UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-7616

AVATAR HOLDINGS INC.

(Exact name of registrant as specified in its charter)

Delaware		23-1739078
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

201 Alhambra Circle, Coral Gables, Florida		33134
(Address of Principal Executive Offices)		(Zip Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

11,361,331 shares of Avatar’s common stock ($1.00 par value) were outstanding as of July 31, 2010.

 

 

AVATAR HOLDINGS INC. AND SUBSIDIARIES

INDEX

		PAGE
PART I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets — June 30, 2010 and December 31, 2009			3
Consolidated Statements of Operations — Six and three months ended June 30, 2010 and 2009			4
Consolidated Statements of Cash Flows — Six months ended June 30, 2010 and 2009			5
Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosure About Market Risk			38
Item 4. Controls and Procedures			38
PART II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 6. Exhibits			40
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AVATAR HOLDINGS INC. AND SUBSIDIARIES

Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands)

		June 30,				December 31,
		2010				2009
Assets
Cash and cash equivalents		$	160,266			$	217,132
Restricted cash			23,080				699
Receivables, net			6,841				6,656
Income tax receivable			1,391				35,018
Land and other inventories			263,594				264,236
Property and equipment, net			46,493				48,010
Poinciana Parkway			8,452				8,482
Investment in and notes receivable from unconsolidated entities			5,228				5,321
Prepaid expenses and other assets			8,913				9,165
Total Assets		$	524,258			$	594,719
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable		$	1,401			$	2,014
Accrued and other liabilities			6,228				5,293
Customer deposits and deferred revenues			2,895				2,874
Estimated development liability for sold land			20,347				20,417
Notes, mortgage notes and other debt:
Corporate			63,728				63,010
Real estate			111				55,992
Total Liabilities			94,710				149,600
Commitments and Contingencies
Stockholders’ Equity
Common Stock, par value $1 per share
Authorized: 50,000,000 shares
Issued: 14,019,792 shares at June 30, 2010 14,013,912 shares at December 31, 2009			14,020				14,014
Additional paid-in capital			286,670				286,096
Retained earnings			207,049				222,928
			507,739				523,038
Treasury stock: at cost, 2,658,461 shares at June 30, 2010 and December 31, 2009			(78,937	)			(78,937	)
Total Avatar stockholders’ equity			428,802				444,101
Non-controlling interest			746				1,018
Total Equity			429,548				445,119
Total Liabilities and Stockholders’ Equity		$	524,258			$	594,719

See notes to consolidated financial statements.

AVATAR HOLDINGS INC. AND SUBSIDIARIES

Consolidated Statements of Operations
For the six and three months ended June 30, 2010 and 2009
(Unaudited)
(Dollars in thousands except per-share amounts)

		Six Months								Three Months
		2010				2009				2010				2009
Revenues
Real estate revenues		$	25,938			$	32,012			$	16,496			$	18,261
Interest income			254				378				132				179
Other			733				2,312				674				915
Total revenues			26,925				34,702				17,302				19,355
Expenses
Real estate expenses			31,694				39,518				17,819				22,061
Impairment charges			168				1,676				—				928
General and administrative expenses			7,845				9,011				3,762				4,344
Interest expense			3,162				3,550				1,486				1,713
Total expenses			42,869				53,755				23,067				29,046
Equity losses from unconsolidated entities			(207	)			(148	)			(117	)			(86	)
Loss before income taxes			(16,151	)			(19,201	)			(5,882	)			(9,777	)
Income tax benefit			—				830				—				—
Net loss (including net loss attributable to non-controlling interests)			(16,151	)			(18,371	)			(5,882	)			(9,777	)
Less: Net loss attributable to non-controlling interests			(272	)			—				(139	)			—
Net loss attributable to Avatar			($15,879	)			($18,371	)			($5,743	)			($9,777	)
Basic and Diluted Loss Per Share			($1.41	)			($2.12	)			($0.51	)			($1.13	)

See notes to consolidated financial statements.

AVATAR HOLDINGS INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
For the six months ended June 30, 2010 and 2009
(Dollars in Thousands)

		2010				2009
OPERATING ACTIVITIES
Net loss (including net loss attributable to non-controlling interests)			($16,151	)			($18,371	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization			2,379				2,788
Amortization of stock-based compensation			580				980
Impairment of land and other inventories			168				1,228
Impairment of the Poinciana Parkway			—				448
Gain from repurchase of 4.50% Notes			—				(1,783	)
Return of earnings from an unconsolidated entity			(32	)			(95	)
Equity losses from unconsolidated entities			207				148
Deferred income taxes			—				2,005
Changes in operating assets and liabilities:
Restricted cash			(22,381	)			397
Receivables, net			(185	)			(795	)
Income tax receivable			33,627				18,522
Land and other inventories			446				13,977
Prepaid expenses and other assets			252				1,096
Accounts payable and accrued and other liabilities			184				(970	)
Customer deposits and deferred revenues			21				(886	)
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES			(885	)			18,689
INVESTING ACTIVITIES
Investment in property and equipment			(48	)			(34	)
Return from (investment in) Poinciana Parkway			30				(5	)
Investment in unconsolidated entities			(82	)			(23	)
NET CASH USED IN INVESTING ACTIVITIES			(100	)			(62	)
FINANCING ACTIVITIES
Repurchase of 4.50% Notes			—				(11,627	)
Principal payments of real estate borrowings			(55,881	)			(97	)
NET CASH USED IN FINANCING ACTIVITIES			(55,881	)			(11,724	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(56,866	)			6,903
Cash and cash equivalents at beginning of period			217,132				175,396
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	160,266			$	182,299

See notes to consolidated financial statements.

AVATAR HOLDINGS INC. AND SUBSIDIARIES

Basis of Financial Statement Presentation and Summary of Significant Accounting Policies

     The accompanying consolidated financial statements include the accounts of Avatar Holdings Inc. and all subsidiaries, partnerships and other entities in which Avatar Holdings Inc. (“Avatar”, “we”, “us” or “our”) has a controlling interest. Our investments in unconsolidated entities in which we have less than a controlling interest are accounted for using the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation.

     The consolidated balance sheets as of June 30, 2010 and December 31, 2009, and the related consolidated statements of operations for the six and three months ended June 30, 2010 and 2009 and the consolidated statements of cash flows for the six months ended June 30, 2010 and 2009 have been prepared in accordance with United States generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statement presentation. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. Interim results are not necessarily indicative of results for a full year.

     The preparation of our consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Due to Avatar’s normal operating cycle being in excess of one year, we present unclassified balance sheets.

     The consolidated balance sheet as of December 31, 2009 was derived from audited consolidated financial statements included in our 2009 Annual Report on Form 10-K but does not include all disclosures required by United States generally accepted accounting principles. These consolidated financial statements should be read in conjunction with our December 31, 2009 audited consolidated financial statements included in our 2009 Annual Report on Form 10-K and the notes to the consolidated financial statements included therein.

Reclassifications

     Certain 2009 financial statement items have been reclassified to conform to the 2010 presentation.

Cash and Cash Equivalents and Restricted Cash

     We consider all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. We also consider closing proceeds from our house closings held by our title insurance agency as cash equivalents which were $0 and $330 as of June 30, 2010 and December 31, 2009, respectively. As of June 30, 2010, our cash and cash equivalents were invested primarily in money market accounts that invest in U.S. government securities. Due to the short maturity period of the cash equivalents, the carrying amount of these instruments approximates their fair values.

