AVATAR HOLDINGS INC.
201 ALHAMBRA CIRCLE
CORAL GABLES, FLORIDA 33134
December 13, 2007
BY EDGAR correspondence
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Mr. John Cash
Accounting Branch Chief
Division of Corporation Finance
U.S. Securities and Exchange Commission
Mail Stop 7010
100 F Fifth Street, N.E.
Washington, D.C. 20549
Re: Avatar Holdings Inc.
Response to Staff Comments on:
Form 10-K for the fiscal year ended December 31, 2006
Filed March 16, 2007
File No. 1-7395
Dear Mr. Cash:
On behalf of Avatar Holdings Inc. ("Avatar"), this letter responds to
your letter dated November 29, 2007, relating to comments of the staff of the
U.S. Securities and Exchange Commission (the "Commission") on the
above-referenced filing of Avatar. The responses to the Staff's comments are
numbered to relate to the corresponding comments in your letter.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
Impairment of Long Lived Assets, page 6
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1. WE NOTE THE IMPAIRMENT LOSS YOU RECORDED DURING THE FIRST QUARTER OF
2007. IT APPEARS TO US THAT YOUR CURRENT DISCLOSURE, INCLUDING YOUR
CRITICAL ACCOUNTING POLICY DISCLOSURE IN YOUR FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2006, IS TOO GENERAL IN NATURE TO
PROVIDE INVESTORS WITH SUFFICIENT INFORMATION ABOUT MANAGEMENT'S
INSIGHT AND ASSUMPTIONS WITH REGARD TO HOW YOU DETERMINED THE AMOUNT
OF IMPAIRMENTS AS WELL AS THE RECOVERABILITY OF YOUR REMAINING LAND
AND OTHER INVENTORIES ASSET.
o PLEASE EXPAND YOUR DISCLOSURES TO MORE SPECIFICALLY
DESCRIBE THE STEPS THAT YOU PERFORM TO REVIEW EACH
COMPONENT OF YOUR LAND AND OTHER INVENTORIES ASSET FOR
RECOVERABILITY. PLEASE ADDRESS FOR US SUPPLEMENTALLY
WHETHER YOU HAD ANY MATERIALLY SIGNIFICANT COMMUNITIES
Mr. John Cash
December 13, 2007
Page 2
FOR WHICH ESTIMATED FUTURE UNDISCOUNTED CASH FLOWS WERE
CLOSE TO THEIR CARRYING VALUE. IF SO, PLEASE TELL US
WHAT CONSIDERATION YOU HAVE GIVEN TO PROVIDING INVESTORS
WITH AN UNDERSTANDING OF RISK ASSOCIATED WITH POTENTIAL
FUTURE IMPAIRMENTS OF THESE COMMUNITIES.
o PLEASE MORE SPECIFICALLY DISCUSS HOW YOU DETERMINED THE
AMOUNT OF THE IMPAIRMENT THAT WAS NECESSARY. PLEASE
EXPLAIN THE MAIN ASSUMPTIONS YOU USED IN THIS
DETERMINATION AND AS WELL AS YOUR BASIS FOR THESE
ASSUMPTIONS. IN ADDITION, PLEASE PROVIDE A SENSITIVITY
ANALYSIS SHOWING THE EFFECT OF A 100 BASIS POINT CHANGE
IN EACH SIGNIFICANT ASSUMPTION.
o PROVIDE DISAGGREGATED DISCLOSURES REGARDING THE
CANCELLATIONS OF SALES AGREEMENTS BY SEGMENT.
o ADDRESS THE DETERMINING FACTORS YOU HAVE IDENTIFIED TO
ASSESS THE APPROPRIATENESS OF MOVING FORWARD WITH LAND
DEVELOPMENT AND COSTS FOR FUTURE DEVELOPMENT OR TO
WRITE-OFF THE RELATED AMOUNTS PREVIOUSLY CAPITALIZED.
