Land write-downs can, in fact, cause bankruptcy because those write-downs, although they are non-cash, reduce the company’s equity which negatively affects the debt-to-equity ratio, all else being equal. The covenants in the loan agreements between a builder and its lenders stipulate that certain minimum capital ratios remain in place or else funding can be pulled and… whoops!… the builder can be out of business. Generally it’s operational losses that put a builder out of business, but land write-downs have pushed companies over the edge in the past (although it’s an exception to the rule).
Land write-downs can, in fact, cause bankruptcy because those write-downs, although they are non-cash, reduce the company’s equity which negatively affects the debt-to-equity ratio, all else being equal. The covenants in the loan agreements between a builder and its lenders stipulate that certain minimum capital ratios remain in place or else funding can be pulled and… whoops!… the builder can be out of business. Generally it’s operational losses that put a builder out of business, but land write-downs have pushed companies over the edge in the past (although it’s an exception to the rule).
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