     Restricted cash includes deposits of $23,080 and $699 as of June 30, 2010 and December 31, 2009, respectively. The balance at June 30, 2010 comprised primarily of $22,035 on deposit with Wells Fargo, N.A., successor by merger with Wachovia Bank, N.A., to collateralize letters of credit outstanding under the credit facility, which was effectively terminated in May 2010. Additionally, within restricted cash we include housing deposits from customers that will become available when the housing contracts close. We held escrow funds of $286 and $383 as of June 30, 2010 and December 31, 2009, respectively, which are not considered assets of ours and, therefore, are excluded from restricted cash in the accompanying consolidated balance sheets.

Notes to Consolidated Financial Statements (dollars in thousands except share and per share data) (Unaudited) – continued

Income Tax Receivable

     Income tax receivable consists of tax refunds we expect to receive within one year. As of June 30, 2010 and December 31, 2009, there was $1,391 and $35,018, respectively, of income tax receivables. During the three months ended June 30, 2010 we received tax refunds of $33,627.

Land and Other Inventories

     Land and Other Inventories 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. Land and Other Inventories include expenditures for land acquisition, construction, land development and direct and allocated costs. Land and Other Inventories owned and constructed by us also include interest cost capitalized until development and construction are substantially 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 United States generally accepted accounting principles.

     In accordance with ASC 360-10, Property, Plant and Equipment (“ASC 360-10”) we review our Land and Other Inventories for indicators of impairment.

     For assets held and used, if indicators are present, we perform an impairment test in which the asset is reviewed for impairment by comparing the estimated future undiscounted cash flows to be generated by the asset to its carrying value. If such cash flows are less than the asset’s carrying value, the carrying value is written down to its estimated fair value. Generally, 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 expectations of future operations and economic conditions and certain factors described below. Changes to these assumptions could significantly affect the estimates of future cash flows which could affect the potential for future impairments. Due to the uncertainties of the estimation process, actual results could differ significantly from such estimates.

     For assets held for sale (such as completed speculative housing inventory), we perform an impairment test in which the asset is reviewed for impairment by comparing the fair value (estimated sales prices) less cost to sell the asset to its carrying value. If such fair value less cost to sell is less than the asset’s carrying value, the carrying value is written down to its estimated fair value less cost to sell.

     We evaluate our Land and Other Inventories for impairment on a quarterly basis. During the six and three months ended June 30, 2010, our impairment assessment resulted in impairment charges of $168 and $0, respectively, for homes completed or under construction. During the six and three months ended June 30, 2009, our impairment assessment resulted in impairment charges of $1,228 and $798, respectively, for homes completed or under construction. Our evaluation of land developed and/or held for future development or sale did not result in impairment charges for the six and three months ended June 30, 2010. As of June 30, 2010, we had no land developed and/or held for future development or sale that had undiscounted cash flows within 25% of their carrying values.

     Other than at our recently acquired community of Seasons at Tradition, we have experienced difficulty in selling homes at a profit, which has caused us to reduce prices to monetize our speculative housing inventory. During 2009 and for the six months ended June 30, 2010, other than Seasons at Tradition, most of our sales contracts were signed at selling prices that have resulted or will result in losses upon closing when factoring in operating costs such as sales and marketing and divisional overhead. During the six months ended June 30, 2010, at Seasons at Tradition, we entered into 47 sales contracts representing an aggregate dollar value of approximately $7,516. Closings of homes at Seasons at Tradition commenced during April 2010. During the six and three months ended June 30, 2010, at Seasons at Tradition, we had 42 closings with an aggregate dollar value of approximately $6,766.

Notes to Consolidated Financial Statements (dollars in thousands except share and per share data) (Unaudited) – continued

Land and Other Inventories – continued

     In our impairment analysis of Land and Other Inventories, we utilize various assumptions including estimates of contribution margins. Contribution margins are defined as house sales prices less direct production costs (including the lot cost) as well as closing costs and commissions. The following significant trends were utilized in the evaluation of our Land and Other Inventories for impairment.

     Primary Residential Communities.

The average price on sales closed from primary residential homebuilding operations during the six and three months ended June 30, 2010 increased from $183 and $164 during the six and three months ended June 30, 2009 to $203 and $212 during the comparable periods in 2010. Our average sales price on sales contracts entered into during the six and three months ended June 30, 2010 was $237 and $321, respectively, compared to $163 and $151 during the six and three months ended June 30, 2009, respectively. The increases in average sales price were due to changes in mix between our lower and higher price communities. The average contribution margin on closings from primary residential homebuilding operations was approximately 2% and 10% during the six and three months ended June 30, 2010, respectively, compared to approximately 5% and 0.1% during the six and three months ended June, 30, 2009.

Notes to Consolidated Financial Statements (dollars in thousands except share and per share data) (Unaudited) – continued

Land and Other Inventories – continued

of assumptions with respect to each analysis. Many of these assumptions extend over a significant number of years. The substantial number of variables to these assumptions could significantly affect the potential for future impairments.

     Declines in contribution margins below those realized from our current sales prices and estimations could result in future impairment losses in one or more of our housing communities.

     Land developed and/or held for future development or sale: Our land developed and/or held for future development or sale represents land holdings for the potential development of future active adult and/or primary residential communities. For land developed and/or 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. In determining estimated future cash flows for purposes of the impairment test, the estimated future cash flows are significantly impacted by specific community factors such as: (i) sales absorption rates; (ii) estimated sales prices and sales incentives; and (iii) estimated costs of home construction, estimated land and land development costs, interest costs, indirect construction and overhead costs, and selling and marketing costs. In addition, our estimated future cash flows are also impacted by general economic and local market conditions, competition from other homebuilders, foreclosures and depressed home sales in the areas where we own land for future development, product desirability in our local markets and the buyers’ ability to obtain mortgage financing. Factors that we consider in determining the appropriateness of moving forward with land development or whether 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. Build-out of our land held for future development generally exceeds five years. There are a significant number of assumptions with respect to each analysis. Many of these assumptions extend over a significant number of years. The substantial number of variables to these assumptions could significantly affect the potential for future impairments.

     Declines in market values below those realized from our current sales prices and estimations could result in future impairment.

     Land and Other Inventories consist of the following:

		June 30,				December 31,
		2010				2009
Land developed and in process of development		$	135,430			$	136,578
Land held for future development or sale			105,028				98,818
Homes completed or under construction			22,294				27,971
Other			842				869
		$	263,594			$	264,236

     On June 1, 2010, we acquired approximately 1,064 residential lots in a community known as Tortosa in Maricopa, Arizona (approximately 35 miles southeast of Phoenix) for a purchase price of $5,683. On August 5, 2010, we acquired 368 residential lots in a planned development known as Turtle Creek located in St. Cloud (Osceola County), Florida for a purchase price of $7,000.

Notes to Consolidated Financial Statements (dollars in thousands except share and per share data) (Unaudited) – continued

Land and Other Inventories – continued

     During the six and three months ended June 30, 2010, we realized pre-tax profits (losses) of ($27) and $10, respectively, on revenues of $23 from sales of commercial, industrial and other land. During the six and three months ended June 30, 2009, we realized pre-tax profits of $1,987 and $209, respectively, on revenues of $2,064 and $239, respectively, from sales of commercial, industrial and other land. For the six and three months ended June 30, 2009, pre-tax profits from sales of commercial and industrial land were $1,758 and $0, respectively, on aggregate revenues of $1,785 and $0, respectively. For the six and three months ended June 30, 2009, pre-tax profits from other land sales were $229 and $209, respectively, on aggregate revenues of $279 and $239, respectively.

