424B4 1 d562142d424b4.htm FILED PURSUANT TO RULE 424(B)(4) Filed Pursuant to Rule 424(b)(4)
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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-187735

 

P R O S P E C T U S

 

LOGO

 

7,750,000 Shares

UCP, Inc.

Class A Common Stock

$15.00 per share

 

This is the initial public offering of our Class A common stock. We are selling 7,750,000 shares of our Class A common stock. The initial public offering price is $15.00 per share of our Class A common stock.

 

We will be a holding company and our sole material asset will be membership interests representing 42.3% of the economic interests of UCP, LLC, assuming the underwriters do not exercise their option to purchase additional shares of our Class A common stock. After the completion of this offering, PICO Holdings, Inc., or PICO, will own a majority of the combined voting power of our common stock, will have the ability to elect a majority of our board of directors and will have substantial influence over our governance. We have granted the underwriters an option to purchase up to 1,162,500 additional shares of our Class A common stock and we intend to use the net proceeds from any exercise of the option to purchase a portion of PICO’s existing interest in UCP, LLC.

 

Our Class A common stock has been approved for listing on the New York Stock Exchange under the symbol “UCP.”

 

 

 

Investing in our Class A common stock involves a high degree of risk. See “Risk Factors” beginning on page 23.

 

 

 

We are an “emerging growth company” under the federal securities laws and are eligible for reduced reporting requirements. See “Summary—Implications of Being an Emerging Growth Company.”

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

      Per Share      Total  

Public Offering Price

   $ 15.00       $ 116,250,000   

Underwriting Discount(1)

   $ 1.05       $ 8,137,500   

Proceeds to Us (before expenses)

   $ 13.95       $ 108,112,500   

 

(1)   

We are paying certain expenses of this offering. See “Underwriting.”

 

The underwriters expect to deliver the shares to purchasers on or about July 23, 2013.

 

Citigroup   Deutsche Bank Securities   Zelman Partners LLC

 

JMP Securities

 

July 17, 2013


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We are responsible for the information contained in this prospectus. We have not authorized anyone to provide you with different information, and we take no responsibility for any other information others may give you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than its date.

 

TABLE OF CONTENTS

 

     Page  

Summary

     1   

Risk Factors

     23   

Cautionary Note Concerning Forward-Looking Statements

     54   

Organizational Structure

     55   

Use of Proceeds

     60   

Capitalization

     61   

Dilution

     64   

Unaudited Pro Forma Financial Information

     66   

Dividend Policy

     74   

Selected Consolidated Financial and Operating Data

     75   

Management’s Discussion and Analysis of Financial Condition and Results Of Operations

     78   

Market Opportunity

     101   

Our Business

     142   

Management

     158   

Executive and Director Compensation

     166   

Certain Relationships and Related Party Transactions

     173   

Conflicts of Interest

     181   

Principal Stockholders

     182   

Description of Capital Stock

     184   

Shares Eligible for Future Sale

     189   

Material Federal Income Tax Considerations

     191   

Underwriting

     196   

Legal Matters

     202   

Experts

     202   

Where You Can Find More Information

     202   

Index to Consolidated Financial Statements

     F-1   

 

We use market data and industry forecasts and projections throughout this prospectus, and in particular in the sections entitled “Summary,” “Market Opportunity” and “Our Business.” We have obtained substantially all of this information from a market study prepared for us in connection with this offering by John Burns Real Estate Consulting, LLC (“JBREC”), an independent research provider and consulting firm focused on the housing industry. We have agreed to pay JBREC a fee of $40,000 for that market study, plus an amount charged at an hourly rate for additional information we may require from JBREC from time to time in connection with that market study. Such information is included in this prospectus in reliance on JBREC’s authority as an expert on such matters. Any forecasts prepared by JBREC are based on data (including third-party data), models and experience of various professionals, and are based on various assumptions (including the completeness and accuracy of third-party data), all of which are subject to change without notice. See “Experts.” In addition, certain market and industry data has been taken from publicly available industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. We have not independently verified the data obtained from these sources. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and additional uncertainties regarding the other forward-looking statements in this prospectus.

 

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SUMMARY

 

This summary highlights information contained elsewhere in this prospectus, but it does not contain all of the information that you should consider important in making your investment decision. Therefore, you should read this entire prospectus carefully, including, in particular, the “Risk Factors” section beginning on page 23 of this prospectus. As used in this prospectus, unless the context otherwise requires or indicates, references to “the Company,” “our company,” “we,” “our” and “us” (1) for the period prior to January 4, 2008, the date on which PICO (as defined below) acquired our business, refer to Union Community Partners, LLC, (2) for the period beginning January 4, 2008 and prior to completion of the transactions described in this prospectus under “Organizational Structure,” refer to UCP, LLC and its subsidiaries and (3) following the completion of the transactions described in this prospectus under “Organizational Structure,” refer to UCP, Inc. and its subsidiaries; and references to “PICO” refer to PICO Holdings, Inc., prior to this offering the sole member of UCP, LLC (together with its wholly owned subsidiaries excluding UCP, LLC).

 

Unless otherwise indicated, market data is derived from a market study prepared for us in connection with this offering by John Burns Real Estate Consulting, LLC (“JBREC”).

 

Unless the context otherwise requires, the information in this prospectus assumes that: (1) the transactions described in this prospectus under “Organizational Structure” have been completed, (2) the shares of our Class A common stock to be sold in this offering are sold at $15.00 per share and (3) the underwriters’ option to purchase additional shares is not exercised.

 

Our Company

 

We are a homebuilder and land developer, with significant land acquisition and entitlement expertise, in growth markets in Northern California and with a growing presence in attractive markets in the Puget Sound area of Washington State. Our operations began in 2004 with the founding of Union Community Partners, LLC by Dustin L. Bogue, our President and Chief Executive Officer, and we were principally focused on acquiring land, entitling and developing it for residential construction, and selling residential lots to third-party homebuilders. In January 2008, we were acquired by PICO, a NASDAQ-listed, diversified holding company, which allowed us to accelerate the development of our business and gain access to a capital partner capable of funding our pursuit of attractive opportunities resulting from the recent residential real estate downturn. Since we were acquired by PICO, we have invested over $219.1 million acquiring ownership or control of and improving over 6,000 single-family residential lots. In 2010, we formed Benchmark Communities, LLC, or Benchmark Communities, our wholly owned homebuilding subsidiary, to design, construct and sell high quality single-family homes. As of March 31, 2013, our property portfolio consisted of 48 communities in 17 cities in Northern California and the Puget Sound area of Washington State.

 

In Northern California, we primarily operate in three areas: the Central Valley area (Fresno and Madera counties), the Monterey Bay area (Monterey County) and the South San Francisco Bay area (Santa Clara and San Benito counties). In Washington State, we operate in the Puget Sound area (King, Snohomish, Thurston and Kitsap counties). We believe that these areas have attractive residential real estate investment characteristics, such as favorable long-term population demographics, a demand for single-family housing that often exceeds available supply, large and growing employment bases, and high home affordability levels, as discussed further in the “—Industry Overview” section of this summary and under the heading “Market Opportunity” included elsewhere in this prospectus. We continue to experience significant homebuilding and land development opportunities in our current markets and are evaluating potential expansion opportunities in other markets that we believe have attractive long-term investment characteristics.

 

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Since 2008 and throughout the recent residential real estate downturn, we have been a significant acquiror of real estate for residential development and construction in our markets. We actively source land acquisition opportunities from a variety of parties, including land owners, land brokers, lenders and other land development and real estate companies. When we have elected to sell residential lots to third parties, our primary customers have been public and private homebuilders. Since 2008 and through March 31, 2013, we have sold 841 lots and 101 homes, generating revenue of $105.5 million across our markets.

 

LOGO

 

(1)   

Includes owned lots and lots that we control through purchase or option contracts.

(2)   

Includes 35 lots purchased in December 2007.

 

Our revenue increased from $2.4 million in 2010 to $58.1 million in 2012 and $11.8 million for the three months ended March 31, 2013. In the three months ended March 31, 2013, we sold 12 homes and 54 lots located in seven communities in California. In 2012, we sold 41 homes and 560 lots located in 10 communities in California and Washington State; and in 2011, we sold 33 homes and 118 lots located in seven communities in and around the Central Valley area, the South San Francisco Bay area and the Monterey Bay area of California. In the three months ended March 31, 2013, we generated homebuilding gross margin of $873,000, or 20.1%, and land development gross margin of $2.9 million, or 38.7%. In the year ended December 31, 2012, we generated homebuilding gross margin of $4.2 million, or 30.1%, and land development gross margin of $11.2 million, or 25.4%. In the three months ended March 31, 2013, we generated homebuilding adjusted gross margin of $935,000, or 21.6%, and land development adjusted gross margin of $2.9 million, or 38.8%. In the year ended December 31, 2012, we generated homebuilding adjusted gross margin of $4.4 million, or 30.9%, and land development adjusted gross margin of $12.5 million, or 28.4%. Homebuilding adjusted gross margin and land development adjusted gross margin are non-U.S. generally accepted accounting principles (“U.S. GAAP”) financial measures. For a discussion of these measures and a reconciliation of these measures to the most comparable U.S. GAAP financial measure, see “Selected Consolidated Financial and Operating Data—Consolidated Gross Margin and Consolidated Adjusted Gross Margin and U.S. GAAP Reconciliation.”

 

As of March 31, 2013, we owned or controlled 5,061 lots, which approximated an eight year supply of land based on our home and lot sales for the 12 months ended March 31, 2013, and which we believe will support our

 

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business strategy for a multi-year period. While we expect to opportunistically sell residential lots to third-party homebuilders when we believe that will maximize our returns or lower our risk, we expect that homebuilding and home sales will constitute our primary source of revenue growth.

 

Since we were acquired by PICO in 2008, we have operated as a wholly owned subsidiary of PICO, and upon completion of this offering, PICO will hold a majority of the voting power of UCP, Inc. and of the economic interests of UCP, LLC, as described in this prospectus under “Organizational Structure.” John R. Hart, PICO’s President and Chief Executive Officer, is a member of our board of directors and Maxim C. W. Webb, PICO’s Chief Financial Officer, is also one of our directors.

 

PICO seeks to invest in businesses using a disciplined, long-term risk-adverse investment approach that emphasizes preservation of capital. As a subsidiary of PICO, the development of our acquisition and financing strategies was influenced by PICO’s substantial experience as an owner of businesses in a variety of industries. We believe that we will continue to benefit from PICO’s substantial business expertise, vision, and public company experience, and that our corporate culture has benefited from the discipline of operating as a subsidiary of a public company. Upon completion of this offering, we will enter into a Transition Services Agreement with PICO, which will provide us with access to a developed public company platform for accounting, human resources and information technology functions, as we develop our own corporate infrastructure.

 

We have operated our business through UCP, LLC under the name Union Community Partners. Upon completion of this offering, UCP, LLC will become a subsidiary of UCP, Inc. PICO will own 57.7% of the economic interests of UCP, LLC (51.4% if the underwriters exercise their option to purchase additional shares of our Class A common stock in full and the net proceeds therefrom are used to repurchase a portion of PICO’s interest in UCP, LLC) and UCP, Inc. will own 42.3% of the economic interests of UCP, LLC (48.6% if the underwriters exercise their option to purchase additional shares of our Class A common stock in full and the net proceeds therefrom are used to repurchase a portion of PICO’s interest in UCP, LLC).

 

Industry Overview

 

The U.S. housing market continues to improve from the cyclical low points reached during the 2008-2009 national recession. Between the 2005-market peak and 2011, single-family housing sales declined 76%, according to data compiled by the U.S. Census Bureau, and median home prices declined 34%, as measured by the S&P Case-Shiller Index. In 2011, early signs of a recovery began to materialize in many markets around the country as a result of an improving macroeconomic backdrop and a historically high level of housing affordability. In the twelve months ended March 31, 2013, homebuilding permits increased 30% and the median single-family home price increased 9.3% as compared to the twelve months ended March 31, 2012. Growth in new home sales outpaced growth in existing home sales over the same period, increasing 20% for new homes versus 9% for existing homes (which were impacted by foreclosure-related sales and limited resale inventory).

 

Historically, strong housing markets have been associated with excellent affordability, a healthy domestic economy, positive demographic trends such as population growth and household formation, falling mortgage rates, increases in renters that qualify as home buyers, and locally based dynamics such as housing demand relative to housing supply. Many markets across the U.S. are exhibiting a number of these positive characteristics. Relative to long-term historical averages, the U.S. economy is creating more jobs than homebuilding permits issued, the inventory of new homes for sale and resale homes is well below average and affordability is near its best level in more than 30 years, as measured by the ratio of homeownership costs to household income.

 

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Despite recent momentum, the U.S. housing market has not fully recovered from the 2008-2009 recession as consumer confidence remains below average levels, mortgage underwriting standards have tightened and the number of delinquent homes remains elevated relative to historical averages. Additionally, real estate is a local industry and not all markets exhibit the same trends. For a detailed discussion of the residential real estate investment characteristics of the areas in which we operate, see the information included in this prospectus under the heading “Market Opportunity.”

 

Our Competitive Strengths

 

We believe the following competitive strengths will provide us with a competitive advantage in implementing our business strategy:

 

Substantial Presence in Attractive West Coast Markets

 

We currently focus on West Coast markets with high barriers to the development of residential real estate, such as geographic or political factors, and that we believe exhibit attractive residential real estate investment characteristics, such as improving levels of employment and population growth relative to national averages. Our extensive land holdings in select markets in California and Washington State provide us significant exposure to the current U.S. housing market recovery. We believe that we are well positioned if housing sales volumes or home price appreciation accelerate in the future and that any such trends would enhance our profit potential. Since inception, our focus has been on acquiring land at various stages of entitlement and development in the following areas of California: the Central Valley area, the Monterey Bay area and the South San Francisco Bay area. Beginning in 2011, we entered the Puget Sound area of Washington State. We believe that these residential real estate markets offer an attractive long-term investment opportunity due to favorable demographic trends and positive economic indicators. Currently, evidence of a housing recovery in our markets includes decreasing levels of existing home inventory, high affordability, an increasing volume of new home sales and increasing home prices. Furthermore, recent key housing data in our markets compare favorably to national averages.

