investing activities totaled $105 million and $280 million, respectively. During 2021, our cash used in investing activities was primarily due to cash contributions of $408 million to unconsolidated entities, which primarily included (1) $251 million to Homebuilding unconsolidated entities (2) $72 million to Multifamily unconsolidated entities, and (3) $83 million to strategic technology investments included in the Lennar Other segment. In addition, we had $128 million of purchases of investment securities related to strategic technology investments in the Lennar Other segment. This was partially offset by distributions of capital from unconsolidated entities of $362 million, which primarily included (1) $177 million from Homebuilding unconsolidated entities (2) $128 million from Multifamily unconsolidated entities, and (3) $57 million from our Lennar Other segment, which included our unconsolidated Rialto real estate funds and distributions from strategic investments.

During 2020, our cash used in investing activities was primarily due to cash contributions of $486 million to unconsolidated entities and the deconsolidation of a previously consolidated entity, which included (1) $167 million to Multifamily unconsolidated entities, (2) $104 million to Homebuilding unconsolidated entities, (3) $63 million to the strategic technology investments included in the Lennar Other segment; and (4) the derecognition of $152 million of cash as of the date of deconsolidation of a previously consolidated Financial Services entity. This was partially offset by distributions of capital from unconsolidated entities of $221 million, which primarily included (1) $93 million from Multifamily unconsolidated entities, (2) $75 million from Homebuilding unconsolidated entities, (3) $1 million from strategic technology ventures, and (4) $44 million from the unconsolidated Rialto real estate funds included in our Lennar Other segment.

Financing Cash Flow Activities

During 2021 and 2020, our cash used in financing activities totaled $2.4 billion and $2.4 billion, respectively. During 2021, our cash used in financing activities was primarily impacted by (1) redemption of $600 million aggregate principal amount of our 4.125% senior notes due January 2022 at par, (2) retired early, at a premium, $250 million aggregate principal amount of our 5.375% senior notes due October 2022, (3) $300 million aggregate principal amount of our 6.25% senior notes due December 2021, (4) $195 million principal payments on notes payable and other borrowings, (5) repurchase of our common stock for $1.4 billion, which included $1.4 billion of repurchases of our stock under our repurchase program and $65 million of repurchases related to our equity compensation plan, and (6) $310 million of dividend payments. These were partially offset by (1) $344 million of net proceeds from liabilities related to consolidated inventory not owned due to land sales to land banks, (2) $262 million of net borrowings under our Financial Services warehouse facilities, and (3) receipts related to noncontrolling interests of $70 million.

During 2020, our cash used in financing activities was primarily impacted by (1) redemption of $300 million aggregate principal amount of our 2.95% senior notes due November 2020, (2) redemption of $400 million aggregate principal amount of our 8.375% senior notes due January 2021, (3) redemption of $500 million aggregate principal amount of our 4.75% senior notes due April 2021, (4) redemption of $300 million aggregate principal amount of our 6.625% senior notes due May 2020, (5) $605 million principal payments on notes payable and other borrowings, (6) repurchase of our common stock for $322 million, which included $289 million of repurchases of our stock under our repurchase program and $33 million of repurchases related to our equity compensation plan, (7) $282 million of net repayments under our Financial Services warehouse facilities, and (8) $195 million of dividend payments. This was partially offset by (1) $346 million of proceeds from liabilities related to consolidated inventory not owned due to land sales to land banks, (2) $177 million of receipts related to noncontrolling interests, and (3) $93 million of proceeds from other borrowings.

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Debt to total capital ratios are financial measures commonly used in the homebuilding industry and are presented to assist in understanding the leverage of our Homebuilding operations. Homebuilding debt to total capital and net Homebuilding debt to total capital were calculated as follows:

(1)Net homebuilding debt to total capital is a non-GAAP financial measure defined as net homebuilding debt (homebuilding debt less homebuilding cash and cash equivalents) divided by total capital (net homebuilding debt plus stockholders' equity). Our management believes the ratio of net homebuilding debt to total capital is a relevant and a useful financial measure to investors in understanding the leverage employed in our homebuilding operations. However, because net homebuilding debt to total capital is not calculated in accordance with GAAP, this financial measure should not be considered in isolation or as an alternative to financial measures prescribed by GAAP. Rather, this non-GAAP financial measure should be used to supplement our GAAP results.