     See “Financial Information Relating to Reportable Segments” below.

Property and Equipment

     Property and Equipment are stated at cost and depreciation is computed by the straight-line method over the following estimated useful lives of the assets: land improvements 10 to 25 years; buildings and improvements 8 to 39 years; and machinery, equipment and fixtures 3 to 7 years. Maintenance and operating expenses of equipment utilized in the development of land are capitalized as land inventory cost. Repairs and maintenance are expensed as incurred.

     Property and Equipment includes the cost of amenities owned by us. The cost of amenities includes expenditures for land acquisition, construction, land development and direct and allocated costs. Property and Equipment owned and constructed by us also includes interest cost incurred during development and construction.

     Each reporting period, we review our Property and Equipment for indicators of impairment in accordance with ASC 360-10. For our amenities, which are located within our housing communities, indicators of potential impairment are similar to those of our housing communities (described above) as these factors may impact our ability to generate revenues at our amenities or cause construction costs to increase. In addition, we factor in the collectability and potential delinquency of the fees due for our amenities. For the six and three months ended June 30, 2010, no impairments existed for Property and Equipment.

Poinciana Parkway

     In December 2006, we entered into agreements with Osceola County, Florida and Polk County, Florida for us to develop and construct at our cost a 9.66 mile four-lane road in Osceola and Polk Counties, to be known as the Poinciana Parkway (the “Poinciana Parkway”). The Poinciana Parkway is to include a 4.15 mile segment to be operated as a toll road. We have acquired right-of-way and federal and state environmental permits necessary to construct the Poinciana Parkway. In July 2008 and August 2008, we entered into amended and restated agreements with Osceola County and Polk County, pursuant to which construction is to be commenced by February 14, 2011. Construction was to be completed by December 31, 2011 subject to extension for Force Majeure. We have notified the Counties that the completion date has been extended to October 14, 2013 due to Force Majeure related to the economic downturn. We advised the Counties that the current economic downturn has resulted in our inability to: (i) conclude negotiations with potential investors; or (ii) obtain financing for the construction of the Poinciana Parkway.

     If funding for the Poinciana Parkway is not obtained and construction of the Poinciana Parkway cannot be commenced by February 14, 2011 as required by our agreements with Osceola County and Polk County, the Counties have no right to obtain damages or sue Avatar for specific performance. Polk County’s sole remedy under its agreement with Avatar is to cancel such agreement if Avatar does not construct the Poinciana Parkway. If the construction of the Parkway is not funded and commenced by February 14, 2011, (i) a portion of Avatar’s land in Osceola County will become subject to Osceola traffic concurrency requirements applicable generally to other home builders in the County and (ii) Avatar will be required to contribute approximately $1,900 towards the construction cost of certain traffic improvements in Osceola County that it otherwise might have been obligated to build or fund if it had not agreed to

Notes to Consolidated Financial Statements (dollars in thousands except share and per share data) (Unaudited) – continued

Poinciana Parkway – continued

construct the Poinciana Parkway. Avatar is investigating the availability of an extension of the Poinciana Parkway permits and the related deadlines in its agreements with the Counties.

     Osceola County and Avatar were unsuccessful in their attempt to obtain a federal grant for construction of the Parkway. Osceola County and Avatar are still attempting to obtain other federal funds for development of the Poinciana Parkway, including highway tax bill monies, a newly announced federal transportation grant and a federal loan. We cannot predict whether any federal funds will be available.For the Poinciana Parkway, indicators of impairment are general economic conditions, rate of population growth and estimated change in traffic levels. If indicators are present, we perform an impairment test in which the asset is reviewed for impairment by comparing the estimated future undiscounted cash flows to be generated by the asset to its carrying value. If such cash flows are less than the asset’s carrying value, the carrying value is written down to its estimated fair value. In determining estimated future cash flows for purposes of the impairment test, we incorporate current market assumptions based on general economic conditions such as anticipated estimated revenues and estimated costs. These assumptions can significantly affect our estimates of future cash flows.

     Our estimate of the right-of-way acquisition, development and construction costs for the Poinciana Parkway approximates $175,000 to $200,000. However, no assurance of the ultimate costs can be given at this stage. Of that amount approximately $47,000 has been expended as of June 30, 2010. During fiscal years 2008 and 2009, we recorded cumulative impairment charges of $38,336 associated with the Poinciana Parkway.

     We review the recoverability of the carrying value of the Poinciana Parkway on a quarterly basis in accordance with authoritative accounting guidance. Based on our review as of June 30, 2010, we determined the estimated future undiscounted cash flows of the Poinciana Parkway were greater than its carrying value, therefore no impairment losses were recorded during the six months ended June 30, 2010. During the six and three months ended June 30, 2009, we recognized impairment losses of $448 and $130, respectively. In addition, non-capitalizable expenditures of $265 and $57 related to the Poinciana Parkway were expensed during the six and three months ended June 30, 2010, respectively, and $341 during the six months ended June 30, 2009. At June 30, 2010, the carrying value of the Poinciana Parkway is $8,452.

Notes, Mortgage Notes and Other Debt

     On March 30, 2004, we issued $120,000 aggregate principal amount of 4.50% Convertible Senior Notes due 2024 (the 4.50% Notes) in a private offering. Interest is payable semiannually on April 1 and October 1. The 4.50% Notes are senior, unsecured obligations and rank equal in right of payment to all of our existing and future unsecured and senior indebtedness. However, the 4.50% Notes are effectively subordinated to all of our existing and future secured debt to the extent of the collateral securing such indebtedness, and to all existing and future liabilities of our subsidiaries.

     Each $1 in principal amount of the 4.50% Notes is convertible, at the option of the holder, at a conversion price of $52.63, or 19.0006 shares of our common stock, upon the satisfaction of one of the following conditions: a) during any calendar quarter (but only during such calendar quarter) commencing after June 30, 2004 if the closing sale price of our common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is more than 120% of the conversion price per share of common stock on such last day; or b) during the five business day period after any five-consecutive-trading-day period in which the trading price per $1 principal amount of the 4.50% Notes for each day of that period was less than 98% of the product of the closing sale price for our common stock for each day of that period and the number of shares of common stock issuable upon conversion of $1 principal amount of the 4.50% Notes, provided that if on the date of any such conversion that is on or after April 1, 2019, the closing sale price of Avatar’s common stock is greater than the conversion price, then holders will receive, in lieu of common stock based on the conversion price, cash or common stock or a combination thereof, at our option, with a value equal to the principal amount of the 4.50% Notes plus accrued and unpaid interest, as of the conversion date. The closing price of Avatar’s common stock exceeded 120% ($63.156) of the conversion price for 20 trading days out of 30 consecutive trading days as of the last trading day of the fourth quarter of 2006, as of the last trading day of the first quarter of 2007 and as of the last trading day of the second quarter of 2007. Therefore, the 4.50%

Notes to Consolidated Financial Statements (dollars in thousands except share and per share data) (Unaudited) – continued

Notes, Mortgage Notes and Other Debt – continued

Notes became convertible for the quarter beginning January 1, 2007, for the quarter beginning April 1, 2007 and for the quarter beginning July 1, 2007. During 2008, 2009 and the six months ended June 30, 2010, the closing price of Avatar’s common stock did not exceed 120% ($63.156) of the conversion price for 20 trading days out of 30 consecutive trading days; therefore, the 4.50% Notes were not convertible during 2008, 2009 and during the six months ended June 30, 2010. During 2007, $200 principal amount of the 4.50% Notes were converted into 3,800 shares of Avatar common stock. Also during 2007, Avatar repurchased $5,000 principal amount of the 4.50% Notes for approximately $4,984 including accrued interest. During 2008, we repurchased $35,920 principal amount of the 4.50% Notes for approximately $28,112 including accrued interest. On March 30, 2009, we repurchased $7,500 principal amount of the 4.50% Notes for approximately $6,038 including accrued interest. This repurchase resulted in a pre-tax gain of approximately $1,365 (which is included in Other Revenues in the consolidated statements of operations for the six and three months ended March 31, 2009). On June 19, 2009, we repurchased $6,576 principal amount of the 4.50% Notes for approximately $5,658, including accrued interest. As of June 30, 2010, $64,804 principal amount of the 4.50% Notes remain outstanding.