 

Significant Land Position Acquired at Low Cost Basis

 

Substantially all of our real estate inventory of 5,061 lots as of March 31, 2013 was aggregated since 2008 at what we believe are attractive prices, providing us with significant opportunity, particularly if home prices and overall housing market conditions continue to improve. Throughout the housing market downturn, we continued to implement our disciplined land acquisition methodology, which emphasizes our value-oriented investment philosophy, along with attractive underlying housing market fundamentals, such as favorable long-term demographics, demand for single-family housing that exceeds available supply, desirable educational systems and institutions, high educational attainment levels, well-developed transportation infrastructure, proximity to major trade corridors and employment centers, positive employment trends, diverse employment bases, and high barriers to the development of residential real estate, such as geographic or political factors.

 

As of March 31, 2013, we owned or controlled 5,061 lots, which approximated an eight year supply of land based on our home and lot sales for the 12 months ended March 31, 2013, and which we believe will support our business strategy for a multi-year period. We believe that our extensive land holdings may reduce our exposure to potential land shortages or increasing land prices in our markets.

 

Growth-Focused Company with No Known Legacy Troubled Assets

 

We believe that our strong balance sheet and absence of known legacy troubled assets enable us to focus on future growth, as opposed to diverting resources to managing troubled assets. Because our land acquisition activity accelerated in January 2008 after we were acquired by PICO, we have no known legacy assets in markets, or at acquisition costs, that we believe are no longer commercially viable, nor do we believe that we

 

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have significant liabilities related to assets that are no longer commercially viable, unlike many competitors that were negatively impacted by the recent housing downturn. Our land inventory has been underwritten at valuations that we believe remain attractive and is located in markets on which we have strategically focused since the 2007 downturn commenced. The absence of known legacy assets and liabilities has aided us in attracting and retaining experienced and talented homebuilding and real estate development personnel. We believe that we are well-positioned to achieve economies of scale as we seek to grow our business.

 

Access to Privately Negotiated Land and Lot Acquisitions, and to Projects with Significant “Value-Add” Opportunities

 

Our strong local relationships and proven land acquisition, development and homebuilding platform have allowed us to generate attractive adjusted gross margins. We benefit from the long-standing relationships our executive management team has with key land owners, brokers, lenders, and development and real estate companies in our markets that have provided us with opportunities to evaluate and privately negotiate acquisitions outside of a broader marketing process. In addition, we believe that our strong balance sheet, positive reputation in our markets among potential land sellers and brokers as a homebuilder and land developer, and track record of acquiring over 6,000 lots since 2008 provide land sellers and brokers confidence that we will consummate transactions in a highly professional, efficient and transparent manner, which in turn strengthens these relationships for future opportunities. We believe our relationships with land owners and brokers will continue to provide opportunities to source land acquisitions privately, helping us to maintain a significant pipeline of opportunities on favorable terms and prices.

 

The land development process in our markets can be very complex and often requires highly-experienced individuals that can respond to numerous unforeseen challenges with a high degree of competency and integrity. We actively seek land acquisition opportunities where others might seek to avoid complexities, as we believe we can add significant value through our expertise in entitlements, re-entitlements, horizontal land planning and development, and by designing and selling homes to targeted home buyer segments that are attracted to our differentiated new home product.

 

Proven Land Acquisition Underwriting Methods

 

Our executive management team has developed a rigorous and disciplined land acquisition underwriting methodology, which has guided our land acquisition activities. Rooted in an analytical approach to decision making, our underwriting methods emphasize risk identification and mitigation, and screen for fundamental asset value with high risk-adjusted return potential. Our underwriting models help us identify, evaluate and act upon residential acquisition and development opportunities based on a variety of indicators, including demand for single-family housing that exceeds available supply, high single-family home affordability, and areas with well regarded educational systems and institutions, high educational attainment levels, accommodative transportation infrastructure, proximity to major trade corridors, positive employment trends, diverse employment bases and geographic or political barriers that limit the development of new housing.

 

Our executive management team is closely involved in the sourcing, underwriting, negotiation and closing of our land transactions. Our rigorous diligence process entails gaining a detailed understanding of the risks and profit potential of each asset, internal and third-party analysis of local supply and demand factors, internal and third-party analysis of competitive market dynamics, and analysis of broader market conditions, such as prevailing employment and demographic information.

 

Innovative Homebuilding Platform with Distinctive, Diverse Product Offering

 

We build homes through our wholly owned homebuilding subsidiary, Benchmark Communities. Benchmark Communities operates under the principle that “Everything Matters!” This principle underlies all phases of our

 

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new home process including planning, construction, sales and customer service. Based on third-party surveys and realtor feedback, our Benchmark Communities brand is recognized by home buyers in markets where Benchmark Communities has built and sold homes for its high-quality construction materials and craftsmanship, cutting edge home design, and customer-centric service and warranty programs. Eliant Surveys, a third-party customer experience management company that has been surveying buyers of new homes for over twenty years, surveys our home buyers after closing on their home purchases. For the three months ended March 31, 2013, our initial quality and customer service scores were 90.7% and 97.0%, respectively, as compared to national homebuilder averages of 85.8% and 90.6% respectively.

 

We are diversified by product offering, which we believe broadens our exposure to the housing recovery and reduces our exposure to any particular market or customer segment. Target home buyers vary by project and geographic market, in part dictated by each particular asset, its location, topography and competitive market positioning and the amenities of the surrounding area and the community in which it is located.

 

Optionality Provided by Our Hybrid Homebuilding and Land Development Strategy

 

As a hybrid homebuilder and land developer, we are strategically positioned to either build new homes on our lots or to sell our lots to third-party homebuilders. While our business plan contemplates building new homes on the majority of our lots, we proactively monitor market conditions and our nimble operations allow us to opportunistically sell a portion of our lots to third-party homebuilders if we believe that will maximize our returns or lower our risk. We believe our ability and willingness to opportunistically build on or sell our lots to third-party homebuilders affords us the following important advantages:

 

   

exploit periods of cyclical expansion by building on our lots;

 

   

manage our operating margins and reduce operating income volatility by opportunistically selling lots as operating performance and market conditions dictate; and

 

   

manage operating risk in periods where we anticipate cyclical contraction by reducing our land supply through lot sales.

 

Proven and Experienced Management Team

 

With an average of 23 years of residential land acquisition, development and homebuilding experience, our executive management team, led by Dustin L. Bogue, our President and Chief Executive Officer, William J. La Herran, our Chief Financial Officer and Treasurer, and James W. Fletcher, our Chief Operating Officer, successfully guided our company through the deep and extensive housing depression that lasted from our inception through 2012. During this time and through March 31, 2013, our executive management team has executed over 40 land acquisition transactions valued at more than $219.1 million of invested capital and totaling over 6,000 lots.

 

Beginning in early 2008, our executive management team developed and implemented our strategy of acquiring a significant amount of residential land, at what we believe to be meaningful discounts to its long-term value, for us to build homes upon or sell to third-party homebuilders. We believe our executive management team has positioned us to benefit significantly from any continuation of the U.S. housing recovery, with positive exposure to any related home price appreciation.

 

Our Business Strategy

 

We actively source, evaluate and acquire land for residential real estate development and homebuilding. For each of our real estate assets, we periodically analyze ways to maximize value by either (i) building single-family

 

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homes and marketing them for sale under our Benchmark Communities brand, or (ii) completing entitlement work and horizontal infrastructure development and selling finished lots to third-party homebuilders. We perform this analysis using a disciplined analytical process, which we believe is a differentiating component of our business strategy.

 

We believe that we are well positioned to capitalize on any continuation of the prevailing housing market recovery through the disciplined execution of the following strategies:

 

Grow Revenue by Increasing Community Count

 

As of March 31, 2013, we owned or controlled 5,061 lots, providing us with significant lot supply, which we believe will support our business strategy for a multi-year period. We believe that our sizable inventory of well located land provides us with a significant opportunity to develop communities and design, construct, and sell homes under our Benchmark Communities brand. While we expect to opportunistically sell select residential lots to third-party homebuilders when we believe that will maximize our returns or lower our risk, we expect that homebuilding and home sales will constitute our primary means of generating revenue growth for the foreseeable future. As of March 31, 2013, we had five actively selling communities consisting of 290 lots, and we expect to open nine additional communities during the remainder of 2013. However, this is subject to market and operating conditions, and no assurance can be given that we will open these communities during this time period.

 

Continue to Implement Return-Focused Investment and Operational Discipline

 

When acquiring real estate assets, we focus on seeking maximum long-term risk-adjusted returns. Our underwriting and operating philosophies emphasize capital preservation, risk identification and mitigation, and risk-adjusted returns. Our investing and operating discipline have resulted in consolidated gross margin percentages of 26.5% and 5.3% for the years ended December 31, 2012 and 2011, respectively and 31.9% and 31.8% for the three months ended March 31, 2013 and 2012, respectively; and consolidated adjusted gross margin percentages of 29.0% and 30.2% for the years ended December 31, 2012 and 2011, respectively, and 32.5% and 35.0% for the three months ended March 31, 2013 and 2012, respectively. We seek to mitigate our exposure to market downturns and capitalize on market upturns through the following key strategies:

 

   

identifying the risks associated with our assets and business, including market, entitlement and environmental risks, and structuring transactions to minimize the impact of those risks;

 

   

maintaining high quality in our construction activities;

 

   

maintaining a strong balance sheet, using a prudent amount of leverage;

 

   

leveraging our purchasing power and controlling costs;

 

   

attracting highly experienced professionals and encouraging them to maintain a deep understanding and ownership of their respective disciplines;

 

   

maintaining a strong corporate culture that is based on integrity, honesty, transparency, value, quality and excellence; and

 

   

maintaining rigorous supervision over our operations.

 

Maximize Benefits of Hybrid Homebuilding and Land Development Model

 

Our business model provides the flexibility to monetize the value of our land assets either by building and selling homes through Benchmark Communities or developing land and selling lots to third-party homebuilders. When evaluating monetization strategies for our land assets, we consider each asset’s potential contribution to our overall performance, taking into account the time frame over which we may monetize the asset, rather than simply considering its ability to drive sales in a particular submarket over a short period of time. While we

 

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currently intend to monetize the majority of our land assets by building homes on our lots, we believe our hybrid homebuilding and land development model provides us with increased flexibility to seek to maximize risk-adjusted returns as market conditions warrant.

 

Design, Construct and Develop High Quality, Innovative Homes and Communities

 

We believe our target home buyers look for distinctive new homes; accordingly, we design homes in thoughtful and creative ways to create homes that we expect buyers will find highly desirable. We seek to accomplish this by collecting and analyzing information about our target home buyers and incorporating our analysis into new home designs. We source information about target home buyers from our experience selling new homes and through market research that enables us to identify design preferences that we believe will appeal to our customers. We target diverse buyer segments, including first-time buyers, first-time move-up buyers, second-time move-up buyers and move-down buyers.

 

Most of our communities target multiple buyer segments within such community, enabling us to seek increased sales pace and reduce our dependence on any single buyer segment. For example, our East Garrison project in Monterey County, California is expected to ultimately include eight communities.

 

Each of these communities will be designed, appointed and branded to appeal to a specific buyer segment that we have identified as sizable and that offer significant potential demand. We choose the targeted buyer segments based upon internal research, multiple third-party research reports and our senior management team’s extensive experience.

 

We contract with high quality architects, engineers and interior designers to assist our experienced internal product development personnel in designing homes that are intended to reflect our target customers’ tastes and preferences. In addition to identifying desirable design and amenities, this process includes a rigorous value engineering strategy that allows us to seek efficiencies in the construction process.

 

Deliver Superior High-Touch Customer Service

 

We seek to make the home buying experience friendly, effective and efficient. Our integrated quality assurance and customer care functions assign the same personnel at each community the responsibility for monitoring quality control and managing customer service. As a standard practice, we communicate with each homeowner at least seven times during their first two years of ownership in an effort to ensure satisfaction with their new home. Additionally, we monitor the effectiveness of our service efforts with third-party surveys that measure our home buyers’ perception of the quality of our homes and the responsiveness of our customer service. Our customer service program seeks to optimize customer care in terms of availability, response time and effectiveness, and we believe that it reduces our exposure to future liability claims. We believe that our continuing commitment to quality and customer service provides a compelling value proposition for prospective home buyers and reduces our exposure to long-term construction defect claims.

 

Selectively Pursue Geographic Expansion

 

Our geographic expansion strategy targets markets with favorable housing demand fundamentals, including, in particular, long-term population and employment growth. Attributes that make submarkets attractive to us include constrained lot supply, high-ranking schools, affordability, and proximity to transportation corridors and retail centers, among other factors. We avoid submarkets that are challenged by impediments such as excessive residential foreclosure, excessive lot supply and unusually high unemployment. Additionally, we may evaluate the acquisition of other homebuilders or land developers when we believe we can generate operational efficiencies or enter into new markets that may offer attractive fundamentals. We believe that our acquisition by PICO and subsequent integration into PICO’s operations have provided us with first-hand knowledge of how to successfully grow through selective acquisitions.

 

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Recent Developments

 

The following table sets forth our selected preliminary operating data for the three months ended June 30, 2013.

 

     Three
Months
Ended June
30,
     Increase (Decrease)  
     2013      2012      Amount      %  

Homebuilding

           

Net new home orders

     59         3         56         1,866.7

New homes delivered

     57         6         51         850.0

Average selling communities during the period

     7         2         5         320.0

Selling communities at end of period

     9         1         8         800.0

Backlog(1) at end of period, number of homes

     78         4         74         1,850.0

Land development

           

Lots delivered

     54         —           

Backlog(1) at end of period, number of lots

     60         32         28         87.5

 

(1)   

Backlog consists of homes or lots under sales contracts that have not yet closed, and there can be no assurance that closings of such contracts will occur.