At November 30, 2021, Homebuilding debt to total capital was lower compared to November 30, 2020, primarily as a result of a decrease in Homebuilding debt due to debt pay downs and an increase in stockholders' equity due to net earnings, partially offset by share repurchases.

We are continually exploring various types of transactions to manage our leverage and liquidity positions, take advantage of market opportunities and increase our revenues and earnings. These transactions may include the issuance of additional indebtedness, the repurchase of our outstanding indebtedness, the repurchase of our common stock, the acquisition of homebuilders and other companies, the purchase or sale of assets or lines of business, the issuance of common stock or securities convertible into shares of common stock, and/or the pursuit of other financing alternatives. In connection with some of our non-homebuilding businesses, we are also considering other types of transactions such as sales, restructurings, joint ventures, spin-offs or initial public offerings as we continue to move back towards being a pure play homebuilding company. We have announced an intention to spin off our multifamily and single family rental asset management businesses and some of our investment assets.

Our Homebuilding senior notes and other debts payable are summarized within Note 4 of the Notes to Consolidated Financial Statements.

At November 30, 2021, we had an unsecured revolving credit facility (the "Credit Facility") with maximum borrowings of $2.5 billion maturing in 2024, that included a $300 million accordion feature, subject to additional commitments, thus the maximum borrowings could be $2.8 billion. The credit agreement provides that up to $500 million in commitments may be used for letters of credit. As of both November 30, 2021 and 2020, we had no outstanding borrowings under the Credit Facility. Under the Credit Facility agreement, we are required to maintain a minimum consolidated tangible net worth, a maximum leverage ratio and either a liquidity or an interest coverage ratio. These ratios are calculated per the Credit Facility agreement, which involves adjustments to GAAP financial measures. We believe we were in compliance with our debt covenants at November 30, 2021. In addition to the Credit Facility, we have other letter of credit facilities with different financial institutions.

We often post letters of credit instead of making cash deposits for option contracts and for similar purposes. We often are required to post surety bonds to guarantee completion of projects, particularly when municipal authorities are involved. Our outstanding letters of credit and surety bonds are described below:

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Our Homebuilding average debt outstanding and the average rates of interest were as follows:

Under our Credit Facility agreement (the "Credit Agreement"), we are required to maintain a minimum consolidated tangible net worth, a maximum leverage ratio and either a liquidity or an interest coverage ratio. These ratios are calculated per the Credit Agreement, which involves adjustments to GAAP financial measures. As of the end of each fiscal quarter, we are required to maintain minimum consolidated tangible net worth of approximately $7.1 billion plus the sum of 50% of the cumulative consolidated net income for each completed fiscal quarter subsequent to February 28, 2019, if positive, and 50% of the net cash proceeds from any equity offerings from and after February 28, 2019, minus the lesser of 50% of the amount paid after April 11, 2019 to repurchase common stock and $375 million. We are required to maintain a leverage ratio that shall not exceed 65% and may be reduced by 2.5% per quarter if our interest coverage ratio is less than 2.25:1.00 for two consecutive fiscal calendar quarters. The leverage ratio will have a floor of 60%. If our interest coverage ratio subsequently exceeds 2.25:1.00 for two consecutive fiscal calendar quarters, the leverage ratio we will be required to maintain will be increased by 2.5% per quarter to a maximum of 65%. As of the end of each fiscal quarter, we are also required to maintain either (1) liquidity in an amount equal to or greater than 1.00x consolidated interest incurred for the last twelve months then ended or (2) an interest coverage ratio equal to or greater than 1.50:1.00 for the last twelve months then ended. We believe that we were in compliance with our debt covenants at November 30, 2021.

The following summarizes our required debt covenants and our actual levels or ratios with respect to those covenants as calculated per the Credit Agreement as of November 30, 2021:

(1)We are only required to maintain either (1) liquidity in an amount equal to or greater than 1.00x consolidated interest incurred for the last twelve months then ended or (2) an interest coverage ratio of equal to or greater than 1.50:1.00 for the last twelve months then ended. Although we are in compliance with our debt covenants for both calculations, we have only disclosed our liquidity test.

At November 30, 2021, the Financial Services segment had warehouse facilities, all of which were 364-day repurchase facilities and were used to fund residential mortgages or commercial mortgages for LMF Commercial as follows:

(1)Subsequent to November 30, 2021, the maturity date was extended to December 2022.