     We may, at our option, redeem for cash all or a portion of the 4.50% Notes at any time on or after April 5, 2011. Holders may require us to repurchase the 4.50% Notes for cash on April 1, 2011, April 1, 2014 and April 1, 2019; or in certain circumstances involving a designated event, as defined in the indenture for the 4.50% Notes, holders may require us to purchase all or a portion of their 4.50% Notes. In each case, we will pay a repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest, if any.

     Financial Accounting Standards Board (“FASB”) ASC Subtopic 470-20, Debt with Conversion Options – Cash Conversion (“ASC 470-20”) requires the issuer of certain convertible debt instruments that may be settled in cash on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. ASC 470-20 requires bifurcation of the instrument into a debt component that is initially recorded at fair value and an equity component. The difference between the fair value of the debt component and the initial proceeds from issuance of the instrument is recorded as a component of equity. The excess of the principal amount of the liability component over its carrying amount and the debt issuance costs are amortized to interest cost using the interest method over the expected life of a similar liability that does not have an associated equity component.

     As of June 30, 2010 and December 31, 2009, the 4.50% Notes and the equity component associated with the 4.50% Notes were comprised of the following:

		June 30,				December 31,
		2010				2009
4.50% Notes
Principal amount		$	64,804			$	64,804
Unamortized discount			(1,076	)			(1,794	)
Net carrying amount		$	63,728			$	63,010
Equity Component, net of income tax benefit		$	13,737			$	13,737

     The discount on the liability component of the 4.50% Notes is amortized using the effective interest method based on an effective rate of 7.5%, which is the estimated market interest rate for similar debt without a conversion option on the issuance date. The discount is amortized from the issuance date in 2004 through April 1, 2011, the first date that holders of the 4.50% Notes can require us to repurchase the 4.50% Notes. As of June 30, 2010, the remaining expected life over which the unamortized discount will be recognized is less than 1 year. We recognized $718 and $359 in non-cash interest charges related to the amortization of the discount during the six and three months ended June 30,

Notes to Consolidated Financial Statements (dollars in thousands except share and per share data) (Unaudited) – continued

Notes, Mortgage Notes and Other Debt – continued

2010, respectively. We recognized $832 and $347 in non-cash interest charges related to the amortization of the discount during the six and three months ended June 30, 2009, respectively.

     On March 27, 2008, we entered into an Amended and Restated Credit Agreement, by and among our wholly-owned subsidiary, Avatar Properties Inc., as borrower, Wachovia Bank, National Association (as a lender and as administrative agent on behalf of the lenders), and certain financial institutions as lenders (the “Amended Unsecured Credit Facility”). This agreement amended and restated the Credit Agreement, dated as of September 20, 2005, as amended.

     On May 3, 2010, we paid in full the outstanding principal and accrued interest of $55,979 under our Amended and Restated Credit Agreement. In addition, on May 4, 2010, we deposited $22,035 with Wells Fargo, N.A., successor by merger with Wachovia Bank, N.A., to collateralize letters of credit outstanding under the credit facility. In connection with such payment and deposit, we notified our administrative agent that we were exercising our right to reduce our commitment amount under the facility to zero dollars ($0), which had the effect of terminating all parties’ obligations under the credit facility, effective as of May 17, 2010.

     The following table represents interest incurred, interest capitalized, and interest expense for the six and three months ended June 30, 2010 and 2009:

		Six Months								Three Months
		2010				2009				2010				2009
Interest incurred		$	3,219			$	3,809			$	1,528			$	1,836
Interest capitalized			(57	)			(259	)			(42	)			(123	)
Interest expense		$	3,162			$	3,550			$	1,486			$	1,713

     We made interest payments of $2,114 and $2,731 during the six months ended June 30, 2010 and 2009, respectively.

Warranty Costs

     Warranty reserves for houses are established to cover estimated costs for materials and labor with regard to warranty-type claims to be incurred subsequent to the closing of a house. Reserves are determined based on historical data and other relevant factors. We may have recourse against subcontractors for claims relating to workmanship and materials. Warranty reserves are included in Accrued and Other Liabilities in the consolidated balance sheets.

     During the six and three months ended June 30, 2010 and 2009 changes in the warranty reserve consisted of the following:

		Six Months								Three Months
		2010				2009				2010				2009
Accrued warranty reserve, beginning of period		$	458			$	468			$	397			$	421
Estimated warranty expense			257				337				174				242
Amounts charged against warranty reserve			(231	)			(292	)			(87	)			(150	)
Accrued warranty reserve, end of period		$	484			$	513			$	484			$	513

Notes to Consolidated Financial Statements (dollars in thousands except share and per share data) (Unaudited) – continued

Loss Per Share

     We present loss per share in accordance with ASC 260, Earnings Per Share. Basic earnings (loss) per share is computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of Avatar. In accordance with ASC 260, the computation of diluted earnings (loss) per share for the six and three months ended June 30, 2010 and 2009 did not assume the effect of restricted stock units, employee stock options or the 4.50% Notes because the effects were antidilutive.

     The weighted average number of shares outstanding in calculating basic loss per share includes the issuance of 28,900 shares of our common stock for the six and three months ended June 30, 2010. The weighted average number of shares outstanding in calculating basic loss per share includes the issuance of 7,264 shares of our common stock for the six and three months ended June 30, 2009. In accordance with ASC 260, nonvested shares are not included in basic earnings per share until the vesting requirements are met.

     The following table represents the net loss and weighted average shares outstanding for the calculation of basic and diluted loss per share for the six and three months ended June 30, 2010 and 2009:

		Six Months								Three Months
		2010				2009				2010				2009
Numerator:
Basic and diluted loss per share – net loss			($15,879	)			($18,371	)			($5,743	)			($9,777	)
Denominator:
Basic and diluted weighted average shares outstanding			11,245,520				8,654,284				11,250,226				8,655,811

Repurchase of Common Stock

     On October 13, 2008, our Board of Directors amended its June 2005 authorization to purchase the 4.50% Notes and/or common stock to allow expenditures up to $30,000, including the $9,864 previously authorized. On October 17, 2008, we repurchased $35,920 principal amount of the 4.50% Notes for approximately $28,112 including accrued interest. On December 12, 2008, our Board of Directors amended its June 2005 authorization to purchase the 4.50% Notes and/or common stock to allow expenditures up to $30,000, including the $1,888 remaining after the October 2008 activities. On March 30, 2009, we repurchased $7,500 principal amount of the 4.50% Notes for approximately $6,038 including accrued interest. On June 19, 2009, we repurchased $6,576 principal amount of the 4.50% Notes for approximately $5,658 including accrued interest. As of June 30, 2010, the remaining authorization is $18,304.