PLEASE PROVIDE THESE EXPANDED DISCLOSURES IN FUTURE FILINGS AND SHOW US IN
YOUR RESPONSE WHAT YOUR FUTURE DISCLOSURE REVISIONS WILL LOOK LIKE.
RESPONSE:
o In response to the Staff's comment, we will expand our future disclosures,
including our critical accounting policies, to further describe our
process for assessing the recoverability of our Land and Other Inventories
and other long-lived assets. The following is a draft of our future
disclosure of critical accounting policies related to valuation of Land
and Other Inventories and other long-lived assets (please note, however,
that our actual disclosures in future filings will depend on the facts and
circumstances present at that time):
Land and Other Inventories and other long-lived assets (primarily
Property and Equipment) are stated at cost unless the asset is
determined to be impaired, in which case the asset would be written
down to its fair value (as further discussed below). Land and Other
Inventories and Property and Equipment (including our amenities
owned and constructed by us and the Parkway) include expenditures
for land acquisition, construction, land development and direct and
allocated costs. Land and Other Inventories and Property and
Equipment owned and constructed by us also include interest cost
incurred until development and construction is substantially
Mr. John Cash
December 13, 2007
Page 3
completed. Land and development costs, construction and direct and
allocated costs are assigned to components of Land and Other
Inventories based on specific identification or other allocation
methods based upon U.S. generally accepted accounting principles.
Property and Equipment includes the cost of amenities owned by us
and the Parkway and is depreciated principally by the straight-line
method over the useful lives of the assets when these assets are
placed in service.
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", we carry long-lived assets at the lower of the
carrying amount or fair value. Each reporting period, we review our
long-lived assets for indicators of impairment. If indicators are
present, we perform an impairment test in which the asset is
reviewed for impairment by comparing the estimated future
undiscounted cash flow for the asset to its carrying value. If such
cash flow is less than the asset's carrying value, the carrying
value is written down to its estimated fair value. Fair value is
determined by discounting the estimated cash flows at a rate
commensurate with the inherent risks associated with the asset and
related estimated cash flow streams. Assumptions and estimates used
in the determination of the estimated future cash flows are based on
certain factors provided below and that may be known to us at the
time such estimates are made and our expectations of future
operations and economic conditions. Due to the uncertainties of the
estimation process, actual results could differ significantly from
such estimates.
Our long-lived assets that are subject to a review for indicators of
impairment include our: (i) housing communities (primary residential
and active adult); (ii) land held for future development or sale;
and (iii) property and equipment, which includes our amenities and
the Parkway.
Housing communities: For our housing communities, indicators of
potential impairment include changes in local market conditions,
declining customer traffic and sales activity, increases in sales
cancellations, increases in speculative inventory resulting from
cancellations, increases in costs, and declines in gross margins for
homes in backlog. If indicators are present, the asset is reviewed
for impairment described above. In determining estimated future cash
flows for purposes of the impairment test, we incorporate our own
market assumptions regarding the following factors which could
significantly impact future cash flows: expected sales pace;
expected sales prices and sales incentives; and anticipated costs to
be expended, including land and land development costs, home
construction costs, and overhead costs. Our assumptions are based,
in part, on general economic and local market conditions,
competition from other homebuilders in the areas in which we build
and sell homes, product desirability in our local markets and the
Mr. John Cash
December 13, 2007
Page 4
buyers ability to obtain mortgage financing. These assumptions can
significantly affect our estimates of future cash flows.
During the first quarter of 2007, the continued deterioration of
market conditions at a housing community in Florida in which we and
other builders are selling homes and the increase of our speculative
inventory resulting from cancellations at this community caused us
to evaluate the carrying value of this community, consisting of
homes completed and under construction. Based on this evaluation, we
recognized during the first quarter of 2007 an impairment loss of $2
million on the carrying value of the inventory in this community.