The Financial Services segment uses the residential warehouse facilities to finance its residential lending activities until the mortgage loans are sold to investors and the proceeds are collected. The facilities are non-recourse to us and are expected to be renewed or replaced with other facilities when they mature. The LMF Commercial facilities finance LMF Commercial loan originations and securitization activities and were secured by up to 80% interests in the originated commercial loans financed.

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Borrowings and collateral under the facilities and their prior year predecessors were as follows:

If the facilities are not renewed or replaced, the borrowings under the lines of credit will be repaid by selling the mortgage loans held-for-sale to investors and by collecting receivables on loans sold but not yet paid for. Without the facilities, the Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities.

Changes in Capital Structure

In January 2021, our Board of Directors authorized a stock repurchase program, which replaced a January 2019 stock repurchase program, under which we were authorized to purchase up to the lesser of $1.0 billion in value, or 25.0 million in shares, of our outstanding Class A or Class B common stock. The repurchase authority had no expiration date. In October 2021, the Board of Directors authorized an increase to the stock repurchase program to enable us to repurchase up to the lesser of an additional $1.0 billion in value, or 25.0 million in shares, of our outstanding Class A or Class B common stock. The repurchase authority has no expiration date. Shortly after the new authorization, the January 2021 stock repurchase program was completed as we had purchased the $1.0 billion in value authorized under that stock repurchase program. The following table provides information about our repurchases of Class A and Class B common stock for the years ended November 30, 2021 and 2020:

During the year ended November 30, 2021, treasury stock increased by 14.7 million shares of Class A common stock and 0.1 million shares of Class B common stock primarily due to 14.0 million shares of common stock repurchased during the year through our stock repurchase program. During the year ended November 30, 2020, treasury stock increased by 4.9 million shares of Class A common stock and 0.1 million shares of Class B common stock primarily due to 4.4 million shares of common stock repurchased during the year through our stock repurchase program.

During the years ended November 30, 2021 and 2020, our Class A and Class B common stockholders received an aggregate per share annual dividend of $1.00 and $0.625, respectively. On January 12, 2022, our Board of Directors increased the annual dividend rate to $1.50 per share, resulting in a quarterly cash dividend of $0.375 per share on both our Class A and Class B common stock. The dividend is payable on February 10, 2022 to holders of record at the close of business on January 27, 2022.

Based on our current financial condition and credit relationships, we believe that, assuming the effects of the COVID-19 pandemic and resulting governmental actions on our operations do not significantly worsen for a protracted period, our operations and borrowing resources will provide for our current and long-term capital requirements at our anticipated levels of activity.

Supplemental Financial Information

Currently, substantially all of our 100% owned homebuilding subsidiaries are guaranteeing all our senior notes (the "Guaranteed Notes"). The guarantees are full and unconditional. However, they will be suspended as to a subsidiary any time it is not directly or indirectly guaranteeing at least $75 million of Lennar Corporation debt (other than senior notes) and be released when the subsidiary is sold. These guarantees are outlined in the Supplemental Financial Information below.

The indentures governing our senior notes require that, if any of our 100% owned subsidiaries, other than our finance company subsidiaries and foreign subsidiaries, directly or indirectly guarantee at least $75 million principal amount of debt of Lennar Corporation (other than senior notes), those subsidiaries must also guarantee Lennar Corporation’s obligations with regard to its senior notes. Included in the following tables as part of “Obligors” together with Lennar Corporation are subsidiary entities that are not finance company subsidiaries or foreign subsidiaries and were guaranteeing the senior notes because at November 30, 2021 they were guaranteeing Lennar Corporation's letter of credit facilities and its Credit Facility, disclosed in Note 4 of the Notes to Consolidated Financial Statements. The guarantees are full, unconditional and joint and several and the

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guarantor subsidiaries are 100% directly or indirectly owned by Lennar Corporation. A subsidiary's guarantee of Lennar senior notes will be suspended at any time when it is not directly or indirectly guaranteeing at least $75 million principal amount of debt of Lennar Corporation (other than senior notes), and a subsidiary will be released from its guarantee and any other obligations it may have regarding the senior notes if all or substantially all its assets, or all of its capital stock, are sold or otherwise disposed. If the proposed spin-off of our multifamily and single family rental asset management businesses takes place, the subsidiaries involved in those businesses will no longer guarantee our senior notes.