Non-controlling Interest

     Avatar has consolidated certain LLCs, which qualify as variable interest entities (“VIEs”) because we determined that Avatar is the primary beneficiary. Therefore, the LLCs’ financial statements are consolidated in Avatar’s consolidated financial statements and the other partners’ equity in each of the LLCs is recorded as non-controlling interest as a component of consolidated stockholders’ equity. At June 30, 2010 and December 31, 2009, non-controlling interest was $746 and $1,018, respectively. The decrease in non-controlling interest of $272 is a result of the losses generated from these LLCs.

Notes to Consolidated Financial Statements (dollars in thousands except share and per share data) (Unaudited) – continued

Comprehensive Loss

     Net loss and comprehensive loss are the same for the six and three months ended June 30, 2010 and 2009.

Share-Based Payments and Other Executive Compensation

     The Amended and Restated 1997 Incentive and Capital Accumulation Plan (2005 Restatement), as amended (the “Incentive Plan”) provides for the grant of stock options, stock appreciation rights, stock awards, performance awards, and stock units to officers, employees and directors of Avatar. The exercise prices of stock options may not be less than the market value of our common stock on the date of grant. Stock option awards under the Incentive Plan generally expire 10 years after the date of grant.

     As of June 30, 2010, an aggregate of 637,016 shares of our Common Stock, subject to certain adjustments, were available for issuance under the Incentive Plan, including an aggregate of 143,669 options and stock units granted. There were 493,347 shares available for grant at June 30, 2010.

     Compensation expense related to the stock option and restricted stock unit awards during the six months ended June 30, 2010 and 2009 was $528 and $921, respectively, all of which relates to restricted stock units. Compensation expense related to the stock option and restricted stock unit awards during the three months ended June 30, 2010 and 2009 was $264 and $466, respectively, all of which relates to restricted stock units. During the six months ended June 30, 2010, we granted 4,935 restricted stock units, which have a weighted average grant date fair value of $20.68 per share. During the six months ended June 30, 2009, we granted 5,880 restricted stock units, which have a weighted average grant date fair value of $17.44 per share.

     As of June 30, 2010, there was $495 of unrecognized compensation expense related to unvested restricted stock units. That expense is expected to be recognized over a weighted-average period of less than one year.

Income Taxes

     Income tax receivable as of June 30, 2010 and December 31, 2009 consists of $1,391 and $35,018, respectively, in income tax refunds. During the three months ended June 30, 2010 we received tax refunds of $33,627.

     Income taxes have been provided using the liability method under ASC 740, Income Taxes (“ASC 740”). The liability method is used in accounting for income taxes where deferred income tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse.

     In accordance with ASC 740, Avatar evaluates its deferred tax assets quarterly to determine if valuation allowances are required. ASC 740 requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using a “more likely than not” standard. During 2008, we established a valuation allowance against our deferred tax assets. Our cumulative loss position over the evaluation period and the uncertain and volatile market conditions provided significant evidence supporting the need for a valuation allowance as a result of increases in deferred tax assets from our net operating losses. During the six months ended June 30, 2010 we recognized an increase of $6,078 in the valuation allowance. As of June 30, 2010, our deferred tax asset valuation allowance was $16,497. In future periods, the allowance could be reduced based on sufficient evidence indicating that it is more likely than not that a portion of our deferred tax assets will be realized.

Notes to Consolidated Financial Statements (dollars in thousands except share and per share data) (Unaudited) – continued

Income Taxes — continued

     In 2006, we closed on substantially all of the land sold under the threat of condemnation, and in 2007 we closed on the remainder. We believe these transactions entitled us to defer the payment of income taxes of $24,355 from the gain on these sales. During October 2009, we received from the Internal Revenue Service a final extension until December 31, 2010 to obtain replacement property to defer the entire payment of income taxes. It is our intention to acquire replacement property by December 31, 2010. It is possible that we may not identify and purchase adequate replacement property within the required time period, which would require us to make this income tax payment plus interest of approximately $7,000 as of December 31, 2010. We believe the tax planning strategy is prudent and feasible, and we have the ability and intent to purchase and sell, if necessary, replacement property to realize these deferred tax assets.

Fair Value Disclosures

     FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), provides guidance for using fair value to measure assets and liabilities, defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, expands disclosures about fair value measurements, and establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

     FASB ASC 820-10-65, Fair Value Measurements and Disclosures – Overall – Transition and Open Effective Date Information provides guidelines for making fair value measurements more consistent with the principles presented in ASC 820-10, Fair Value Measurements and Disclosures — Overall. This topic provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed; is applicable to all assets and liabilities (i.e. financial and nonfinancial); and requires enhanced disclosures.

     The accounting standards require that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Fair value determined based on quoted market prices in active markets for identical assets and liabilities.

Level 2: Fair value determined using significant observable inputs, such as quoted prices for similar assets or liabilities or quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data, by correlation or other means.

Level 3: Fair value determined using significant unobservable inputs, such as discounted cash flows, or similar techniques.

     The carrying value of cash and cash equivalents, receivables and accounts payable approximates the fair value due to their short-term maturities.

     The majority of our non-financial instruments, which include land and other inventories, Poinciana Parkway and property and equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur such that a non-financial instrument is required to be evaluated for impairment, a resulting asset impairment would require that the non-financial instrument be recorded at the lower of historical cost or its fair value.

Notes to Consolidated Financial Statements (dollars in thousands except share and per share data) (Unaudited) – continued

Fair Value Disclosures – continued

     Avatar’s assets measured at fair value as of June 30, 2010 and losses for the quarter ended June 30, 2010 on a nonrecurring basis are summarized below:

		Fair Value		Fair Value at
Non-financial Assets		Hierarchy		June 30, 2010				Losses
Homes completed or under construction		Level 2		$	1,493			$	0

     The carrying amounts and fair values of our financial instruments at June 30, 2010 and December 31, 2009 are as follows:

		June 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Cash and cash equivalents		$	160,266			$	166,266			$	217,132			$	217,132
Restricted cash		$	23,080			$	23,080			$	699			$	699
Receivables, net		$	6,841			$	6,841			$	6,656			$	6,656
Income tax receivable		$	1,391			$	1,391			$	35,018			$	35,018
Notes, mortgage notes and other debt:
Corporate:
4.50% Notes		$	63,728			$	63,994			$	63,010			$	61,969
Real estate:
5.50% Term Bonds payable		$	111			$	108			$	111			$	105
Amended Unsecured Credit Facility		$	—			$	—			$	55,881			$	54,750

In estimating the fair value of financial instruments, we used the following methods and assumptions:

Cash and cash equivalents and Restricted cash: The carrying amount reported in the consolidated balance sheets for cash and cash equivalents and restricted cash approximates their fair value.

Receivables, net and Income tax receivable: The carrying amount reported in the consolidated balance sheets for receivables, net and income tax receivable approximates their fair value.

4.50% Notes: At June 30, 2010 and December 31, 2009, the fair value of the 4.50% Notes is estimated, based on quoted or estimated market prices.