We are in the process of finalizing our operating data for the three months ended June 30, 2013 and, therefore, actual data for this period is not yet available. The preliminary operating data presented above for the three months ended June 30, 2013 is subject to change pending finalization and actual data may differ.

 

As of March 31, 2013, we owned or controlled, pursuant to purchase or option contracts, an aggregate of 5,061 lots. Subsequent to March 31, 2013, we have acquired 114 residential lots for an aggregate purchase price of $1.5 million and entered into purchase contracts to acquire 771 additional residential lots. If we complete all of these pending acquisitions, the aggregate purchase price for these lots would be $56.5 million. No assurance can be given that we will consummate these acquisitions as currently contemplated.

 

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Project Sales by County

 

The following table sets forth home and lot sales revenue and units delivered by county for our projects during the three months ended March 31, 2013 and 2012 and the years ended December 31, 2012 and 2011.

 

    Three Months Ended March 31,     Year Ended December 31,  
    2013     2012     2012     2011  
    Unit
Sales
    Units
Delivered
    Unit
Sales
    Units
Delivered
    Unit
Sales
    Units
Delivered
    Unit
Sales
    Units
Delivered
 
    (in thousands, except units delivered)  

Home Sales

         

California

         

Monterey County

  $ 685        3      $ 1,108        4      $ 5,588        21      $ 1,288        5   

Santa Clara County

    1,664        3        —          —          3,760        6        —          —     

Fresno County

    1,568        5        —          —          715        2        3,169        10   

Madera County

    —          —          425        2        665        3        3,828        18   

San Benito County

    416        1        —          —          3,332        9        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Home Sales

  $ 4,333        12      $ 1,533        6      $ 14,060        41      $ 8,285        33   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Lot Sales

               

California

               

Santa Clara County

  $ 7,470        54        —          —        $ 13,810        92      $ 11,835        70   

Fresno County

    —          —          —          —          20,502        356        4,058        48   

Washington

               

King County

    —          —        $ 2,002        26        9,754        112        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Land Sales

  $ 7,470        54      $ 2,002        26      $ 44,066        560      $ 15,893        118   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Sales

  $ 11,803        66      $ 3,535        32      $ 58,126        601      $ 24,178        151   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Description of Completed Projects and Projects under Development

 

The following table presents project information relating to each of our markets as of March 31, 2013 and includes information for all projects completed since our acquisition by PICO in January 2008 and projects with communities expected to open during the remainder of 2013.

 

Location

  Actual or
Projected
Year of
First
Delivery
    Projected
Total
Number of
Homes(2)
    Cumulative
Units

Closed as
of
March 31,
2013
    Backlog
at
March  31,
2013(3)
    Owned
Lots as of
March 31,
2013(4)
    Actual or
Anticipated
Sales Price

Range
(in thousands)
    Home Size
Range
(sq. ft.)
 

California

             

Monterey County:

             

SummerField, Soledad

    2011        58        29        22        29      $ 205-$332        1,360-2,080   

Artisan, East Garrison

    2013 (1)      75            75      $ 487-$565        1,719-2,411   

Heritage, East Garrison

    2013 (1)      71            71      $ 555-$640        2,127-2,877   

Monarch, East Garrison

    2013 (1)      65            65      $ 445-$485        1,575-1,789   

Santa Clara County:

             

Jasper Hill, Morgan Hill

    2011        19        9        10        10      $ 480-$600        1,392-2,335   

Fairview, Gilroy

    2013 (1)      23            23      $ 680-$794        2,710-3,346   

Fresno County:

             

Vintage Collection, Clovis

    2011        19        10          9      $ 262-$362        2,423-4,272   

Vantage, Clovis

    2011        79        6        17        73      $ 317-$384        2,257-3,331   

Dakota Square, Fresno

    2013 (1)      169        1        17        168      $ 255-$324        1,816-2,912   

Pasaro, Clovis

    2013 (1)      121            121      $ 328-$386        2,298-3,331   

Red Hawk, Sanger

    2013 (1)      30            30      $ 380-$415        2,499-3,331   

Madera County:

             

Coronado, Madera

    2011        20        20          $ 150-$300        2,047-3,510   

Coronado II, Madera

    2013 (1)      183            183      $ 175-$215        1,536-2,376   

San Benito County:

             

Walnut Park

    2012        20        10        10        10      $ 340-$430        1,536-2,376   

Washington

             

Thurston County:

             

Sagewood I, Tumwater

    2013 (1)      97            97      $ 213-$233        1,600-2,050   

Sagewood III, Tumwater

    2013 (1)      45            45      $ 273-$300        2,250-2,800   
   

 

 

   

 

 

   

 

 

   

 

 

     

Total:

      1,094        85        76        1,009       
   

 

 

   

 

 

   

 

 

   

 

 

     

 

(1)   

Projected year of first delivery is based upon management’s estimates and is subject to change.

(2)   

Projected number of homes to be built at completion is subject to change and there can be no assurance that we will build all of these homes.

(3)  

Backlog consists of homes under sales contracts that have not yet closed, and there can be no assurance that closings of such contracts will occur. As of March 31, 2013 the value of our backlog was $21.8 million, and we expect that all of this amount should be converted to completed sales by December 31, 2013.

(4)   

Owned lots as of March 31, 2013 include owned lots in backlog as of March 31, 2013.

 

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Owned and Controlled Lots

 

As of March 31, 2013, we owned or controlled, pursuant to purchase or option contracts, an aggregate of 5,061 lots. The following table presents certain information with respect to our owned and controlled lots as of March 31, 2013.

 

     As of March 31, 2013  
     Owned      Controlled(1)      Total  

Central Valley Area-California

     1,875         364         2,239   

Monterey Bay Area-California

     1,599         —           1,599   

South San Francisco Bay Area-California

     70         347         417   

Puget Sound Area-Washington

     711         95         806   
  

 

 

    

 

 

    

 

 

 

Total

     4,255         806         5,061   
  

 

 

    

 

 

    

 

 

 

 

(1)   

Controlled lots are those subject to a purchase or option contract.

 

Subsequent to March 31, 2013, we have acquired 114 residential lots for an aggregate purchase price of $1.5 million and entered into purchase contracts to acquire 771 additional residential lots. If we complete all of these pending acquisitions, the aggregate purchase price for these lots would be $56.5 million. No assurance can be given that we will consummate these acquisitions as currently contemplated.

 

Corporate Structure

 

Following this offering we will be a holding company and our sole material asset will be membership interests representing 42.3% of the economic interests of UCP, LLC, assuming no exercise by the underwriters of their option to purchase additional shares of our Class A common stock. See “Organizational Structure” for a diagram depicting our organizational structure immediately after completion of this offering and the transactions described in this prospectus.

 

We will be the sole managing member of UCP, LLC and operate and control all of the business and affairs and consolidate the financial results of UCP, LLC and its subsidiaries. UCP, LLC is a holding company for the companies that directly or indirectly own and operate our business. Prior to this offering, there were 100 UCP, LLC membership interests issued and outstanding, all of which were owned by PICO.

 

Immediately prior to this offering, UCP, LLC’s Amended and Restated Limited Liability Company Operating Agreement will be amended and restated to, among other things, designate UCP, Inc. as the sole managing member of UCP, LLC and establish a new series of membership interests (which we refer to as the “UCP, LLC Series B Units”) which will be held solely by UCP, Inc. and reclassify PICO’s membership interests into “UCP, LLC Series A Units” which will be held solely by PICO (and its permitted transferees). The UCP, LLC Series B Units will rank on a parity with the UCP, LLC Series A Units as to distribution rights and rights upon liquidation, winding up or dissolution. Under the Second Amended and Restated Limited Liability Company Operating Agreement of UCP, LLC, any distributions generally will be made to the holders of UCP, LLC Series A Units and UCP, LLC Series B Units in proportion to the number of units owned by them.

 

We also will enter into an Exchange Agreement pursuant to which PICO (and its permitted transferees) will have the right to cause UCP, Inc. to exchange PICO’s UCP, LLC Series A Units for shares of our Class A common stock on a one-for-one basis, subject to equitable adjustments for stock splits, stock dividends and reclassifications. We expect that, as a result of these exchanges in the future, the tax basis of UCP, LLC’s assets attributable to our interest in UCP, LLC will be increased. These increases in tax basis will result in a tax benefit to UCP, Inc. that would not have been available but for the future exchanges of the UCP, LLC Series A Units for shares of our Class A common stock. These increases in tax basis will reduce the amount of tax that UCP, Inc.

 

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would otherwise be required to pay in the future, although the Internal Revenue Service, or IRS, may challenge all or part of the tax basis increases, and a court could sustain such a challenge. The exchanges by PICO of UCP, LLC Series A Units for shares of our Class A common stock will not, except for the tax benefit generated by the exchanges and the related payments under the Tax Receivable Agreement (described below), affect our public stockholders. Exchanges of UCP, LLC Series A Units for shares of our Class A common stock or other acquisitions by us of UCP, LLC Series A Units will reduce the voting power of our Class B common stock and increase the voting power of our Class A common stock in a commensurate amount.

 

Tax Receivable Agreement

 

In connection with this offering, we will enter into a Tax Receivable Agreement that will provide for the payment by us to PICO of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of any increase in tax basis caused by PICO’s exchange of UCP, LLC Series A Units for shares of our Class A common stock. UCP, Inc. and its Class A common stockholders will benefit from the remaining 15% of cash savings, if any, in income tax that is realized by UCP, Inc. For purposes of the Tax Receivable Agreement, cash savings in income tax will be computed by comparing our actual income tax liability to the amount of such taxes that we would have been required to pay had there been no increase in the tax basis of the assets of UCP, LLC as a result of the exchanges and had we not entered into the Tax Receivable Agreement. The term of the Tax Receivable Agreement will commence upon consummation of this offering and will continue until all such tax benefits have been utilized or expired, unless a change of control occurs, we materially breach our obligations under the agreement or we exercise our right to terminate the Tax Receivable Agreement and, in each case, we pay PICO a required amount based on the present value of payments based on estimates of amounts remaining to be made under the agreement. For additional information regarding our Tax Receivable Agreement, see “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

 

Summary Risk Factors

 

An investment in the shares of our Class A common stock involves a high degree of risk. You should consider carefully the risks discussed below and described more fully along with other risks under “Risk Factors” in this prospectus before investing in our Class A common stock.

 

   

Our long-term growth depends, in part, upon our ability to successfully identify and acquire desirable land parcels for residential buildout.

 

   

Our industry is cyclical and adverse changes in general and local economic conditions could reduce the demand for homes and, as a result, could have a material adverse effect on us.

 

   

Our geographic concentration could materially and adversely affect us if the homebuilding industry in our markets should experience a decline.

 

   

Our business and results of operations are dependent on the availability and skill of subcontractors.

 

   

Fluctuations in real estate values may require us to write-down the book value of our real estate assets.

 

   

PICO holds a significant equity interest in our company and its interests may not be aligned with yours, and as a result of PICO’s relationship with us, conflicts of interests may arise with respect to any transactions involving or with PICO or its affiliates.

 

   

Upon completion of this offering we will enter into a Transition Services Agreement with PICO pursuant to which PICO will provide us with accounting, human resources and information technology functions. Upon expiration PICO may be unwilling to renew the agreement or only willing to renew the agreement on less favorable terms, particularly if PICO ceases to hold a material investment in our company.

 

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In certain cases, payments by us under the Tax Receivable Agreement may be accelerated and/or significantly exceed the benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.

 

   

We expect to use leverage in executing our business strategy, which may adversely affect the return on our assets.

 

   

We have a limited operating history and we may not be able to successfully operate our business.

 

   

There is currently no public market for shares of our Class A common stock, a trading market for our Class A common stock may never develop following this offering and our Class A common stock price may be volatile and could decline substantially following this offering.

 

   

The offering price per share of our Class A common stock offered by this prospectus may not accurately reflect the value of your investment.

 

Our Principal Equityholder

 

Following this offering, PICO will own a majority of the combined voting power of our common stock. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange, or “NYSE,” on which the shares of our Class A common stock will be listed. See “Principal Stockholders.”

 

Our Offices

 

Our principal executive offices are located at 6489 Camden Avenue, Suite 204, San Jose, CA 95120. Our main telephone number is (408) 323-1113. Our Internet website is www.unioncommunityllc.com. Our homebuilding subsidiary, Benchmark Communities, also maintains an Internet website at www.benchmarkcommunities.com. The information contained in, or that can be accessed through, our websites is not incorporated by reference and is not a part of this prospectus. We also lease office space in Fresno, California, and Bellevue, Washington. We manage our business from our leased office space in San Jose and Fresno, California and in Bellevue, Washington; we believe that our leased office space is adequate to support our business for the foreseeable future.

 

Implications of Being an Emerging Growth Company

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” These provisions include, among other matters:

 

   

an exemption to provide fewer years of financial statements and other financial data in an initial public offering registration statement;

 

   

an exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting;

 

   

an exemption from new or revised financial accounting standards until they would apply to private companies and from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation;

 

   

reduced disclosure about the emerging growth company’s executive compensation arrangements; and

 

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no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements.

 

We have determined to opt out of the exemption from compliance with new or revised financial accounting standards. Our decision to opt out of this exemption is irrevocable.

 

We have elected to adopt the reduced disclosure requirements available to emerging growth companies. As a result of these elections, the information that we provide in this prospectus may be different than the information you may receive from other public companies in which you hold equity interests. In addition, it is possible that some investors will find our Class A common stock less attractive as a result of our elections, which may result in a less active trading market for our Class A common stock and more volatility in our stock price.