Supplemental information for the Obligors, which excludes non-guarantor subsidiaries and intercompany transactions, at November 30, 2021 is included in the following tables. Intercompany balances and transactions within the Obligors have been eliminated and amounts attributable to the Obligor’s investment in consolidated subsidiaries that have not issued or guaranteed the senior notes have been excluded. Amounts due from and transactions with non-guarantor subsidiaries and related parties are separately disclosed:

Off-Balance Sheet Arrangements

Homebuilding - Investments in Unconsolidated Entities

At November 30, 2021, we had equity investments in 41 active homebuilding and land unconsolidated entities (of which four had recourse debt, 11 had non-recourse debt and 26 had no debt), compared to 38 active homebuilding and land unconsolidated entities at November 30, 2020. Historically, we have invested in unconsolidated entities that acquired and developed land (1) for our homebuilding operations or for sale to third parties or (2) for the construction of homes for sale to third-party homebuyers. Through these entities, we have primarily sought to reduce and share our risk by limiting the amount of our capital invested in land, while obtaining access to potential future homesites and allowing us to participate in strategic ventures. The use of these entities also, in some instances, has enabled us to acquire land to which we could not otherwise obtain access, or could not obtain access on as favorable terms, without the participation of a strategic partner. Participants in these joint ventures have been land owners/developers, other homebuilders and financial or strategic partners. Joint ventures with land owners/developers have given us access to homesites owned or controlled by our partners. Joint ventures with other homebuilders have provided us with the ability to bid jointly with our partners for large land parcels. Joint ventures with financial partners have allowed us to combine our homebuilding expertise with access to our partners’ capital. Joint ventures with strategic partners have allowed us to combine our homebuilding expertise with the specific expertise (e.g. commercial or infill experience) of our partner. Each joint venture is governed by an executive committee consisting of members from the partners. Details regarding these investments, balances and debt are included in Note 3 of the Notes to Consolidated Financial Statements.

We regularly monitor the results of our unconsolidated joint ventures and any trends that may affect their future liquidity or results of operations. We also monitor the performance of joint ventures in which we have investments on a regular basis to assess compliance with debt covenants. For those joint ventures not in compliance with the debt covenants, we evaluate and assess possible impairment of our investment. We believe all of the joint ventures were in compliance with their debt covenants at November 30, 2021.

The following table summarizes the principal maturities of our Homebuilding unconsolidated entities ("JVs") debt as per current debt arrangements as of November 30, 2021. It does not represent estimates of future cash payments that will be made to reduce debt balances. Many JV loans have extension options in the loan agreements that would allow the loans to be extended into future years.

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Multifamily - Investments in Unconsolidated Entities

At November 30, 2021, Multifamily had equity investments in 17 unconsolidated entities that are engaged in multifamily residential developments (of which 11 had non-recourse debt and 6 had no debt), compared to 22 unconsolidated entities at November 30, 2020. We invest in unconsolidated entities that acquire and develop land to construct multifamily rental properties. Through these entities, we are focusing on developing a geographically diversified portfolio of institutional quality multifamily rental properties in select U.S. markets. Participants in these joint ventures have been financial partners. Joint ventures with financial partners have allowed us to combine our development and construction expertise with access to our partners’ capital. Each joint venture is governed by an operating agreement that provides significant substantive participating voting rights on major decisions to our partners.

The Multifamily segment includes LMV I and LMV II, which are long-term multifamily development investment vehicles involved in the development, construction and ownership of class-A multifamily rental properties. Details of each as of and during the year ended November 30, 2021 are included in Note 3 of the Notes to Consolidated Financial Statements.

We regularly monitor the results of our unconsolidated joint ventures and any trends that may affect their future liquidity or results of operations. We also monitor the performance of joint ventures in which we have investments on a regular basis to assess compliance with debt covenants. For those joint ventures not in compliance with the debt covenants, we evaluate and assess possible impairment of our investment. We believe all of the joint ventures were in compliance with their debt covenants at November 30, 2021.

The following table summarizes the principal maturities of our Multifamily unconsolidated entities debt as per current debt arrangements as of November 30, 2021. It does not represent estimates of future cash payments that will be made to reduce debt balances.