Real Estate Notes Payable: The fair values of the Amended Unsecured Credit Facility and 5.50% term bonds payable as of June 30, 2010 and December 31, 2009 are estimated using discounted cash flow analysis based on the current incremental borrowing rates for similar types of borrowing arrangements.

Notes to Consolidated Financial Statements (dollars in thousands except share and per share data) (Unaudited) – continued

Variable Interest Entities

     ASC 810, Consolidation (“ASC 810”), requires a variable interest entity (“VIE”) to be consolidated in the financial statements of a company if that company is the primary beneficiary of the VIE. Under ASC 810, the primary beneficiary of a VIE is the entity which absorbs a majority of the VIE’s expected losses, receives a majority of the VIE’s expected residual returns, or both. Entities determined to be VIEs, for which we are not the primary beneficiary, are accounted for under the equity method.

     We participate in entities with equity interests ranging from 20% to 50% for the purpose of acquiring and/or developing land in which we may or may not have a controlling interest. These entities are VIEs and our investments in these entities, along with other arrangements represent variable interests, depending on the contractual terms of the arrangement. We analyze these entities in accordance with ASC 810 when they are entered into or upon a reconsideration event.

     Consolidation of Variable Interest Entities

     During 2009, we entered into two separate agreements with unrelated third parties providing for the formation of two separate limited liability companies (“LLCs”). We subsequently sold developed, partially-developed and undeveloped land to each of the newly formed companies for a combination of cash and purchase money notes. We acquired a minority ownership interest in each of the LLCs and participate in the management of each of the LLCs. We also entered into land option contracts with these newly formed LLCs. Under such land option contracts, we paid a specified option deposit in consideration for the right, but not the obligation, to purchase developed lots in the future at predetermined prices.

     In accordance with ASC 810, we determined that these entities qualify as “VIEs” which require consolidation by the entity determined to be the primary beneficiary. The primary beneficiary is the entity determined to absorb the majority of the VIE’s expected losses, receives a majority of the VIE’s expected residual returns, or both. As a result of our analyses, we hold a variable interest in the VIEs through the purchase money notes, the land option contracts and an economic interest in these LLCs. As of June 30, 2010, our consolidated balance sheets include $3,440 in land and other inventories and $1,130 in property and equipment from these LLC’s.

     Avatar and its equity partners make initial or ongoing capital contributions to these consolidated entities on a pro rata basis. The obligation to make capital contributions is governed by each consolidated entity’s respective operating agreement.

     As of June 30, 2010, these consolidated entities were financed by partner equity and do not have third-party debt. In addition, we have not provided any guarantees to these entities or our equity partners.

Notes to Consolidated Financial Statements (dollars in thousands except share and per share data) (Unaudited) — continued

Variable Interest Entities — continued

Unconsolidated Variable Interest Entities

     We participate in entities with equity interests ranging from 20% to 50% for the purpose of acquiring and/or developing land in which we do not have a controlling interest. We analyze these entities in accordance with ASC 810 when they are entered into or upon a reconsideration event. For entities determined to be VIEs, we are not the primary beneficiary if we do not absorb a majority of the VIEs’ expected losses or receive a majority of the VIEs’ expected residual returns. All of such entities in which we had an equity interest at June 30, 2010 and December 31, 2009 are accounted for under the equity method.

     Avatar shares in the profits and losses of these unconsolidated entities generally in accordance with its ownership interests. Avatar and its equity partners make initial or ongoing capital contributions to these unconsolidated entities on a pro rata basis. The obligation to make capital contributions is governed by each unconsolidated entity’s respective operating agreement.

     During 2009 and 2008, we entered into various transactions with unaffiliated third parties providing for the formation of LLCs; and we subsequently sold developed and partially-developed land to each of the newly-formed LLCs. We acquired a minority ownership interest in each of the LLCs and share in the management of each of the LLCs. Avatar made contributions totaling $115 and $126 to its unconsolidated entities during the six months ended June 30, 2010 and 2009, respectively.

     As of June 30, 2010, these unconsolidated entities were financed by partner equity and do not have third-party debt. In addition, we have not provided any guarantees to these entities or our equity partners.

     The following are the consolidated condensed balance sheets of our unconsolidated entities as of June 30, 2010 and December 31, 2009:

		June 30,				December 31,
		2010				2009
Assets:
Cash		$	393			$	243
Land and other inventory			11,574				11,573
Other assets			—				25
Total assets		$	11,967			$	11,841
Liabilities and Partners’ Capital:
Accounts payable and accrued liabilities		$	1,275			$	893
Notes and interest payable to Avatar			3,724				3,724
Partners’ Capital of:
Avatar			1,504				1,597
Equity partner			5,464				5,627
Total liabilities and partners’ capital		$	11,967			$	11,841

Notes to Consolidated Financial Statements (dollars in thousands except share and per share data) (Unaudited) — continued

Variable Interest Entities — continued

     The following are the consolidated condensed statements of operations of our unconsolidated entities for the six and three months ended June 30, 2010 and 2009:

		Six Months								Three Months
		2010				2009				2010				2009
Revenues		$	5			$	31			$	5			$	16
Costs and expenses			627				397				323				226
Net loss from unconsolidated entities			($622	)			($366	)			($318	)			($210	)
Avatar’s share of loss from unconsolidated entities			($207	)			($148	)			($117	)			($86	)

Recently Issued Accounting Pronouncements

     In June 2009, the FASB issued ASC 810. This guidance requires an enterprise to determine whether its variable interest or interests give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise that has both (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. ASC 810 requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. ASC 810 is effective for all variable interest entities and relationships with variable interest entities existing as of January 1, 2010. We adopted this standard on January 1, 2010, which did not have an impact on our consolidated financial position, results of operations or cash flows.

Estimated Development Liability for Sold Land

     The estimated development liability consists primarily of utilities improvements in Poinciana and Rio Rico for more than 8,000 homesites previously sold and is summarized as follows:

		June 30,				December 31,
		2010				2009
Gross estimated unexpended costs		$	26,254			$	26,389
Less costs relating to unsold homesites			(5,907	)			(5,972	)
Estimated development liability for sold land		$	20,347			$	20,417

     The estimated development liability for sold land is reduced by actual expenditures and is evaluated and adjusted, as appropriate, to reflect management’s estimate of anticipated costs. In addition, we obtain quarterly third-party engineer evaluations and adjust this liability to reflect changes in the estimated costs. During the six and three months ended June 30, 2010 we did not record charges associated with these obligations. Charges of approximately $723 and $178 were recorded during the six and three months ended June 30, 2009, respectively. Future increases or decreases of costs for construction, material and labor as well as other land development and utilities infrastructure costs may have a significant effect on the estimated development liability.

Notes to Consolidated Financial Statements (dollars in thousands except share and per share data) (Unaudited) — continued

Commitments and Contingencies

     We are involved in various pending litigation matters primarily arising in the normal course of our business. These cases are in various procedural stages. Although the outcome of these matters cannot be determined, Avatar believes it is probable in accordance with ASC 450-20, Loss Contingencies, that certain claims may result in costs and expenses estimated at approximately $128 and $334, which have been accrued in the accompanying consolidated balance sheets as of June 30, 2010 and December 31, 2009, respectively. Liabilities or costs arising out of these and other currently pending litigation is not expected to have a material adverse effect on our business, consolidated financial position or results of operations.

     Performance bonds, issued by third party entities, are used primarily to guarantee our performance to construct improvements in our various communities. As of June 30, 2010, we had outstanding performance bonds of approximately $3,009. We do not believe that it is likely any of these outstanding performance bonds will be drawn upon.