 

We will remain an “emerging growth company” until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Class A common stock that is held by non-affiliates exceeds $700 million as of the prior June 30, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

 

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The Offering

 

Class A common stock offered by us

7,750,000 shares

 

Class A common stock to be outstanding immediately following this offering

7,750,000 shares(1) (or 18,343,000 shares if all outstanding UCP, LLC Series A Units held by PICO were exchanged for newly issued shares of Class A common stock on a one-for-one basis)

 

Underwriters’ option

We have granted the underwriters an option to purchase up to 1,162,500 additional shares of our Class A common stock. If the underwriters exercise their option to purchase additional shares of Class A common stock, we will use the net proceeds from such exercise to purchase a portion of PICO’s UCP, LLC Series A Units. See “Use of Proceeds.” If necessary, we will reduce the portion of the net proceeds received from any exercise of the underwriters’ option that we use to purchase a portion of PICO’s UCP, LLC Series A Units so that, after giving effect to such purchase, we will remain a “controlled company” within the meaning of the corporate governance standards of the NYSE.

 

Class B common stock outstanding after the offering

100 shares

 

Voting power held by holders of Class A common stock after the offering

42.3% (or 100% if all outstanding UCP, LLC Series A Units held by PICO were exchanged for newly-issued shares of Class A common stock on a one-for-one basis)

 

Voting power held by holder of Class B common stock after the offering

57.7% (or 0% if all outstanding UCP, LLC Series A Units held by PICO were exchanged for newly issued shares of Class A common stock on a one-for-one basis)

 

Use of proceeds

We expect to receive net proceeds from this offering of approximately $105.6 million ($121.8 million if the underwriters exercise their option to purchase additional shares of Class A common stock in full), after deducting the underwriting discount and estimated offering expenses payable by us.

 

 

We intend to use the net proceeds from this offering, exclusive of the net proceeds received from any exercise of the underwriters’ option to purchase additional shares of Class A common stock, to purchase a number of newly-issued UCP, LLC Series B Units equal to the number of shares of Class A common stock sold in this offering, at a purchase price per unit equal to the initial public offering price per share of Class A common stock less the underwriting discount payable thereon. UCP, LLC intends to use such proceeds for general corporate purposes, such as the acquisition of land, including the land described above under “—Owned and Controlled Lots,” and for land development, home construction and other related purposes. If the

 

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underwriters exercise their option to purchase additional shares of Class A common stock, UCP, Inc. will use the net proceeds from such exercise to purchase a portion of PICO’s UCP, LLC Series A Units. See “Organizational Structure—Offering Transactions” and “Use of Proceeds.” If necessary, we will reduce the portion of the net proceeds received from any exercise of the underwriters’ option that we use to purchase a portion of PICO’s UCP, LLC Series A Units so that, after giving effect to such purchase, we will remain a “controlled company” within the meaning of the corporate governance standards of the NYSE.

 

  Though we will receive the net proceeds from any sale of shares of our Class A common stock pursuant to the underwriters’ option to purchase additional shares of our Class A common stock, we will use such proceeds to purchase a portion of PICO’s UCP, LLC Series A Units; accordingly, any such proceeds will not be available to us to acquire or develop land, construct homes or otherwise invest in our business. To the extent we reduce the portion of any such proceeds used to purchase UCP, LLC Series A Units from PICO, such amounts will be available to us for investment in our business.

 

Voting rights

Each share of our Class A common stock entitles its holder to one vote on all matters to be voted on by stockholders generally. PICO holds all of the shares of Class B common stock. The shares of Class B common stock have no economic rights but entitle the holder, without regard to the number of shares of Class B common stock held, to a number of votes on matters presented to stockholders of UCP, Inc. that is equal to the aggregate number of UCP, LLC Series A Units held by such holder. See “Description of Capital Stock—Class B Common Stock.”

 

  Holders of our Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law.

 

Dividend policy

We currently intend to retain our future earnings, if any, to finance the development and expansion of our business and, therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any of our financing instruments and such other factors as our board of directors deems relevant. See “Dividend Policy.”

 

Exchange rights of PICO

Prior to completion this offering, we will enter into an Exchange Agreement pursuant to which PICO (and its permitted transferees) will have the right to cause us to exchange PICO’s UCP, LLC Series A Units for shares of Class A common stock of UCP, Inc. on a one-for-one basis, subject to equitable adjustment for stock splits, stock dividends and reclassifications.

 

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  Under the amended and restated certificate of incorporation of UCP, Inc., the holder of Class B common stock will be entitled, without regard to the number of shares of Class B common stock held by such holder, to one vote for each UCP, LLC Series A Unit held by such holder. Accordingly, as PICO exchanges its UCP, LLC Series A Units for shares of Class A common stock pursuant to the Exchange Agreement, the voting power afforded to PICO by their shares of Class B common stock will be automatically and correspondingly reduced.

 

New York Stock Exchange symbol

Our Class A common stock has been approved for listing on the NYSE under the symbol “UCP.”

 

Risk factors

Investing in our Class A common stock involves a high degree of risk. For a discussion of factors you should consider in making an investment, see “Risk Factors” beginning on page 23 of this prospectus.

 

(1)   

Excludes: (i) an aggregate of 430,333 Class A restricted stock units to be granted to the members of our management team, other officers and employees and our director nominees upon the completion of this offering pursuant to our 2013 Long-Term Incentive Plan; (ii) 1,403,967 shares of our Class A common stock reserved for future issuance under our 2013 Long-Term Incentive Plan and (iii) 1,162,500 shares of our Class A common stock issuable upon exercise of the underwriters’ option to purchase additional shares of our Class A common stock.

 

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Summary Consolidated Financial and Operating Data

 

The following sets forth our summary consolidated financial and operating data. The historical data presented below is that of UCP, LLC. UCP, LLC will be considered our predecessor for accounting purposes, and its consolidated financial statements will be our historical consolidated financial statements following this offering. You should read the following summary consolidated financial data in conjunction with our consolidated financial statements, the related notes thereto, “Unaudited Pro Forma Financial Information,” “Selected Consolidated Financial and Operating Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future.

 

We derived our summary consolidated statement of operations data for the years ended December 31, 2012 and 2011 from the consolidated financial statements of UCP, LLC audited by Deloitte & Touche LLP, independent auditors, whose report with respect thereto is included elsewhere in this prospectus. We derived our unaudited summary consolidated statement of operations data for the three months ended March 31, 2013 and 2012 and unaudited consolidated balance sheet data (excluding the as adjusted data) as of March 31, 2013 from the unaudited condensed consolidated financial statements of UCP, LLC (included elsewhere in this prospectus) which include all adjustments, consisting of normal recurring adjustments, which management considers necessary for a fair presentation of the financial position and the results of operations for such periods. Results for the interim periods are not necessarily indicative of the results for the full year.

 

The summary unaudited pro forma consolidated statements of operations for the year ended December 31, 2012 and the three months ended March 31, 2013 and the summary unaudited pro forma condensed consolidated balance sheet as of March 31, 2013 present UCP, Inc.’s consolidated results of operations and financial position giving pro forma effect to the Reorganization Transactions and Offering Transactions described in “Organizational Structure,” including the anticipated sale of shares of Class A common stock in this offering (excluding shares issuable upon any exercise of the underwriters’ option to purchase additional shares of Class A common stock) and the application of the net proceeds from this offering, as if all such transactions had been completed as of January 1, 2012 with respect to the unaudited consolidated pro forma statement of operations data and as of March 31, 2013 with respect to the unaudited pro forma consolidated balance sheet data. These data are subject and give effect to the assumptions and adjustments described in the notes accompanying the unaudited pro forma financial information included elsewhere in this prospectus, including, without limitation, the sale of 7,750,000 shares of Class A common stock in this offering at the initial public offering price of $15.00 per share. The summary unaudited pro forma financial data are presented for informational purposes only and should not be considered indicative of actual results of operations that would have been achieved had the Reorganization Transactions and Offering Transactions been consummated on the dates indicated, and do not purport to be indicative of balance sheet data or results of operations as of any future date or for any future period.

 

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    UCP, Inc.
Pro Forma As Adjusted
    UCP, LLC  
    Three
Months
Ended
March 31,
    Year Ended
December 31,
    Three Months
Ended March 31,
    Year Ended
December 31,
 
    2013     2012     2013     2012     2012      2011  
    (in thousands)  
    (unaudited)               

Statements of Operations

            

Revenue:

            

Homebuilding

  $ 4,333      $ 14,060      $ 4,333      $ 1,533      $ 14,060       $ 8,285   

Land development

    7,470        44,066        7,470        2,002        44,066         15,893   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
    11,803        58,126        11,803        3,535        58,126         24,178   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Expenses:

            

Cost of sales—homebuilding

    3,460        9,832        3,460        1,062        9,832         5,621   

Cost of sales—land development

    4,580        32,876        4,580        1,349        32,876         17,280   

Sales and marketing

    1,132        2,875        1,132        221        2,875         1,414   

General and administrative

    4,499        16,423        3,480        2,208        10,103         6,464   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
    13,671        62,006        12,652        4,840        55,686         30,779   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income (loss) from operations

    (1,868     (3,880     (849     (1,305     2,440         (6,601

Other income

    39        578        39        208        578         34   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income (loss)

  $ (1,829   $ (3,302   $ (810   $ (1,097   $ 3,018       $ (6,567
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net loss attributable to noncontrolling interest

  $ (1,057   $ (1,907         
 

 

 

   

 

 

          

Net loss attributable to UCP, Inc.

  $ (772   $ (1,395         
 

 

 

   

 

 

          

 

     Three Months Ended
March 31,
    Year Ended December 31,  
      2013     2012     2012     2011  

Operating Data

        

Homebuilding

        
  

 

 

   

 

 

   

 

 

   

 

 

 

Net new home orders

     62        7        61        39   

New homes delivered

     12        6        41        33   

Average sale price of homes delivered

   $ 361,078      $ 255,455      $ 342,921      $ 251,058   

Cancellation rate

     11.4     0.0     12.9     13.3

Average selling communities during the period

     4        2        3        3   

Selling communities at end of period

     5        2        4        2   

Backlog(1) at end of period, number of homes

     76        7        26        6   

Backlog at end of period, aggregate sales value (in thousands)

   $ 26,705      $ 1,598      $ 9,182      $ 1,463   

Land development

        

Lots delivered

     54        26        560        118   

Average sale price of lots delivered

   $ 138,333      $ 77,000      $ 78,689      $ 134,686   

Backlog(1) at end of period, number of lots

     114        —          90        26   

Backlog at end of period, aggregate sales value (in thousands)

   $ 11,465      $ —        $ 6,750      $ 2,002   

 

(1)   

Backlog consists of homes or lots under sales contracts that have not yet closed, and there can be no assurance that closings of such contracts will occur.

 

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     Three Months
Ended March 31,
     Year Ended
December 31,
 
      2013      2012      2012      2011  

Gross Margin and Adjusted Gross Margin

           

Consolidated gross margin percentage

     31.9         31.8         26.5         5.3   

Consolidated adjusted gross margin percentage(1)

     32.5         35.0         29.0         30.2   

Homebuilding gross margin percentage

     20.1         30.7         30.1         32.2   

Homebuilding adjusted gross margin percentage(1)

     21.6         31.7         30.9         32.6   

Land development gross margin percentage

     38.7         32.6         25.4         (8.7

Land development adjusted gross margin percentage(1)

     38.8         37.6         28.4         29.0   

 

(1)   

Consolidated adjusted gross margin percentage, homebuilding adjusted gross margin percentage and land development adjusted gross margin percentage are non-U.S. GAAP financial measures. The most comparable U.S. GAAP financial measures are consolidated gross margin percentage, homebuilding gross margin percentage and land development gross margin percentage, respectively. The adjusted gross margin percentage measures are computed by excluding interest, impairment and abandonment charges in cost of sales from gross margin percentage. For a discussion of these measures and a reconciliation of these measures to the most comparable U.S. GAAP financial measure, see “Selected Consolidated Financial and Operating Data—Consolidated Gross Margin and Consolidated Adjusted Gross Margin and U.S. GAAP Reconciliation.”

 

     March 31, 2013
(unaudited)
 
     UCP, LLC
Actual
     UCP, Inc.
Pro Forma
As  Adjusted(1)
 
     (in thousands)  

Balance Sheet Data

     

Cash and cash equivalents(2)

   $ 8,884       $ 115,431   

Real estate inventories

   $ 143,799       $ 143,799   

Total assets(3)

   $ 156,512       $ 262,136   

Debt

   $ 37,958       $ 37,958   

Total liabilities

   $ 46,280       $ 46,490   

Member’s equity(4)

   $ 110,232       $ —     

Total equity attributable to UCP, Inc.(4)

   $ —         $ 90,990   

Noncontrolling interest(4)

   $ —         $ 124,656   

 

(1)   

Gives effect to (i) the transactions described in this prospectus under “Organizational Structure” and (ii) the sale of 7,750,000 shares of our Class A common stock in this offering by us, at the initial public offering price of $15.00 per share, after deducting the underwriting discount and estimated offering expenses payable by us. Assumes no exercise by the underwriters of their option to purchase 1,162,500 additional shares of our Class A common stock.

(2)   

As adjusted to reflect our receipt of $105.6 million of net proceeds from this offering, at the initial public offering price of $15.00 per share, after deducting the underwriting discount and estimated offering expenses payable by us. Assumes no exercise by the underwriters of their option to purchase 1,162,500 additional shares of our Class A common stock.

 

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(3)   

As adjusted to reflect our receipt of $105.6 million of net proceeds from this offering, at the initial public offering price of $15.00 per share, after deducting the underwriting discount and estimated offering expenses payable by us and the reclassification of previously capitalized offering costs to total equity attributable to UCP, Inc. and noncontrolling interest. Assumes no exercise by the underwriters of their option to purchase 1,162,500 additional shares of our Class A common stock.