Lennar Other - Investments in Unconsolidated Entities

As part of the sale of the Rialto investment and asset management platform, we retained our ability to receive a portion of payments with regard to carried interests if funds meet specified performance thresholds. We periodically receive advance distributions related to the carried interests in order to cover income tax obligations resulting from allocations of taxable income to the carried interests. These distributions are not subject to clawbacks but will reduce future carried interest payments to which we become entitled and have been recorded as revenues.

As of November 30, 2021 and 2020, we had strategic technology investments in unconsolidated entities of $145.6 million and $196.6 million, respectively, accounted for under the equity method of accounting.

Option Contracts

We often obtain access to land through option contracts, which generally enable us to control portions of properties owned by third parties (including land funds) and unconsolidated entities until we have determined whether to exercise the options. Since fiscal year 2020, we have been increasing the percentage of our total homesites that we control through options rather than own.

As part of our focus on strategic relationships to further enhance our land lighter strategy, at the end of fiscal year 2020 we entered into an arrangement with a land bank investor group. The arrangement has a specified time land holding of 12 to 18 months. Under the arrangement, in most instances when we want to acquire a property for use in our for-sale single family home business, we will offer the investor group the opportunity to acquire the property and give us an option to purchase all or a portion of it in the future back, if it is mutually beneficial to both parties. The maximum amount the investor group is

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committed to spend is $3.1 billion. To the extent the investor group does not elect to purchase properties we identify, we can utilize our other investor relationships to have other investor groups purchase the land or we can purchase it directly. The arrangement with the investor group, together with existing and other strategic partnerships we are discussing, are significant steps in our strategy to migrate to a higher percentage of our homesites which we control but do not own, which we expect will result in greater cash flow and higher returns on assets and equity.

The table below indicates the number of homesites owned and homesites to which we had access through option contracts with third parties ("optioned") or unconsolidated JVs (i.e., controlled homesites) at November 30, 2021 and 2020:

(1)Based on trailing twelve months of home deliveries.

Details on option contracts and related consolidated inventory not owned and exposure are included in Note 8 of the Notes to Consolidated Financial Statements.

Contractual Obligations and Commercial Commitments

The following table summarizes certain of our contractual obligations at November 30, 2021:

(1)The amounts presented in the table above exclude debt issuance costs and any discounts/premiums and purchase accounting adjustments.

(2)Interest commitments on variable interest-bearing debt are determined based on the interest rate as of November 30, 2021.

(3)Amounts include $5.0 million and $18.1 million remaining equity investment commitments to LMV I and LMV II, respectively, for future expenditures related to the construction and development of the projects and $106.1 million remaining equity investment commitment to the Upward America Venture.

(4)Total contractual obligations exclude our gross unrecognized tax benefits and accrued interest and penalties totaling $72.2 million as of November 30, 2021, because we are unable to make reasonable estimates as to the period of cash settlement with the respective taxing authorities.

We are subject to the usual obligations associated with entering into contracts (including option contracts) for the purchase, development and sale of real estate in the routine conduct of our business. Option contracts for the purchase of land generally reduces our financial risk and costs of capital associated with land holdings. At November 30, 2021, we had access to

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257,509 homesites through option contracts with third parties and unconsolidated entities in which we have investments. At November 30, 2021, we had $1.2 billion of non-refundable option deposits and pre-acquisition costs related to certain of these homesites and had posted $175.9 million of letters of credit in lieu of cash deposits under certain land and option contracts.

At November 30, 2021, we had letters of credit outstanding in the amount of $1.4 billion (which included the $175.9 million of letters of credit discussed above). Details on our letters of credit outstanding and outstanding surety bonds are included in Note 4 of the Notes to Consolidated Financial Statements.

Our Financial Services segment had a pipeline of loan applications in process of $5.6 billion at November 30, 2021. Loans in process for which interest rates were committed to the borrowers totaled approximately $833.1 million as of November 30, 2021. Substantially all of these commitments were for periods of 60 days or less. Since a portion of these commitments is expected to expire without being exercised by the borrowers or borrowers may not meet certain criteria at the time of closing, the total commitments do not necessarily represent future cash requirements.

Our Financial Services segment uses mandatory mortgage-backed securities ("MBS") forward commitments, option contracts, futures contracts and investor commitments to hedge our mortgage-related interest rate exposure. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with MBS forward commitments, option contracts, futures contracts and loan sales transactions is managed by limiting our counterparties to investment banks, federally regulated bank affiliates and other investors meeting our credit standards. Our risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments and the option contracts. At November 30, 2021, we had open commitments amounting to $1.9 billion to sell MBS with varying settlement dates through February 2022 and there were no open futures contracts.