Financial Information Relating To Reportable Segments

     The following table summarizes Avatar’s information for reportable segments for the six and three months ended June 30, 2010 and 2009:

		Six Months								Three Months
		2010				2009				2010				2009
Revenues:
Segment revenues
Primary residential		$	8,315			$	11,840			$	3,693			$	6,304
Active adult communities			17,053				17,676				12,375				11,478
Commercial and industrial and other land sales			23				2,064				23				239
Other operations			599				531				408				303
			25,990				32,111				16,499				18,324
Unallocated revenues
Interest income			254				378				132				179
Gain on repurchase of 4.50% Notes			—				1,783				—				418
Other			681				430				671				434
Total revenues		$	26,925			$	34,702			$	17,302			$	19,355
Operating income (loss):
Segment operating income (loss)
Primary residential			($2,503	)			($4,259	)			($861	)			($2,361	)
Active adult communities			(1,478	)			(2,253	)			535				(821	)
Commercial and industrial and other land sales			(27	)			1,987				10				209
Other operations			270				105				279				94
			(3,738	)			(4,420	)			(37	)			(2,879	)
Unallocated income (expenses)
Interest income			254				378				132				179
Gain on repurchase of 4.50% Notes			—				1,783				—				418
Equity loss from unconsolidated entities			(207	)			(148	)			(117	)			(86	)
Net loss attributable to non-controlling interests			272				—				139				—
General and administrative expenses			(7,845	)			(9,011	)			(3,762	)			(4,344	)
Interest expense			(3,162	)			(3,550	)			(1,486	)			(1,713	)
Other real estate expenses			(1,453	)			(3,785	)			(612	)			(1,222	)
Impairment of the Poinciana Parkway			—				(448	)			—				(130	)
Loss before income taxes			($15,879	)			($19,201	)			($5,743	)			($9,777	)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands except share and per share data)

     The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q.

     In the preparation of our financial statements, we apply United States generally accepted accounting principles. The application of generally accepted accounting principles may require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying results. For a description of our accounting policies, refer to Avatar Holdings Inc.’s 2009 Annual Report on Form 10-K.

     Certain statements discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and elsewhere in this Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others: the stability of certain financial markets; disruption of the credit markets and reduced availability and more stringent financing requirements for commercial and residential mortgages of all types; the number of investor and speculator resale homes for sale and homes in foreclosure in our communities and in the geographic areas in which we develop and sell homes; the increased level of unemployment; the decline in net worth and/or of income of potential buyers; the decline in consumer confidence; the failure to successfully implement our business strategy; shifts in demographic trends affecting demand for active adult and primary housing; the level of immigration and migration into the areas in which we conduct real estate activities; our access to financing; construction defect and home warranty claims; changes in, or the failure or inability to comply with, government regulations; and other factors as are described in Avatar’s filings with the Securities and Exchange Commission, including under the caption “Risk Factors” included in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. At least 80% of active adult homes are intended for occupancy by at least one person 55 years or older.

EXECUTIVE SUMMARY

     We are engaged in the business of real estate operations in Florida and Arizona. Our residential community development activities have been adversely affected in both markets, bringing development in our active adult and primary residential communities to a low level. We also engage in other real estate activities, such as the operation of amenities, the sale for third-party development of commercial and industrial land and the operation of a title insurance agency, which activities have also been adversely affected by economic conditions.

     Our primary business strategy continues to be the development of lifestyle communities, including active adult and primary residential communities, as well as the development and construction of housing on scattered lots. However, due to the significant deterioration in the economy and the residential real estate business, we have focused on maintaining the integrity of our balance sheet through preservation of capital, sustaining liquidity and reduction of overhead. Our development activities have been minimal as we work through the negative impacts on the homebuilding industry. We continue to evaluate the economic feasibility of other real estate activities or unrelated businesses. While our homebuilding operations are at a low level, our business remains capital intensive and requires or may require expenditures for replacement land for the Ocala sale, land and infrastructure development, housing construction, funding of operating deficits and working capital, as well as potential new acquisition and development opportunities.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands except share and per share data) —continued

EXECUTIVE SUMMARY — continued

     We remain focused on maintaining sufficient liquidity. We continue to carefully manage our inventory levels through curtailing land development and monitoring home starts. We are currently in the preliminary planning and permitting phase for new products at Bellalago and Solivita in Central Florida and at Estancias del Corazon in Arizona. These new products will include smaller and less amenitized houses to enable us to sell homes at lower price points as the market recovers. In the areas in which our developments are located, we believe that for the foreseeable future there may be more demand for smaller and less amenitized homes than in prior years.

     On September 24, 2009, we acquired 87 completed and partially completed homes, 267 developed lots, 364 partially developed lots and approximately 400 undeveloped master planned lots in a residential community known as Seasons at Tradition in St. Lucie County, Florida. As of June 30, 2010, we entered into 47 sales contracts representing an aggregate dollar value of approximately $7,516. During the six months ended June 30, 2010, at Seasons at Tradition, we had 42 closings with an aggregate dollar value of approximately $6,766. As of June 30, 2010, we have 45 completed homes remaining to close.

     On June 1, 2010, we acquired approximately 1,064 residential lots in a community known as Tortosa in Maricopa, Arizona (approximately 35 miles southeast of Phoenix) for a purchase price of $5,683. On August 5, 2010, we acquired 368 residential lots in a planned development known as Turtle Creek located in St. Cloud (Osceola County), Florida for a purchase price of $7,000. We continue to focus on acquiring real estate or real estate related assets as the fallout from the deleveraging of the economy continues to adversely affect real estate values.

Land Inventory

     Our assets consist primarily of real estate in the states of Florida and Arizona. As of June 30, 2010, we own more than 16,000 acres and have a minority ownership interest through limited liability companies (“LLCs”) in an additional 830 acres of developed, partially developed or developable residential, commercial and industrial property. Avatar is required to consolidate these LLCs in accordance with authoritative accounting guidance. Some portion of these acres may be developed as roads, retention ponds, parks, school sites, community amenities or for other similar uses.

     Within Florida and Arizona we also own more than 15,000 acres of preserves, wetlands, open space and other areas that at this time are not developable, permitable and/or economically feasible to develop, but may at some future date have an economic value for preservation or conservation purposes.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands except share and per share data) —continued

EXECUTIVE SUMMARY — continued

Land Inventory — continued

     The following is a breakdown of our esimated land holdings (not including our housing inventory) as of June 30, 2010 (dollars in thousands):

						Estimated Planned Lots/Units (1)
Acquisition Date		Contract Date				Developed				Partially Developed				Raw (2)				Total				Book Value
Residential
Osceola County, Florida
Pre-1980							200				—				2,200				2,400			$	5,198
1999-2001							500				700				—				1,200				45,018
2003			2002-2003				—				—				1,000				1,000				7,880
2004			2002-2003				—				—				1,400				1,400				19,307
2006			2002-2003				—				—				1,600				1,600				19,281
Total Osceola County							700				700				6,200				7,600				96,684
Polk County, Florida
Pre-1980							900				1,000				2,400				4,300				20,914
2003			2002-2003				900				—				100				1,000				30,732
2004			2002-2003				—				—				2,500				2,500				19,966
Total Polk County							1,800				1,000				5,000				7,800				71,612
St. Lucie County, Florida
2009			2009				267				364				400				1,031				2,416
Hernando County, Florida
2004-2005			2003				—				5				—				5				30
Collier and Lee Counties, Florida
Pre-1980							50				—				—				50				187
Highlands County, Florida
Pre-1980							40				—				40				80				102
Santa Cruz County,(Rio Rico), Arizona
Pre-1980							600				300				3,700				4,600				10,446
Pinal County, Arizona
2010			2010				—				—				1,064				1,064				5,683
Pima County, Arizona
2009			2009				86				—				—				86				3,725
Total Residential							3,543				2,369				16,404				22,316			$	190,885
Consolidated LLCs (4)
Polk County, Florida
2005			2004				200				—				300				500			$	1,774
Martin County, Florida
1981-1987							75				—				200				275				1,666
Total Consolidated LLCs							275				—				500				775			$	3,440