(4)  

As adjusted to reflect (i) the reclassification of PICO’s membership interests in UCP, LLC into UCP, LLC Series A Units and establishment of UCP, LLC Series B Units to be issued to UCP, Inc. pursuant to the Second Amended and Restated Limited Liability Company Operating Agreement of UCP, LLC; (ii) the consolidation of UCP, LLC and its consolidated subsidiaries into UCP, Inc.’s financial statements pursuant to ASC 810 and the resulting increase of additional paid-in capital and an allocation of a portion of UCP, LLC’s equity to the noncontrolling interest; (iii) the conversion of UCP, Inc.’s outstanding common stock (all of which is held by PICO) into 100 shares of Class B common stock pursuant to UCP, Inc.’s amended and restated certificate of incorporation; (iv) the issuance by UCP, Inc. of 7,750,000 shares of Class A common stock in connection with this offering; and (v) UCP, Inc.’s purchase of a number of newly-issued UCP, LLC Series B Units from UCP, LLC equal to the number of shares of Class A common stock sold in this offering, at a purchase price per UCP, LLC Series B Unit equal to the initial public offering price per share of Class A common stock less the underwriting discount payable thereon. Assumes no exercise by the underwriters of their option to purchase 1,162,500 additional shares of our Class A common stock.

 

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RISK FACTORS

 

An investment in our Class A common stock involves a high degree of risk and should be considered highly speculative. Before making an investment decision, you should carefully consider the following risk factors, which we believe address the material risks concerning our business and an investment in our Class A common stock, together with the other information contained in this prospectus. If any of the risks discussed in this prospectus occur, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected, in which case the trading price of our Class A common stock could decline significantly and you could lose all or a part of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Cautionary Note Concerning Forward-Looking Statements.”

 

Risks Related to Our Business

 

The homebuilding and land development industry in the United States has recently undergone a significant downturn, and the likelihood of a continued recovery is uncertain in the current state of the economy.

 

The homebuilding and land development industry experienced substantial losses in connection with the recent downturn in the U.S. housing market and, in particular, in the Northern California housing market. Although the housing markets in the U.S. and Northern California markets have begun to recover, we cannot predict whether and to what extent this recovery will continue or its timing. While some of the many negative factors that contributed to the housing downturn may have moderated in 2012, several remain, and they could return and/or intensify to inhibit any future improvement in housing market conditions. These negative factors include but are not limited to (a) weak general economic and employment growth that, among other things, restrains consumer incomes, consumer confidence and demand for homes; (b) elevated levels of mortgage loan delinquencies, defaults and foreclosures that could add to a “shadow inventory” of lender-owned homes that may be sold in competition with new and other resale homes at low “distressed” prices or that generate short sales activity at such price levels; (c) a significant number of homeowners whose outstanding principal balance on their mortgage loan exceeds the market value of their home, which undermines their ability to purchase another home that they otherwise might desire and be able to afford; (d) volatility and uncertainty in domestic and international financial, credit and consumer lending markets amid slow growth or recessionary conditions in various regions around the world; and (e) tight lending standards and practices for mortgage loans that limit consumers’ ability to qualify for mortgage financing to purchase a home, including increased minimum credit score requirements, credit risk/mortgage loan insurance premiums and/or other fees and required down payment amounts, more conservative appraisals, higher loan-to-value ratios and extensive buyer income and asset documentation requirements. Additional headwinds may come from the efforts and proposals of lawmakers to reduce the debt of the federal government through tax increases and/or spending cuts, and financial markets’ and businesses’ reactions to those efforts and proposals, which could impair economic growth. Given these factors, there can be no guarantee that we will be successful in implementing our business plan or continue to operate profitably.

 

Our long-term growth depends, in part, upon our ability to successfully identify and acquire desirable land parcels for residential buildout, which may become limited due to a variety of factors.

 

Our future growth depends, in part, upon our ability to successfully identify and acquire attractive land parcels for development of single-family homes at reasonable prices, either by ourselves, through Benchmark Communities, or by our third-party homebuilder customers. Our ability to acquire land parcels for new single-family homes may be adversely affected by changes in the general availability of land parcels, the willingness of land sellers to sell land parcels at reasonable prices, competition for available land parcels, availability of financing to acquire land parcels, zoning and other market conditions. If the supply of land parcels appropriate for development of single-family homes is limited because of these factors, or for any other reason, our ability to grow could be significantly limited, and our revenue and gross margin could decline. To the extent that we are unable to purchase land parcels or enter into new contracts or options for the purchase of land parcels at reasonable prices, our revenue and results of operations could be negatively impacted.

 

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Our industry is cyclical and adverse changes in general and local economic conditions could reduce the demand for homes and, as a result, could have a material adverse effect on us.

 

The residential homebuilding industry is cyclical and is highly sensitive to changes in general economic conditions such as levels of employment, consumer confidence and income, availability and cost of financing for acquisitions, construction and mortgages, interest rate levels, inflation and demand for housing. The health of the residential homebuilding industry may also be significantly affected by “shadow inventory” levels during recessionary and recovery periods.

 

“Shadow inventory” refers to the number of homes with mortgages that are in some form of distress but that have not yet been listed for sale. Shadow inventory can occur when lenders put properties that have been foreclosed or forfeited to lenders on the market gradually, rather than all at once, or delay the foreclosure process. A significant shadow inventory in our markets could, were it to be released, adversely impact home and land prices and demand for our homes and land, which would have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations. In addition, an important segment of our end-purchaser and customer base consists of first-time and second-time “move-up” buyers, who often purchase homes subject to contingencies related to the sale of their existing homes. The difficulties facing these buyers in selling their homes during recessionary periods may adversely affect our sales. Moreover, during such periods, we may need to reduce our sales prices and offer greater incentives to buyers to compete for sales that may result in reduced margins.

 

Our long-term growth depends, in part, upon our ability to acquire undeveloped land suitable for residential homebuilding at reasonable prices.

 

The availability of partially finished developed lots and undeveloped land for purchase at reasonable prices depends on a number of factors outside our control, including land availability in general, competition with other homebuilders and land buyers, inflation in land prices, zoning, allowable housing density, the ability to obtain building permits and other regulatory requirements. Should suitable lots or land become less available, the number of homes we may be able to build and sell could be reduced, and the cost of land could be increased, perhaps substantially, which could adversely impact us. As competition for suitable land increases, the cost of acquiring partially finished developed lots and undeveloped lots and the cost of developing owned land could rise and the availability of suitable land at acceptable prices may decline, which could adversely impact us. The availability of suitable land assets could also affect the success of our land acquisition strategy, which may impact our ability to increase the number of actively selling communities, grow our revenue and margins, and achieve or maintain profitability. Additionally, developing undeveloped land is capital intensive and time consuming. It is possible that we may develop land based upon forecasts and assumptions that prove to be inaccurate, resulting in projects that are not economically viable.

 

Because of the seasonal nature of our business our quarterly operating results fluctuate.

 

As discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Seasonality,” we have experienced seasonal fluctuations in our quarterly operating results and capital requirements that can have a material impact on our results and our consolidated financial statements. We typically experience the highest new home order activity in spring and summer, although this activity is also highly dependent on the number of active selling communities, timing of new community openings and other market factors. Since it typically takes four to six months to construct a new home, we deliver more homes in the second half of the year as spring and summer home orders convert to home deliveries. Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest in the second and third quarters, and the majority of cash receipts from home deliveries occur during the second half of the year. We expect this seasonal pattern to continue over the long-term, although it may be affected by volatility in the homebuilding industry. We expect the traditional seasonality cycle and its impact on our results to become more prominent if and as the present housing recovery progresses and the homebuilding industry returns to a more normal operating environment, but we can make no assurances as to the degree to which our historical

 

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seasonal patterns will occur in 2013 and beyond, if at all. This seasonality requires us to finance our construction activities significantly in advance of the receipt of sales proceeds. Accordingly, there is a risk that we will invest significant amounts of capital in the acquisition and development of land and construction of homes that we do not sell at anticipated pricing levels or within anticipated time frames. If, due to market conditions, construction delays or other causes, we do not complete home sales at anticipated pricing levels or within anticipated time frames, our liquidity, financial condition and results of operations would be adversely affected.

 

If the market value of our land inventory decreases, our results of operations could be adversely affected by impairments and write-downs.

 

The market value of our land and housing inventories depends on market conditions. We acquire land for expansion into new markets and for replacement of land inventory and expansion within our current markets. There is an inherent risk that the value of the land owned by us may decline after purchase. The valuation of property is inherently subjective and based on the individual characteristics of each property. We may have acquired options on or bought and developed land at a cost we will not be able to recover fully or on which we cannot build and sell homes profitably. In addition, our deposits for lots controlled under purchase, option or similar contracts may be put at risk.

 

Factors such as changes in regulatory requirements and applicable laws (including in relation to building regulations, taxation and planning), political conditions, the condition of financial markets, both local and national economic conditions, the financial condition of customers, potentially adverse tax consequences, and interest and inflation rate fluctuations subject valuations to uncertainty. Moreover, our valuations are made on the basis of assumptions that may not prove to reflect economic or demographic reality.

 

If housing demand fails to meet our expectations when we acquired our inventory, our profitability may be adversely affected and we may not be able to recover our costs when we sell and build houses.

 

In 2011, housing market conditions adversely impacted the anticipated timing and amount of sales at certain of our projects. We revised our expectations for the cash flows from these projects and evaluated whether each project’s expected cash flows exceeded its carrying value. As of December 31, 2011, after examining market data relating to two of our projects located in outlying areas of Fresno, California, we concluded that our expected future cash flows from these projects (which can be very difficult to project, particularly estimated land development and off-site infrastructure costs in the absence of approved entitlements) would not exceed their carrying values. Accordingly, we measured the fair values of these projects using discounted cash flow models and recorded a non-cash impairment charge of $5.2 million in cost of sales-land development for the year ended December 31, 2011. We regularly review the value of our land holdings and continue to review our holdings on a periodic basis. Further material write-downs and impairments in the value of our inventory may be required, and we may in the future sell land or homes at a loss, which could adversely affect our results of operations and financial condition.

 

The estimates, forecasts and projections relating to our markets prepared by JBREC are based upon numerous assumptions and may not prove to be accurate.

 

This prospectus contains estimates, forecasts and projections relating to our markets that were prepared for us for use in connection with this offering by JBREC, an independent research provider and consulting firm focused on the housing industry. See “Market Opportunity.” The estimates, forecasts and projections relate to, among other things, employment, demographics, household income, home sales prices and affordability. No assurance can be given that these estimates are, or that the forecasts and projections will prove to be, accurate. These estimates, forecasts and projections are based on data (including third-party data), significant assumptions, proprietary methodologies and the experience and judgment of JBREC. No assurance can be given regarding the accuracy or appropriateness of the assumptions and judgments made, or the methodologies used, by JBREC. The application of alternative assumptions, judgments or methodologies could result in materially less favorable

 

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estimates, forecasts and projections than those contained in this prospectus. Other real estate experts have different views regarding these forecasts and projections that may be more positive or negative, including in terms of the timing, magnitude and direction of future changes.

 

The forecasts and projections are forward-looking statements and involve risks and uncertainties that may cause actual results to be materially different from the projections. JBREC has made these forecasts and projections based on studying the historical and current performance of the residential housing market and applying JBREC’s qualitative knowledge about the residential housing market. The future is difficult to predict, particularly given that the economy and housing markets can be cyclical, subject to changing consumer and market psychology, and governmental policies related to mortgage regulations and interest rates. There will usually be differences between projected and actual outcomes, because events and circumstances frequently do not occur as expected, and the differences may be material. Accordingly, the forecasts and projections included in this prospectus might not occur or might occur to a different extent or at a different time. For the foregoing reasons, neither we nor JBREC can provide any assurance that the estimates, forecasts and projections contained in this prospectus are accurate, actual outcomes may vary significantly from those contained or implied by the forecasts and projections, and you should not place undue reliance on these estimates, forecasts and projections. Except as required by law, we are not obligated to, and do not intend to, update the statements in this prospectus to conform to actual outcomes or changes in our or JBREC’s expectations.

 

The homebuilding industry is highly competitive and if our competitors are more successful or offer better value to our customers our business could decline.

 

We operate in a very competitive environment which is characterized by competition from a number of other homebuilders and land developers in each market in which we operate. Additionally, there are relatively low barriers to entry into our business. We compete with numerous large national and regional homebuilding companies and with smaller local homebuilders and land developers for, among other things, home buyers, desirable land parcels, financing, raw materials and skilled management and labor resources. Our competitors may independently develop land and construct housing units that are superior or substantially similar to our products.

 

Increased competition could hurt our business, as it could prevent us from acquiring attractive land parcels on which to build homes or make such acquisitions more expensive, hinder our market share expansion and cause us to increase our selling incentives and reduce our prices. An oversupply of homes available for sale or discounting of home prices could adversely affect pricing for homes in the markets in which we operate. Oversupply and price discounting have periodically adversely affected certain markets, and it is possible that our markets will be adversely affected by these factors in the future.

 

We also compete with the resale, or “previously owned,” home market which has increased significantly due to the large number of homes that have been foreclosed on or could be foreclosed on due to the recent economic downturn. If we are unable to compete effectively in our markets, our business could decline disproportionately to our competitors, and our results of operations and financial condition could be adversely affected.

 

We may be at a competitive disadvantage with regard to certain of our large national and regional homebuilding competitors whose operations are more geographically diversified than ours, as these competitors may be better able to withstand any future regional downturn in the housing market. We compete directly with a number of large national and regional homebuilders, many of which have longer operating histories and greater financial and operational resources than we do. Many of these competitors also have longstanding relationships with subcontractors and suppliers in the markets in which we operate. This may give our competitors an advantage in marketing their products, securing materials and labor at lower prices and allowing their homes to be delivered to customers more quickly and at more favorable prices. This competition could reduce our market share and limit our ability to expand our business as we have planned.

 

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If home buyers are not able to obtain suitable mortgage financing, due to more stringent lending standards, rising interest rates, changes in regulation, reduced investor demand for mortgage loans and mortgage backed securities, changes in the relationship between Fannie Mae and Freddie Mac and the federal government or other reasons, our results of operations may decline.