The following sections discuss market and financing risk, seasonality and interest rates and changing prices that may have an impact on our business:

Market and Financing Risk

We finance our contributions to JVs, land acquisition and development activities, construction activities, financial services activities, Multifamily activities and general operating needs primarily with cash generated from operations and debt, as well as borrowings under our Credit Facility and warehouse repurchase facilities. We also purchase land under option agreements, which enables us to control homesites until we have determined whether to exercise the options. We try to manage the financial risks of adverse market conditions associated with land holdings by what we believe to be prudent underwriting of land purchases in areas we view as desirable growth markets, careful management of the land development process and limitation of risks by using partners to share the costs of purchasing and developing land as well as obtaining access to land through option contracts. Although we believed our land underwriting standards were conservative, we did not anticipate the severe decline in land values and the sharply reduced demand for new homes encountered in the 2008 - 2010 economic downturn.

Seasonality

We historically have experienced, and expect to continue to experience, variability in quarterly results. Our homebuilding business is seasonal in nature and generally reflects higher levels of new home order activity in our second and third fiscal quarters and increased deliveries in the second half of our fiscal year. However, a variety of factors can alter seasonal patterns. For example, in 2020, the shutdown of large portions of our national economy in March and April due to the COVID-19 pandemic temporarily reduced our home sales, and therefore altered our normal seasonal pattern.

Interest Rates and Changing Prices

Inflation can have a long-term impact on us because increasing costs of land, materials and labor result in a need to increase the sales prices of homes. In addition, inflation is often accompanied by higher interest rates, which can have a negative impact on housing demand and increase the costs of financing land development activities and housing construction. Rising interest rates as well as increased material and labor costs, may reduce gross margins. An increase in materials and labor costs would be particularly a problem during a period of declining home prices. Conversely, deflation can impact the value of real estate and make it difficult for us to recover our land costs. Therefore, either inflation or deflation could adversely impact our future results of operations.

New Accounting Pronouncements

See Note 1 of the notes to our consolidated financial statements for a comprehensive list of new accounting pronouncements.

Critical Accounting Policies and Estimates

Our accounting policies are more fully described in Note 1 of the notes to our consolidated financial statements included in Item 8 of this document. As discussed in Note 1, the preparation of financial statements in conformity with

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accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and such differences may be material to our consolidated financial statements. Listed below are those policies and estimates that we believe are critical and require the use of significant judgment in their application.

Goodwill

We have recorded a significant amount of goodwill in connection with the 2018 acquisition of CalAtlantic. We record goodwill associated with acquisitions of businesses when the purchase price of the business exceeds the fair value of the net tangible and identifiable assets acquired. In accordance with ASC Topic 350, Intangibles-Goodwill and Other ("ASC 350"), we evaluate goodwill for potential impairment on at least an annual basis. We have the option to perform a qualitative or quantitative assessment to determine whether the fair value of a reporting unit exceeds its carrying value. Qualitative factors may include, but are not limited to, economic conditions, industry and market considerations, cost factors, overall financial performance of the reporting units and other entity and reporting unit specific events. We believe that the accounting estimate for goodwill is a critical accounting estimate because of the judgment required in assessing the fair value of each of our reporting units. We estimate fair value through various valuation methods, including the use of discounted expected future cash flows of each reporting unit. The expected future cash flows for each segment are significantly impacted by current market conditions. If these market conditions and resulting expected future cash flows for each reporting unit decline significantly, the actual results for each segment could differ from our estimate, which would cause goodwill to be impaired. Our accounting for goodwill represents our best estimate of future events.

Homebuilding Revenue Recognition

Homebuilding revenues and related profits from sales of homes are recognized at the time of the closing of a sale, when title to and possession of the property are transferred to the homebuyer. Our performance obligation, to deliver the agreed-upon home, is generally satisfied in less than one year from the original contract date. Cash proceeds from home closings held in escrow for our benefit, typically for approximately three days, are included in Homebuilding cash and cash equivalents in the Consolidated Balance Sheets and disclosed in the notes to consolidated balance sheets. Contract liabilities include customer deposits liabilities related to sold but undelivered homes that are included in other liabilities in the Consolidated Balance Sheets. We periodically elect to sell parcels of land to third parties. Cash consideration from land sales is typically due on the closing date, which is generally when performance obligations are satisfied, and revenue is recognized as title to and possession of the property are transferred to the buyer.