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands except share and per share data) —continued

EXECUTIVE SUMMARY — continued

Land Inventory — continued

Acquisition		Contract				Estimated				Book
Date		Date				Acres				Value
Commercial/Industrial/Institutional
Florida
Pre-1980							1,300			$	7,105
2004 (3)			2004				300				14,790
2005 (3)			2004				400				15,948
Total Florida							2,000				37,843
Arizona
Pre-1980							200				267
Total Commercial/Industrial/Institutional							2,200			$	38,110
Other
Preserves, wetlands, open space
Pre-1980							—				3,176
Other							—				4,847
Total Other							—			$	8,023

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands except share and per share data) —continued

EXECUTIVE SUMMARY — continued

     For the six months ended June 30, 2010, our homebuilding results reflect the difficult conditions in our Florida and Arizona markets characterized by record levels of homes available for sale and diminished buyer confidence. The number of foreclosure sales as well as investor-owned units for sale; the number of foreclosures, pending foreclosures and mortgage defaults; the availability of significant discounts; the difficulty of potential purchasers in selling their existing homes at prices they are willing to accept; the significant amount of standing inventory and competition continue to adversely affect both the number of homes we are able to sell and the prices at which we are able to sell them. As a result, our communities continue to experience low traffic, significant discounts, low margins, and continued high delinquencies on homeowner association and club membership dues. In addition, our business is affected to some extent by the seasonality of home sales which are generally higher during the months of November through April in the geographic areas in which we conduct our business. During the six and three months ended June 30, 2010, we recorded impairment charges of $168 and $0, respectively, for housing communities relating to homes completed or under construction. We believe that housing market conditions will continue to be difficult during 2010. During 2009 and the six months ended June 30, 2010, other than Seasons at Tradition, most of our sales contracts were signed at selling prices that have resulted or will result in losses upon closing when factoring in operating costs such as sales and marketing and divisional overhead.

     While the level and duration of the downturn currently cannot be predicted, we anticipate that these conditions will continue to have an adverse effect on our operations during 2010. We anticipate that we will continue to generate operating losses during 2010. We believe that we have sufficient available cash to fund these losses for 2010.

     We have taken steps to decrease operating expenses including the consolidation of field operations and a reduction of staff. Since December 31, 2005, we have reduced our headcount by 62% to 223 full-time and part-time employees (almost half of whom are support staff for amenity operations and maintenance) from 585 full-time and part-time employees.

     We continue to manage Avatar and its assets for the long-term benefit of our shareholders. We remain focused on maintaining sufficient liquidity. We continue to carefully manage our inventory levels through curtailing land development and monitoring home starts. Our strategy also includes the monetization of commercial and industrial land and other assets, and the possible sale of certain residential land to bring forward future cash flows that would otherwise constitute long-term developments.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands except share and per share data) —continued

RESULTS OF OPERATIONS

     The following table provides a comparison of certain financial data related to our operations for the six and three months ended June 30, 2010 and 2009:

		Six Months								Three Months
		2010				2009				2010				2009
Operating income (loss):
Primary residential
Revenues		$	8,315			$	11,840			$	3,693			$	6,304
Expenses			10,818				16,099				4,554				8,665
Segment operating loss			(2,503	)			(4,259	)			(861	)			(2,361	)
Active adult communities
Revenues			17,053				17,676				12,375				11,478
Expenses			18,531				19,929				11,840				12,299
Segment operating loss			(1,478	)			(2,253	)			535				(821	)
Commercial and industrial and other land sales
Revenues			23				2,064				23				239
Expenses			50				77				13				30
Segment operating income			(27	)			1,987				10				209
Other operations
Revenues			599				531				408				303
Expenses			329				426				129				209
Segment operating income (loss)			270				105				279				94
Operating income (loss)			(3,738	)			(4,420	)			(37	)			(2,879	)
Unallocated income (expenses):
Interest income			254				378				132				179
Gain on repurchase of 4.50% Notes			—				1,783				—				418
Equity loss from unconsolidated entities			(207	)			(148	)			(117	)			(86	)
Net loss attributable to non-controlling interests			272				—				139				—
General and administrative expenses			(7,845	)			(9,011	)			(3,762	)			(4,344	)
Interest expense			(3,162	)			(3,550	)			(1,486	)			(1,713	)
Other real estate expenses			(1,453	)			(3,785	)			(612	)			(1,222	)
Impairment of the Poinciana Parkway			—				(448	)			—				(130	)
Loss before income taxes			(15,879	)			(19,201	)			(5,743	)			(9,777	)
Income tax benefit			—				830				—				—
Net loss			($15,879	)			($18,371	)			($5,743	)			($9,777	)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands except share and per share data) —continued

RESULTS OF OPERATIONS — continued

     Data from closings for the primary residential and active adult homebuilding segments for the six and three months ended June 30, 2010 and 2009 is summarized as follows:

		Number of								Average Price
		Units				Revenues				Per Unit
For the six months ended June 30,
2010
Primary residential			35			$	7,112			$	203
Active adult communities			60				11,093			$	185
Total			95			$	18,205			$	192
2009
Primary residential			56			$	10,255			$	183
Active adult communities			48				11,800			$	246
Total			104			$	22,055			$	212
For the three months ended June 30,
2010
Primary residential			15			$	3,181			$	212
Active adult communities			52				9,573			$	184
Total			67			$	12,754			$	190
2009
Primary residential			34			$	5,571			$	164
Active adult communities			36				8,728			$	242
Total			70			$	14,299			$	204

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands except share and per share data) —continued

     Data from contracts signed for the primary residential and active adult homebuilding segments for the six and three months ended June 30, 2010 and 2009 is summarized as follows:

		Gross Number								Contracts								Average
		of Contracts								Signed, Net of								Price Per
		Signed				Cancellations				Cancellations				Dollar Value				Unit
For the six months ended June 30,
2010
Primary residential			34				(7	)			27			$	6,392			$	237
Active adult communities			78				(7	)			71				14,393			$	203
Total			112				(14	)			98			$	20,785			$	212
2009
Primary residential			108				(19	)			89			$	14,506			$	163
Active adult communities			41				(8	)			33				6,690			$	203
Total			149				(27	)			122			$	21,196			$	174
For the three months ended June 30,
2010
Primary residential			14				(3	)			11			$	3,527			$	321
Active adult communities			31				(4	)			27				5,104			$	189
Total			45				(7	)			38			$	8,631			$	227
2009
Primary residential			60				(10	)			50			$	7,555			$	151
Active adult communities			18				(3	)			15				3,303			$	220
Total			78				(13	)			65			$	10,858			$	167