 

A substantial majority of home buyers finance their home purchases through lenders that provide mortgage financing. The availability of mortgage financing remains constrained, due in part to lower mortgage valuations on properties, various regulatory changes and lower risk appetite by lenders, with many lenders requiring increased levels of financial qualification, lending at lower multiples of income and requiring larger down payments. First-time home buyers are generally more affected by the availability of mortgage financing than other potential home buyers. These buyers are a key source of demand for new homes. A limited availability of home mortgage financing may adversely affect the volume of our home and land sales and the sales prices we achieve. Additionally, housing demand is adversely affected by reduced availability of mortgage financing and factors that increase the upfront or monthly cost of financing a home, such as increases in interest rates, insurance premiums or limitations on mortgage interest deductibility. The recent decrease in the willingness and ability of lenders to make home mortgage loans, the tightening of lending standards and the reduction in the types of financing products available, have made it more difficult for home buyers to obtain acceptable financing. Any substantial increase in mortgage interest rates or unavailability of mortgage financing may adversely affect the ability of prospective first-time and move-up home buyers to obtain financing for our homes, as well as adversely affect the ability of prospective move-up home buyers to sell their current homes. The housing industry is benefiting from the current low interest rate environment, which has allowed many home buyers to obtain mortgage financing with relatively low interest rates as compared to long-term historical averages. While the timing of any increase in interest rates is uncertain, it is widely expected that interest rates will increase, and any such increase will make mortgage financing more expensive and adversely affect the ability of home buyers to purchase our homes. The recent disruptions in the credit markets and the curtailed availability of mortgage financing has adversely affected, and is expected to continue to adversely affect, our business, prospects, liquidity, financial condition, results of operations and cash flows as compared to prior periods.

 

Beginning in 2008, the mortgage lending industry has experienced significant instability, beginning with increased defaults on sub-prime loans and other nonconforming loans and compounded by expectations of increasing interest payment requirements and further defaults. This in turn resulted in a decline in the market value of many mortgage loans and related securities. Lenders, regulators and others questioned the adequacy of lending standards and other credit requirements for several loan products and programs offered in recent years. Credit requirements have tightened, and investor demand for mortgage loans and mortgage-backed securities has declined. The deterioration in credit quality during the recent economic downturn caused almost all lenders to stop offering sub-prime mortgages and most other loan products that were not eligible for sale to Fannie Mae or Freddie Mac or loans that did not meet FHA and Veterans Administration requirements. Fewer loan products, tighter loan qualifications and a reduced willingness of lenders to make loans may continue to make it more difficult for certain buyers to finance the purchase of our homes.

 

These factors may reduce the pool of qualified home buyers and make it more difficult to sell to first-time and move-up buyers who have historically made up a substantial part of our homebuilding customers. Reductions in demand adversely affected our business and financial results during the downturn, and the duration and severity of some of their effects remain uncertain.

 

The liquidity provided by Fannie Mae and Freddie Mac to the mortgage industry has been very important to the housing market. These entities have required substantial injections of capital from the federal government and may require additional government support in the future. Several federal government officials have proposed changing the nature of the relationship between Fannie Mae and Freddie Mac and the federal government and even nationalizing or eliminating these entities entirely. If Fannie Mae and Freddie Mac were dissolved or if the federal government determined to stop providing liquidity support to the mortgage market, there would be a reduction in the availability of the financing provided by these institutions. Any such reduction would likely have an adverse effect on interest rates, mortgage availability and our sales of new homes.

 

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If home buyers are not able to obtain FHA financing due to further tightening of borrower eligibility and future restrictions imposed by lenders on FHA financing, our results of operations may decline.

 

The FHA insures mortgage loans that generally have lower down payment requirements and qualification standards compared to conventional guidelines, and as a result, continue to be a particularly important source for financing the sale of our homes. In recent years, lenders have taken a more conservative view of FHA guidelines causing significant tightening of borrower eligibility for approval. In the near future, further restrictions are expected on FHA-insured loans, including limitations on seller-paid closing costs and concessions. This or any other restriction may negatively affect the availability or affordability of FHA financing, which could adversely affect our ability to sell homes. In addition, changes in federal regulatory and fiscal policies aimed at aiding the home buying market (including a repeal of the home mortgage interest tax deduction) may also negatively affect potential home buyers’ ability to purchase homes.

 

If suitable mortgage financing is not available to home buyers generally, our home buyers may not be able to sell their existing homes in order to buy a new home from us, which would adversely affect our results of operations.

 

In each of our markets, decreases in the availability of credit and increases in the cost of credit adversely affect the ability of home buyers to obtain or service mortgage debt. Even if potential home buyers do not themselves need mortgage financing, where potential home buyers must sell their existing homes in order to buy a new home, increases in mortgage costs, lack of availability of mortgages and/or regulatory changes could prevent the buyers of potential home buyers’ existing homes from obtaining a mortgage, which would result in our potential customers’ inability to buy a new home from us. Similar risks apply to those buyers who are awaiting delivery of their homes and are currently in backlog. Our success depends, in part, on the ability of potential home buyers to obtain mortgages for the purchase of homes. If our customers (or potential buyers of our customers’ existing homes) cannot obtain suitable financing, our sales and results of operations could be adversely affected.

 

New lending requirements pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act could reduce the availability and increase the cost of mortgage financing, which could adversely affect out results of operations.

 

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. This legislation provides for a number of new requirements relating to residential mortgages and mortgage lending practices, many of which are to be developed further by implementing rules. These include, among others, minimum standards for mortgages and lender practices in making mortgages, limitations on certain fees and incentive arrangements, retention of credit risk and remedies for borrowers in foreclosure proceedings. The effect of such provisions on lending institutions will depend on the rules that are ultimately enacted. However, these requirements, as and when implemented, are expected to reduce the availability of loans to borrowers and/or increase the costs to borrowers to obtain such loans. Any such reduction could result in a decline of our home and land sales, which could materially and adversely affect us.

 

Our geographic concentration could materially and adversely affect us if the homebuilding industry in our current markets should experience a decline.

 

Our business strategy is focused on the acquisition of suitable land and the design, construction and sale of single-family homes in residential subdivisions, including planned communities, in Northern California and Washington State. In California, we principally operate in the Central Valley area, the Monterey Bay area and the South San Francisco Bay area; in Washington State, we operate in the Puget Sound area. Because our operations are concentrated in these areas, a prolonged economic downturn in one or more of these areas, particularly within California, could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations, and a disproportionately greater impact on us than other homebuilders with more diversified operations. From 2007 to 2009, land values, the demand for new homes and home prices declined

 

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substantially in California. In addition, the state of California has experienced severe budget shortfalls in recent years and has raised taxes and certain fees to offset the deficit.

 

If these conditions in California persist or worsen, it would have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations. If buyer demand for new homes in California or Washington State decreases, home prices could stagnate or decline, which would have a material adverse effect on us.

 

Any limitation on, or reduction or elimination of, tax benefits associated with owning a home would have an adverse effect upon the demand for land and homes for residential development, which could be material to our business.

 

Changes in federal income tax laws may affect demand for new homes and land suitable for residential development. Current tax laws generally permit significant expenses associated with owning a home, primarily mortgage interest expense and real estate taxes, to be deducted for the purpose of calculating an individual’s federal, and in many cases, state, taxable income. Various proposals have been publicly discussed to limit mortgage interest deductions and to limit the exclusion of gain from the sale of a principal residence. For instance, under the American Taxpayer Relief Act of 2012, which was signed into law in January 2013, the federal government enacted higher income tax rates and limits on the value of tax deductions for certain high-income individuals and households. If the federal government or a state government changes or further changes its income tax laws, as some lawmakers have proposed, by eliminating, limiting or substantially reducing these income tax benefits, without offsetting provisions, the after-tax cost of owning a new home would increase for many of our potential customers. Enactment of any such proposal may have an adverse effect on the homebuilding industry in general, as the loss or reduction of homeowner tax deductions could decrease the demand for new homes and land suitable for residential development.

 

Difficulty in obtaining sufficient capital could result in an inability to acquire land for our developments or increased costs and delays in the completion of development projects.

 

The homebuilding and land development industry is capital-intensive and requires significant up front expenditures to acquire land parcels and begin development. In addition, if housing markets are not favorable or permitting or development takes longer than anticipated, we may be required to hold our investments in land for extended periods of time. If internally generated funds are not sufficient, we may seek additional capital in the form of equity or debt financing from a variety of potential sources, including additional bank financings and/or securities offerings. The availability of borrowed funds, especially for land acquisition and construction financing, may be greatly reduced nationally, and the lending community may require increased amounts of equity to be invested in a project by borrowers in connection with both new loans and the extension of existing loans. The credit and capital markets have recently experienced significant volatility. If we are required to seek additional financing to fund our operations, continued volatility in these markets may restrict our flexibility to access such financing. If we are not successful in obtaining sufficient capital to fund our planned capital and other expenditures, we may be unable to acquire land for development or to develop housing.

 

Additionally, if we cannot obtain additional financing to fund the purchase of land under our purchase or option contracts, we may incur contractual penalties and fees. Any difficulty in obtaining sufficient capital for planned development expenditures could also cause project delays and any such delay could result in cost increases. Any one or more of the foregoing events could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

We face potentially substantial risk with respect to our land and lot inventory.

 

We intend to acquire land parcels for replacement and expansion of land inventory within our current and any new markets we choose to enter. The risks inherent in purchasing and developing land parcels increase as

 

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consumer demand for housing decreases. As a result, we may buy and develop land parcels on which homes cannot be profitably built and sold. The market value of land parcels, building lots and housing inventories can fluctuate significantly as a result of changing market conditions, and the measures we employ to manage inventory risk may not be adequate to insulate our operations from a severe drop in inventory values. When market conditions are such that land values are depreciating, previously entered into option agreements may become less desirable, at which time we may elect to forego deposits, option costs and pre-acquisition costs and terminate the agreements. Land parcels, building lots and housing inventories are illiquid assets and we may not be able to dispose of them efficiently or at all if we are in financial distress. In addition, inventory carrying costs can be significant and can result in losses in a poorly performing project or market. In the event of significant changes in economic or market conditions, we may have to sell homes at significantly lower margins or at a loss, if we are able to sell them at all.

 

Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties for reasonable prices in response to changing economic, financial and investment conditions may be limited and we may be forced to hold non-income producing properties for extended periods of time.

 

Real estate investments are relatively difficult to sell quickly. As a result, our ability to promptly sell one or more properties in response to changing economic, financial and investment conditions is limited and we may be forced to hold non-income producing assets for an extended period of time. We cannot predict whether we will be able to sell any property for the price or on the terms that we set or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.

 

Risks associated with our real estate inventories could adversely affect our business or financial results.

 

Risks inherent in controlling or purchasing, holding and developing land for new home construction are substantial. In certain circumstances, a grant of entitlements or development agreement with respect to a particular parcel of land may include restrictions on the transfer of such entitlements to a buyer of such land, which would negatively impact the price of such entitled land by restricting our ability to sell it for its full entitled value. In addition, inventory carrying costs can be significant and can result in reduced margins or losses in a poorly performing community or market. Developing land and constructing homes takes a significant amount of time and requires a substantial cash investment. We have substantial real estate inventories which regularly remain on our balance sheet for significant periods of time, during which time we are exposed to the risk of adverse market developments, prior to their sale. If conditions in our markets were to deteriorate, we may be required to sell homes and land for lower margins than we have in the past. Additionally, deteriorating market conditions could cause us to record significant inventory impairment charges. We recorded an impairment charge of $5.2 million for the year ended December 31, 2011 relating to two projects located in outlying areas of Fresno, California, and it is possible that we could record significant impairment charges in the future relating to our real estate inventories. The recording of a significant inventory impairment could negatively affect our reported earnings per share and negatively impact the market perception of our business.

 

Adverse weather and geological conditions may increase costs, cause project delays and reduce consumer demand for housing, all of which could materially and adversely affect us.

 

As a homebuilder and land developer, we are subject to the risks associated with numerous weather-related and geologic events, many of which are beyond our control. These weather-related and geologic events include but are not limited to droughts, floods, wildfires, landslides, soil subsidence and earthquakes. The occurrence of any of these events could damage our land parcels and projects, cause delays in completion of our projects, reduce consumer demand for housing, and cause shortages and price increases in labor or raw materials, any of which could affect our sales and profitability. Our California markets are in areas which have historically experienced significant earthquake activity and seasonal wildfires.

 

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In addition to directly damaging our land or projects, earthquakes, wildfires or other natural events could damage roads and highways providing access to those assets or affect the desirability of our land or projects, thereby adversely affecting our ability to market homes or sell land in those areas and possibly increasing the costs of homebuilding completion.

 

There are some risks of loss for which we may be unable to purchase insurance coverage. For example, losses associated with landslides, earthquakes and other geologic events may not be insurable and other losses, such as those arising from terrorism, may not be economically insurable. A sizeable uninsured loss could materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.

 

Acquisition activity could expose us to additional risks.

 

We may seek to acquire other homebuilders or land developers. We may be unable to achieve the anticipated benefits of any such acquisition, the anticipated benefits may take longer to realize than expected or we may incur greater costs than expected in attempting to achieve the anticipated benefits. We may not be successful in integrating any such acquisitions. For example, we may be required to integrate widely dispersed operations with different corporate cultures, operating margins, competitive environments, computer systems, compensation schemes, business plans and growth potential, which would likely require significant management time and attention. This could disrupt our ongoing operations and divert management resources that would otherwise focus on developing our existing business. Depending upon the circumstances of any particular acquisition, successful integration may depend, in large part, on retaining key personnel who have, for example, unique experience or business relationships. The loss of key personnel at any business we may acquire could result in a disruption of operations, a loss of information and business relationships, unanticipated recruitment and training costs, and otherwise diminish anticipated benefits of any such acquisitions. Acquisitions could also result in our assumption of unknown contingent liabilities, which could be material, expose us to the risk of impaired inventory and other assets relating to the acquisition, and the risks associated with entering markets in which we have limited or no direct experience. When financing any acquisitions, we may choose to issue additional shares of our Class A common stock, which would dilute the ownership interest of existing stockholders, or incur substantial additional indebtedness.