Multifamily Revenue Recognition

Our Multifamily segment provides management services with respect to the development, construction and property management of rental projects in joint ventures in which we have investments. As a result, our Multifamily segment earns and receives fees, which are generally based upon a stated percentage of development and construction costs and a percentage of gross rental collections. These fees are recorded over the period in which the services are performed using an input method, which properly depicts the level of effort required to complete the management services. In addition, our Multifamily segment provides general contractor services for the construction of some of its rental projects and recognizes the revenue over the period in which the services are performed using an input method, which properly depicts the level of effort required to complete the construction services. These customer contracts require us to provide management and general contractor services which represents a performance obligation that we satisfy over time. Management fees and general contractor services in the Multifamily segment are included in Multifamily revenue.

Inventories

Inventories are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. Inventory costs include land, land development and home construction costs, real estate taxes, deposits on land purchase contracts and interest related to development and construction. We review our inventory for indicators of impairment by evaluating each community during each reporting period. If the undiscounted cash flows expected to be generated by a community are less than its carrying amount, an impairment charge is recorded to write down the carrying amount of such community to its estimated fair value.

In conducting our review for indicators of impairment on a community level, we evaluate, among other things, the margins on homes that have been delivered, margins on homes under sales contracts in backlog, projected margins with regard to future home sales over the life of the community, projected margins with regard to future land sales, and the estimated fair value of the land itself.

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We estimate the fair value of our communities using a discounted cash flow model. The projected cash flows for each community are significantly impacted by estimates related to market supply and demand, product type by community, homesite sizes, sales pace, sales prices, sales incentives, construction costs, sales and marketing expenses, the local economy, competitive conditions, labor costs, costs of materials and other factors for that particular community. Every division evaluates the historical performance of each of its communities as well as current trends in the market and economy impacting the community and its surrounding areas. These trends are analyzed for each of the estimates listed above.

Since the estimates and assumptions included in our cash flow models are based upon historical results and projected trends, they do not anticipate unexpected changes in market conditions or strategies that may lead to us incurring additional impairment charges in the future.

Using all the available information, we calculate our best estimate of projected cash flows for each community. While many of the estimates are calculated based on historical and projected trends, all estimates are subjective and change from market to market and community to community as market and economic conditions change. The determination of fair value also requires discounting the estimated cash flows at a rate we believe a market participant would determine to be commensurate with the inherent risks associated with the assets and related estimated cash flow streams. The discount rate used in determining each asset’s fair value depends on the community’s projected life and development stage.

We estimate the fair value of inventory evaluated for impairment based on market conditions and assumptions made by management at the time the inventory is evaluated, which may differ materially from actual results if market conditions or our assumptions change.

We believe that the accounting related to inventory valuation and impairment is a critical accounting policy because: (1) assumptions inherent in the valuation of our inventory are highly subjective and susceptible to change and (2) the impact of recognizing impairments on our inventory has been and could continue to be material to our consolidated financial statements.

Product Warranty

Although we subcontract virtually all aspects of construction to others and our contracts call for the subcontractors to repair or replace any deficient items related to their trades, we are primarily responsible to homebuyers to correct any deficiencies. Additionally, in some instances, we may be held responsible for the actions of or losses incurred by subcontractors. Warranty and similar reserves for homes are established at an amount estimated to be adequate to cover potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a home. Reserves are determined based upon historical data and trends with respect to similar product types and geographical areas. We believe the accounting estimate related to the reserve for warranty costs is a critical accounting estimate because the estimate requires a large degree of judgment. While we believe that the reserve for warranty costs is adequate, there can be no assurances that historical data and trends will accurately predict our actual warranty costs. Additionally, there can be no assurances that future economic or financial developments might not lead to a significant change in the reserve.

Investments in Unconsolidated Entities

We strategically invest in unconsolidated entities that acquire and develop land (1) for our homebuilding operations or for sale to third parties, (2) for construction of homes for sale to third-party homebuyers or (3) for the construction and sale of multifamily rental properties. Our Homebuilding partners generally are unrelated homebuilders, land owners/developers and financial or other strategic partners. Additionally, in recent years, we have invested in technology companies that are looking to improve the homebuilding and financial services industry in order to better serve homebuyers and homeowners and increase efficiencies. Our Multifamily partners are all financial partners.