The most significant assumptions used in this evaluation were the
expected sales prices of these homes since the homes in this
community were either completed or substantially completed (most of
the construction spending was completed) and that we expected this
community to be closed out within twelve months of the impairment
evaluation.
Land held for future development or sale: For land held for future
development or sale, indicators of potential impairment include
changes in use, changes in local market conditions, declines in the
selling prices of similar assets and increases in costs. If
indicators are present, the asset is reviewed for impairment as
described above. In determining estimated future cash flows for
purposes of the impairment test, we incorporate our own market
assumptions regarding the following factors which could
significantly impact future cash flows: expected sales values, and
anticipated costs to be expended including land and land development
costs and overhead costs. Our assumptions are based, in part, on
general economic and local market conditions, the current state of
the homebuilding industry, and competition from other homebuilders
in the areas in which we build and sell homes. These assumptions can
significantly affect our estimates of future cash flows.
Property and equipment: For our amenities, which are located within
our housing communities, indicators of potential impairment are
similar to those of our housing communities as these factors may
impact our ability to generate revenues at our amenities or cause
the cost to construct to increase.
For the Parkway, indicators of impairment are similar to indicators
of impairment of our land held for development or future sale. If
indicators are present, the asset is reviewed for impairment as
described above. In determining estimated future cash flows for
purposes of the impairment test, we incorporate our own market
assumptions regarding the following factors which could
significantly impact future cash flows: expected sales pace based
upon general economic conditions; expected sales prices; and
anticipated costs to be expended including land and land development
costs, construction costs, and overhead costs. Our assumptions are
based, in part, on general economic and local market conditions, the
Mr. John Cash
December 13, 2007
Page 5
current state of the homebuilding industry, and competition from
other homebuilders in the areas in which we build and sell homes.
These assumptions can significantly affect our estimates of future
cash flows.
o In response to the Staff's comment, we believe that we had no materially
significant communities where the estimated future undiscounted cash flows
were close to their carrying value. The impairments we have recorded
reflect management's best estimates of the future cash flows of our
communities. Estimates used in the determination of the estimated future
cash flows are based on factors known to us at the time such estimates are
made and our expectations of future operations, and economic and real
estate market conditions. Due to the uncertainties of the estimation
process, actual results could differ significantly from such estimate. A
substantial portion of our landholdings has been owned for many years and
is carried at book values which we believe are substantially below current
market values. We have not contracted to purchase land since January 2005.
o In response to the Staff's comment, we do not believe a 100 basis point
change in the expected sales prices (significant assumption) would have a
significant effect on the impairment charge taken or the need to have
taken additional impairment charges.
o In response to the Staff's comment, the following represents the
disaggregated disclosures regarding the cancellation of home sales
contracts by segment for the years ended December 31, 2007 (data will be
provided upon filing of our 2007 Form 10-K), 2006 and 2005:
Cancellations for the years ended
December 31,
-----------------------------------------
2007 2006 2005
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Reportable Segment:
Primary residential XX 425 195
Active adult XX 92 50
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Total XX 517 245
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Future filings will be revised to include disaggregated disclosures
regarding the cancellation of home sales contracts by segment.
Mr. John Cash
December 13, 2007
Page 6
o In response to the Staff's comment, the factors that we consider in
determining the appropriateness of moving forward with land development
and costs for future development or to write-off the related amounts
capitalized include our current inventory levels, local market economic
conditions, availability of adequate resources and the estimated future
net cash flows to be generated from the project.
Avatar hereby acknowledges that:
o Avatar is responsible for the adequacy and accuracy of the
disclosures in our filings;
o staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action with
respect to the filing; and
o Avatar may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal
securities laws of the United States.
If you have any questions or would like additional information, please
contact the undersigned at (305) 442-7000.
Very truly yours,
AVATAR HOLDINGS INC.
By: /s/ Randy L. Kotler
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Randy L. Kotler
Executive Vice President, Chief
Financial Officer and Treasurer