 

Accordingly, any acquisition activity could expose us to significant risks, beyond those associated with operating our existing business, and may adversely affect our business, financial position and results of operation.

 

Our business and results of operations are dependent on the availability and skill of subcontractors.

 

Substantially all of our construction work is done by third-party subcontractors with us acting as the general contractor. Accordingly, the timing and quality of our construction depend on the availability and skill of our subcontractors. We do not have long-term contractual commitments with any subcontractors, and there can be no assurance that skilled subcontractors will continue to be available at reasonable rates and in our markets. Certain of the subcontractors engaged by us are represented by labor unions or are subject to collective bargaining arrangements that require the payment of prevailing wages that are higher than normally expected on a residential construction site. A strike or other work stoppage involving any of our subcontractors could also make it difficult for us to retain subcontractors for our construction work. In addition, union activity or a scarcity of skilled labor supply could result in higher costs to retain our subcontractors. The inability to contract with skilled subcontractors at reasonable costs on a timely basis could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

In addition, despite our quality control efforts, we may discover that our subcontractors were engaging in improper construction practices or installing defective materials in our homes. When we discover these issues, we, generally through our subcontractors, repair the homes in accordance with our new home warranty and as required by law. We reserve a portion of the sales price of each home we sell to satisfy warranty and other legal

 

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obligations to our home buyers. We establish these reserves based on market practices, our historical experiences, and our judgment of the qualitative risks associated with the types of homes built. However, the cost of satisfying our warranty and other legal obligations in these instances may be significantly higher than our reserves, and we may be unable to recover the cost of repair from such subcontractors. Regardless of the steps we take, we can in some instances be subject to fines or other penalties, and our reputation may be adversely affected.

 

Labor and raw material shortages and price fluctuations could delay or increase the cost of home construction, which could materially and adversely affect us.

 

The residential construction industry experiences serious labor and raw material shortages from time to time, including shortages in qualified tradespeople, and supplies of insulation, drywall, cement, steel and lumber. These labor and raw material shortages can be more severe during periods of strong demand for housing or during periods following natural disasters that have a significant impact on existing residential and commercial structures. Certain of our markets have recently begun to exhibit a scarcity of skilled labor relative to increased homebuilding demand in these markets. The cost of labor and raw materials may also be adversely affected during periods of shortage or high inflation. During the recent economic downturn, a large number of qualified tradespeople went out of business or otherwise exited the market. A reduction in available tradespeople will likely exacerbate labor shortages if demand for new housing continues to increase. Shortages and price increases could cause delays in and increase our costs of home construction, which in turn could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

New and existing laws and regulations or other governmental actions may increase our expenses, limit the number of homes that we can build or delay completion of our projects.

 

We are subject to numerous local, state, federal and other statutes, ordinances, rules and regulations concerning zoning, development, building design, construction and similar matters which impose restrictive zoning and density requirements, the result of which is to limit the number of homes that can be built within the boundaries of a particular area. Projects that are not entitled may be subjected to periodic delays, changes in use, less intensive development or elimination of development in certain specific areas due to government regulations. We may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or “slow-growth” or “no-growth” initiatives that could be implemented in the future. Local governments also have broad discretion regarding the imposition of development fees and exactions for projects in their jurisdiction. Projects for which we have received land use and development entitlements or approvals may still require a variety of other governmental approvals and permits during the development process and can also be impacted adversely by unforeseen health, safety and welfare issues, which can further delay these projects or prevent their development. As a result, home sales could decline and costs increase, which could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

We may be unable to obtain suitable bonding for the development of our housing projects.

 

We are often required to provide bonds to governmental authorities and others to ensure the completion of our projects. As a result of market conditions, surety providers have been reluctant to issue new bonds and some providers are requesting credit enhancements (such as guarantees, cash deposits or letters of credit) in order to maintain existing bonds or to issue new bonds. As of March 31, 2013, PICO had guaranteed our obligations under performance bonds with an aggregate amount of $8.9 million. We do not expect that PICO will guarantee any additional performance bonds we may be required to obtain after completion of this offering, and it is possible that without PICO’s credit support it will be more difficult for us to obtain performance bonding. If we are unable to obtain required bonds in the future for our projects, or if we are required to provide credit enhancements with respect to our current or future bonds, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected.

 

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We are subject to environmental laws and regulations, which may increase our costs, result in liabilities, limit the areas in which we can build homes and delay completion of our projects.

 

We are subject to a variety of local, state, federal and other laws, statutes, ordinances, rules and regulations concerning the environment, hazardous materials, the discharge of pollutants and human health and safety. The particular environmental requirements which apply to any given site vary according to multiple factors, including the site’s location, its environmental conditions, the current and former uses of the site, the presence or absence of endangered plants or animals or sensitive habitats, and conditions at nearby properties. We may not identify all of these concerns during any pre-acquisition or pre-development review of project sites. Environmental requirements and conditions may result in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict development and homebuilding activity in environmentally sensitive regions or in areas contaminated by others before we commence development. We are also subject to third-party challenges, such as by environmental groups or neighborhood associations, under environmental laws and regulations to the permits and other approvals for our projects and operations. Sometimes regulators from different governmental agencies do not concur on development, remedial standards or property use restrictions for a project, and the resulting delays or additional costs can be material for a given project.

 

In addition, in those cases where an endangered or threatened species is involved and related agency rule-making and litigation are ongoing, the outcome of such rule-making and litigation can be unpredictable and can result in unplanned or unforeseeable restrictions on, or the prohibition of, development and building activity in identified environmentally sensitive areas. For example, California listed the California Tiger Salamander, which may be present at our East Garrison property, as a state endangered species in 2010, and we are currently implementing ongoing management measures for the California Tiger Salamander pursuant to agreements with the U.S. Fish & Wildlife Service. Subsequent to the listing, our East Garrison project filed a permit application with the California Department of Fish & Game with respect to management of the California Tiger Salamander. There can be no assurance as to whether or when the California Department of Fish & Game will issue the permit, or whether any permit terms will be unexpectedly restrictive or costly, conflict with any existing agreement with the U.S. Fish & Wildlife Service, result in project delays or require changes to existing development or building plans.

 

We may be required to pay fines or penalties relating to non-compliance with applicable environmental laws, or such laws may increase our costs.

 

From time to time, the United States Environmental Protection Agency (the “EPA”) and similar federal, state or local agencies review land developers’ and homebuilders’ compliance with environmental laws and may levy fines and penalties for failure to strictly comply with applicable environmental laws, including those applicable to control of storm water discharges during construction, or impose additional requirements for future compliance as a result of past failures. Any such actions taken with respect to us may increase our costs and result in project delays. We expect that increasingly stringent requirements will be imposed on land developers and homebuilders in the future. We cannot assure you that environmental, health and safety laws will not change or become more stringent in the future in a manner that could have a material adverse effect on our business. Environmental regulations can also have an adverse impact on the availability and price of certain raw materials such as lumber, and on other building materials, such as paint. California is especially susceptible to restrictive government regulations and environmental laws, although increasingly Washington State also imposes unique state obligations under environmental laws. For example, California has enacted climate change legislation which could result in additional costs to achieve energy use or energy efficiency mandates, alter community layouts, meet “green building” standards, impose carbon or other greenhouse gas reductions or offset obligations, and which could result in other costs or obligations. California in particular also has adopted stringent and sometimes unique mandates or restrictions on products used in homebuilding, or the materials used in such products, or on equipment we might use, or on the fuels used in such equipment, and such California mandates or restrictions often increase costs, result in delays or render certain products or equipment unavailable when needed, or available only at higher costs than originally anticipated.

 

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We may incur costs associated with the clean up of hazardous or toxic substances or petroleum product releases and we may be liable for related damages.

 

Under various environmental laws, current or former owners and operators of real estate, as well as persons that have arranged for the disposal or treatment of hazardous substances at a site regardless of whether such person owned or operated such site, may be required to investigate and clean up hazardous or toxic substances or petroleum product releases, and may be held liable to a governmental entity or to third parties for related damages, including for personal injury or property damage and for investigation and clean up costs incurred by such parties in connection with the contamination. Environmental impacts from historical activities have been identified at or under some of the projects we have developed in the past and additional projects are located on land that was or may have been contaminated by previous use. Our costs of any required removal, investigation or remediation of such substances or our costs of defending against environmental claims may be substantial, and liability can be retroactive, strict, joint and several and can be imposed regardless of fault. The presence of such substances, or the failure to remediate such substances properly, may also adversely affect our ability to sell the land or to borrow using the land as security. For example, a mitigation system may be installed during the construction of a home if a cleanup does not or cannot remove all contaminants of concern, or to address a naturally occurring condition such as radon or methane. Some buyers may not want to purchase a home with a mitigation system. In addition, environmental laws, particularly in California, impose notification obligations with respect to environmental conditions, which may cause some persons, or their financing sources, to view subject parcels as less valuable or impaired. At our East Garrison project, disclosures in the deed and otherwise to home buyers will be extensive and impose property use restrictions due to prior operations at part of Fort Ord, a military base and a site listed on the National Priorities List. Extensive remedial and decommissioning actions have been undertaken to convert portions of Fort Ord to civilian use. In addition to such prior remedial work by others, we will be required to conduct future remediation of asbestos, lead-based paints and certain wastes. Remediation of hazardous substances or unsafe conditions which had not previously been identified or fully abated, could be required in the future within our East Garrison project, or within other portions of Fort Ord, including the ground water thereunder. It is possible that any remediation at our East Garrison project undertaken by us or another party, such as the federal government, could adversely affect the value of this project.

 

Ownership, leasing or occupation of land and the use of hazardous materials carries potential environmental risks and liabilities.

 

We are subject to a variety of local, state and federal statutes, rules and regulations concerning land use and the protection of health and the environment, including those governing discharge of pollutants to soil, water and air, including asbestos, the handling of hazardous materials and the cleanup of contaminated sites. We may be liable for the costs of removal, investigation or remediation of man-made or natural hazardous or toxic substances located on, under or in a property currently or formerly owned, leased or occupied by us, whether or not we caused or knew of the pollution.

 

The particular impact and requirements of environmental laws that apply to any given community vary greatly according to the community site, the site’s environmental conditions and the present and former uses of the site. We expect that increasingly stringent requirements may be imposed on land developers and homebuilders in the future. Environmental laws may result in delays, cause us to implement time consuming and expensive compliance programs and prohibit or severely restrict development in certain environmentally sensitive regions or areas, such as wetlands. Concerns could arise due to post-acquisition changes in laws or agency policies, or the interpretation thereof.

 

Furthermore, we could incur substantial costs, including cleanup costs, fines, penalties and other sanctions and damages from third-party claims for property damage or personal injury, as a result of our failure to comply with, or liabilities under, applicable environmental laws and regulations. In addition, we are subject to third-party challenges, such as by environmental groups or neighborhood associations, under environmental laws and regulations to the permits and other approvals required for our projects and operations. These matters could adversely affect our business, prospects, liquidity, financial condition and results of operations.

 

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We may be liable for claims for damages as a result of use of hazardous materials.

 

As a homebuilding and land development business with a wide variety of historic ownership, development, homebuilding and construction activities, we could be liable for future claims for damages as a result of the past or present use of hazardous materials, including building materials or fixtures known or suspected to be hazardous or to contain hazardous materials or due to use of building materials or fixtures which are associated with elevated mold. Any such claims may adversely affect our business, prospects, financial condition and results of operations. Insurance coverage for such claims may be limited or non-existent.

 

We may suffer uninsured losses or suffer material losses in excess of insurance limits.

 

We could suffer physical damage to property and liabilities resulting in losses that may not be fully recoverable by insurance. In addition, certain types of risks, such as personal injury claims, may be, or may become in the future, either uninsurable or not economically insurable, or may not be currently or in the future covered by our insurance policies or otherwise be subject to significant deductibles or limits. Should an uninsured loss or a loss in excess of insured limits occur or be subject to deductibles, we could sustain financial loss or lose capital invested in the affected property as well as anticipated future income from that property. In addition, we could be liable to repair damage or meet liabilities caused by risks that are uninsured or subject to deductibles. We may be liable for any debt or other financial obligations related to affected property. Material losses or liabilities in excess of insurance proceeds may occur in the future.

 

Increases in our cancellation rate could have a negative impact on our home sales revenue and homebuilding margins.

 

Home order cancellations can result from a number of factors, including declines or slow appreciation in the market value of homes, increases in the supply of homes available to be purchased, increased competition, higher mortgage interest rates, home buyers’ inability to sell their existing homes, home buyers’ inability to obtain suitable financing, including providing sufficient down payments, and adverse changes in economic conditions. Upon a home order cancellation, the escrow deposit is returned to the prospective purchaser (other than with respect to certain design-related deposits, which we retain). For the year ended December 31, 2012, our cancellation rate was 12.9%, as compared to 13.3% for the year ended December 31, 2011, and for the three months ended March 31, 2013, our cancellation rate was 11.4%, as compared to 0.0% for the three months ended March 31, 2012. The increase in our cancellation rate was primarily due to a larger proportion of the parties with whom we entered into sales contracts being unable to obtain mortgage financing to consummate the sale during such periods as compared to the prior periods. An increase in the level of our home order cancellations, due to stringent lending standards or otherwise, could have a negative impact on our business, prospects, liquidity, financial condition and results of operations.

 

We are subject to product liability and warranty claims arising in the ordinary course of business.