Most of the unconsolidated entities through which we acquire and develop land are accounted for by the equity method of accounting because we are not the primary beneficiary or a de-facto agent, and we have a significant, but less than controlling, interest in the entities. We record our investments in these entities in our consolidated balance sheets as Investments in Unconsolidated Entities and our pro-rata share of the entities’ earnings or losses in our consolidated statements of operations as Equity in Earnings (Loss) from Unconsolidated Entities within each of the respective segments. For most unconsolidated entities, we generally have the right to share in earnings and distributions on a pro-rata basis based upon ownership percentages. However, certain Homebuilding unconsolidated entities and all of our Multifamily unconsolidated entities provide for a different allocation of profit and cash distributions if and when cumulative results of the joint venture exceed specified targets (such as a specified internal rate of return). Advances to these entities are included in the investment balance.

Management looks at specific criteria and uses its judgment when determining if we are the primary beneficiary of, or have a controlling interest in, an unconsolidated entity. Factors considered in determining whether we have significant influence, or we have control include risk and reward sharing, experience and financial condition of the other partners, voting rights, involvement in day-to-day capital and operating decisions and continuing involvement. The accounting policy relating to the use of the equity method of accounting is a critical accounting policy due to the judgment required in determining whether the entity is a VIE or a voting interest entity and then whether we are the primary beneficiary or have control or significant

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influence. We believe that the equity method of accounting is appropriate for our investments in unconsolidated entities where we are not the primary beneficiary and we do not have a controlling interest, but rather share control with our partners.

We evaluate the long-lived assets in unconsolidated entities for indicators of impairment during each reporting period. A series of operating losses of an investee or other factors may indicate that a decrease in the fair value of our investment in the unconsolidated entity below its carrying amount has occurred which is other-than-temporary. The amount of impairment recognized is the excess of the investment’s carrying amount over its estimated fair value.

The evaluation of our investment in unconsolidated entities for other-than-temporary impairment includes certain critical assumptions: (1) projected future distributions from the unconsolidated entities, (2) discount rates applied to the future distributions and (3) various other factors. Our assumptions on the projected future distributions from unconsolidated entities are dependent on market conditions.

We believe our assumptions on discount rates are critical accounting policies because the selection of the discount rates affects the estimated fair value of our investments in unconsolidated entities. A higher discount rate reduces the estimated fair value of our investments in unconsolidated entities, while a lower discount rate increases the estimated fair value of our investments in unconsolidated entities. Because of changes in economic conditions, actual results could differ materially from management’s assumptions and may require material valuation adjustments to our investments in unconsolidated entities to be recorded in the future.

Consolidation of Variable Interest Entities

GAAP requires the assessment of whether an entity is a VIE and, if so, if we are the primary beneficiary at the inception of the entity or at a reconsideration event. Additionally, GAAP requires the consolidation of VIEs in which we have a controlling financial interest. A controlling financial interest will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Our variable interest in VIEs may be in the form of (1) equity ownership, (2) contracts to purchase assets, (3) management services and development agreements between us and a VIE, (4) loans provided by us to a VIE or other partner and/or (5) guarantees provided by members to banks and other third parties. We examine specific criteria and use our judgment when determining if we are the primary beneficiary of a VIE. Factors considered in determining whether we are the primary beneficiary include risk and reward sharing, experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE’s executive committee, existence of unilateral kick-out rights or voting rights, level of economic disproportionality between us and the other partner(s) and contracts to purchase assets from VIEs.

Generally, all major decision making in our joint ventures is shared among all partners. In particular, business plans and budgets are generally required to be unanimously approved by all partners. Usually, management and other fees earned by us are nominal and believed to be at market and there is no significant economic disproportionality between us and other partners. Generally, we purchase less than a majority of the JV’s assets and the purchase prices under our option contracts are believed to be at market.

Generally, our unconsolidated entities become VIEs and consolidate when the other partner(s) lack the intent and financial wherewithal to remain in the entity. As a result, we continue to fund operations and debt paydowns through partner loans or substituted capital contributions. The accounting policy relating to variable interest entities is a critical accounting policy because the determination of whether an entity is a VIE and, if so, whether we are primary beneficiary may require us to exercise significant judgment.