 

As a homebuilder, we are subject to construction defect, product liability and home warranty claims, including moisture intrusion and related claims, arising in the ordinary course of business. While we maintain general liability insurance and generally seek to require our subcontractors and design professionals to indemnify us for some portion of the liabilities arising from their work, there can be no assurance that these insurance rights and indemnities will be collectable or adequate to cover any or all construction defect and warranty claims for which we may be liable. For example, contractual indemnities can be difficult to enforce, we are often responsible for applicable self-insured retentions (particularly in markets where we include our subcontractors on our general liability insurance and our ability to seek indemnity for insured claims is significantly limited), certain claims may not be covered by insurance or may exceed applicable coverage limits, and one or more of our insurance carriers could become insolvent. Further, in the United States, and California in particular, the coverage offered and the availability of general liability insurance for construction defects is currently limited and is costly. As a result, an increasing number of our subcontractors may be unable to obtain insurance,

 

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particularly in California where we have instituted an “owner controlled insurance program,” under which subcontractors are effectively insured by us.

 

If we cannot effectively recover construction defect liabilities and costs of defense from our subcontractors or their insurers, or if we have self-insured, we may suffer losses. Coverage may be further restricted and become even more costly. Such circumstances could adversely affect our business, prospects, liquidity, financial condition and results of operations. Further, any product liability or warranty claims made against us, whether or not they are viable, may lead to negative publicity, which could impact our reputation and our home sales.

 

In addition, we conduct the substantial portion of our business in California, one of the most highly regulated and litigious jurisdictions in the United States, which imposes a ten year, strict liability tail on many construction liability claims. As a result, our potential losses and expenses due to litigation, new laws and regulations may be greater than those of our competitors who have more limited California operations.

 

Our operating performance is subject to risks associated with the real estate industry.

 

Real estate investments are subject to various risks and fluctuations and cycles in value and demand, many of which are beyond our control. These events include, but are not limited to:

 

   

adverse changes in international, national or local economic and demographic conditions;

 

   

adverse changes in financial conditions of buyers and sellers of properties, particularly residential homes and land suitable for development of residential homes;

 

   

competition from other real estate investors with significant capital, including other real estate operating companies and developers and institutional investment funds;

 

   

reductions in the level of demand for and increases in the supply of land suitable for development;

 

   

fluctuations in interest rates, which could adversely affect our ability, or the ability of home buyers, to obtain financing on favorable terms or at all;

 

   

unanticipated increases in expenses, including, without limitation, insurance costs, development costs, real estate assessments and other taxes and costs of compliance with laws, regulations and governmental policies; and

 

   

changes in enforcement of laws, regulations and governmental policies, including, without limitation, health, safety, environmental, zoning and tax laws, governmental fiscal policies and the Americans with Disabilities Act of 1990.

 

In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in the purchase of homes or an increased incidence of home order cancellations. If we cannot successfully implement our business strategy, our business, prospects, liquidity, financial condition and results of operations will be adversely affected.

 

Poor relations with the residents of our communities could negatively impact sales, which could cause our revenue or results of operations to decline.

 

Residents of communities we develop rely on us to resolve issues or disputes that may arise in connection with the operation or development of their communities. Efforts made by us to resolve these issues or disputes could be deemed unsatisfactory by the affected residents and subsequent actions by these residents could adversely affect sales or our reputation. In addition, we could be required to make material expenditures related to the settlement of such issues or disputes or to modify our community development plans, which could adversely affect our results of operations.

 

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If we are unable to develop our communities successfully or within expected timeframes, our results of operations could be adversely affected.

 

Before a community generates any revenue, time and material expenditures are required to acquire land, obtain development approvals and construct significant portions of project infrastructure, amenities, model homes and sales facilities. It can take several years from the time we acquire control of a property to the time we make our first home sale on the site. Delays in the development of communities expose us to the risk of changes in market conditions for homes. A decline in our ability to develop and market our communities successfully and to generate positive cash flow from these operations in a timely manner could have a material adverse effect on our business and results of operations and on our ability to service our debt and to meet our working capital requirements.

 

We depend on key senior management personnel and other experienced employees.

 

Our success depends to a significant degree upon the contributions of certain key senior management personnel including, but not limited to, Dustin L. Bogue, our President and Chief Executive Officer, William J. La Herran, our Chief Financial Officer, and James W. Fletcher, our Chief Operating Officer, each of whom would be difficult to replace. Although we will enter into employment agreements with Messrs. Bogue, La Herran and Fletcher upon the completion of this offering, there is no guarantee that these executives will remain employed by us. If any of our key senior management personnel were to cease employment with us, our operating results could suffer. Our ability to retain our key senior management personnel or to attract suitable replacements should any members of our management team leave is dependent on the competitive nature of the employment market. The loss of services from key senior management personnel or a limitation in their availability could materially and adversely impact our business, prospects, liquidity, financial condition and results of operations. Further, such a loss could be negatively perceived in the capital markets. We have not obtained key man life insurance that would provide us with proceeds in the event of death or disability of any of our key senior management personnel.

 

Experienced employees in the homebuilding, land acquisition and construction industries are fundamental to our ability to generate, obtain and manage opportunities. In particular, local knowledge and relationships are critical to our ability to source attractive land acquisition opportunities. Experienced employees working in the homebuilding and construction industries are highly sought after. Failure to attract and retain such personnel or to ensure that their experience and knowledge is not lost when they leave the business through retirement, redundancy or otherwise may adversely affect the standards of our service and may have an adverse impact on our business, prospects, liquidity, financial condition and results of operations. The loss of any of our key personnel could adversely impact our business, prospects, financial condition and results of operations.

 

Fluctuations in real estate values may require us to write-down the book value of our real estate assets.

 

The homebuilding and land development industries are subject to significant variability and fluctuations in real estate values. As a result, we may be required to write-down the book value of our real estate assets in accordance with U.S. GAAP, and some of those write-downs could be material. Any material write-downs of assets could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

Inflation could adversely affect our business and financial results.

 

Inflation could adversely affect us by increasing the costs of land, raw materials and labor needed to operate our business. If our markets have an oversupply of homes relative to demand, we may be unable to offset any such increases in costs with corresponding higher sales prices for our homes. Inflation may also accompany higher interests rates, which could adversely impact potential customers’ ability to obtain financing on favorable terms, thereby further decreasing demand. If we are unable to raise the prices of our homes to offset the increasing costs of our operations, our margins could decrease. Furthermore, if we need to lower the price of our homes to meet demand, the value of our land inventory may decrease. Inflation may also raise our costs of capital and decrease our purchasing power, making it more difficult to maintain sufficient funds to operate our business.

 

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We may become subject to litigation, which could materially and adversely affect us.

 

In the future we may become subject to litigation, including claims relating to our operations, security offerings and otherwise in the ordinary course of business. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. We cannot be certain of the ultimate outcomes of any claims that may arise in the future.

 

Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby materially and adversely affecting us. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could materially and adversely impact us, expose us to increased risks that would be uninsured, and materially and adversely impact our ability to attract directors and officers.

 

A major health and safety incident relating to our business could be costly in terms of potential liabilities and reputational damage.

 

Building sites are inherently dangerous, and operating in the homebuilding and land development industry poses certain inherent health and safety risks. Due to health and safety regulatory requirements and the number of projects we work on, health and safety performance is critical to the success of all areas of our business.

 

Any failure in health and safety performance may result in penalties for non-compliance with relevant regulatory requirements or litigation, and a failure that results in a major or significant health and safety incident is likely to be costly in terms of potential liabilities incurred as a result. Such a failure could generate significant negative publicity and have a corresponding impact on our reputation, our relationships with relevant regulatory agencies, governmental authorities and local communities, and our ability to win new business, which in turn could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

Acts of war or terrorism may seriously harm our business.

 

Acts of war, any outbreak or escalation of hostilities between the United States and any foreign power or acts of terrorism may cause disruption to the U.S. economy, or the local economies of the markets in which we operate, cause shortages of building materials, increase costs associated with obtaining building materials, result in building code changes that could increase costs of construction, affect job growth and consumer confidence, or cause economic changes that we cannot anticipate, all of which could reduce demand for our homes and adversely impact our business, prospects, liquidity, financial condition and results of operations.

 

We have broad discretion to use the offering proceeds and our investment of those proceeds may not yield a favorable return.

 

Our management has broad discretion to spend the proceeds from this offering in ways with which you may not agree. The failure of our management to apply these funds effectively could result in unfavorable returns. This could harm our business and could cause the price of our Class A common stock to decline.

 

Risks Related to our Controlling Stockholder

 

PICO holds a majority equity interest in our company and its interests may not be aligned with yours.

 

Upon the completion of this offering, PICO will hold 57.7% of the voting power of UCP, Inc. (or 51.4% if the underwriters exercise their option to purchase additional shares of our Class A common stock in full and the net proceeds therefrom are used to repurchase a portion of PICO’s UCP, LLC Series A Units). See “Principal Stockholders.” For so long as PICO continues to beneficially own a controlling stake in us, PICO will have the

 

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power to elect and remove all of our directors and to approve any action requiring the majority approval of our stockholders. PICO will also have the power to agree to transfer its controlling stake in our company. In addition, pursuant to an Investor Rights Agreement that we will enter into with PICO immediately prior to the completion of this offering, PICO will have the right to nominate two individuals for election to our board of directors for as long as PICO owns 25% or more of the combined voting power of our outstanding Class A and Class B common stock and one individual for as long as it owns at least 10% of the combined voting power of our outstanding Class A and Class B common stock (in each case, excluding any shares of our common stock that are subject to issuance upon the exercise or exchange of rights of conversion or any options, warrants or other rights to acquire shares); and Messrs. Bogue, La Herran and Fletcher will agree to vote all shares of our Class A common stock that they own in favor of such PICO nominees in any election of directors for as long as PICO owns at least 10% of the combined voting power of our outstanding Class A and Class B common stock. In the event that any board member nominated by PICO shall for any reason cease to serve as a member of our board of directors during his or her term of office, the resulting vacancy on the board will be filled by an individual selected by PICO.

 

PICO’s interests may not be fully aligned with yours and this could lead to actions that are not in your best interest. PICO holds all of the outstanding UCP, LLC Series A Units. Because PICO holds its economic interest in our business through UCP, LLC, rather than through the public company, it may have conflicting interests with holders of shares of our Class A common stock. For example, PICO may have different tax positions from us which could influence its decisions regarding whether and when we should dispose of assets or incur new or refinance existing indebtedness, especially in light of the existence of the Tax Receivable Agreement that we will enter into in connection with this offering, and whether and when we should undergo certain changes of control within the meaning of the Tax Receivable Agreement or terminate the Tax Receivable Agreement, which would accelerate our obligations thereunder. In addition, the structuring of future transactions may take into consideration these tax or other considerations even where no similar benefit would accrue to us. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” In addition, PICO’s significant ownership in us and resulting ability to effectively control us may discourage someone from making a significant equity investment in us, or could discourage transactions involving a change in control, including transactions in which you as a holder of shares of our Class A common stock might otherwise receive a premium for your shares over the then-current market price.

 

Moreover, for as long as PICO’s beneficial ownership of the combined voting power of our outstanding Class A and Class B common stock continues to exceed 50%, we may elect to be treated as a “controlled company” for purposes of the NYSE, which would allow us to opt out of certain corporate governance requirements, including requirements that a majority of the board of directors consist of independent directors and that the compensation committee and nominating and corporate governance committee be composed entirely of independent directors. We intend to elect to be treated as a “controlled company” and, to the extent we continue to qualify, we may choose to continue to take advantage of these exemptions in the future.

 

As a result of PICO’s relationship with our company, conflicts of interest may arise with respect to any transactions involving or with PICO or its affiliates.

 

John R. Hart, a member of our board of directors, is the President and Chief Executive Officer of PICO and Maxim C. W. Webb, also a member of our board of directors, is the Chief Financial Officer of PICO. As a result of our relationship with PICO, there may be transactions between us and PICO that could present an actual or perceived conflict of interest.

 

These conflicts of interest may lead Messrs. Hart and Webb to recuse themselves from actions of our board of directors with respect to any transactions involving or with PICO or its affiliates. In addition, Mr. Hart and Mr. Webb will devote only a portion of their business time to their duties with our board of directors, and they will devote the majority of their time to their duties with PICO and other commitments. PICO or its affiliates may also pursue transactions in competition with us.

 

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Upon completion of this offering, we will enter into a Transition Services Agreement with PICO pursuant to which PICO will provide us with accounting, human resources and information technology functions. Upon its expiration, PICO may be unwilling to renew the agreement or only willing to renew the agreement on less favorable terms, particularly if PICO ceases to hold a material investment in our company.

 

Upon completion of this offering, the Transition Services Agreement with PICO will provide us with access to accounting, human resources and information technology functions. Upon expiration of this agreement, even if we seek to continue to receive these services from PICO, PICO may be unwilling to renew the agreement or only willing to renew the agreement on less favorable terms. Were this to happen, it is likely that we would incur increased costs to internalize or subcontract the functions that were previously provided to us by PICO through the Transition Services Agreement.

 

As a “controlled company” within the meaning of the corporate governance rules of the NYSE, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. As a result, holders of our Class A common stock may not have the same degree of protection as that afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

 

We will be a “controlled company” within the meaning of the corporate governance rules of the NYSE as a result of the ownership position and voting rights of PICO upon completion of this offering. A “controlled company” is a company of which more than 50% of the voting power is held by an individual, group or another company. More than 50% of the combined voting power of our outstanding Class A and Class B common stock will be held by PICO after completion of this offering. As a controlled company, we are entitled to not comply with certain corporate governance rules of the NYSE that would otherwise require our board of directors to have a majority of independent directors and our compensation committee and our nominating and corporate governance committee to be comprised entirely of independent directors, have written charters addressing such committee’s purpose and responsibilities and perform an annual evaluation of such committee. Accordingly, holders of our Class A common stock will not have the same protection afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE and the ability of our independent directors to influence our business policies and affairs may be reduced.

 

Risks Related to Our Indebtedness

 

We expect to use leverage in executing our business strategy, which may adversely affect the return on our assets.

 

We expect to use debt to finance a portion of the cost of constructing our homes and acquiring and developing our lots. As of March 31, 2013, the aggregate commitments of our construction loans and our acquisition and development loans were $48.5 million, of which $38 million was outstanding. Our indebtedness is primarily comprised of project-level secured acquisition, development and constructions loans, with recourse limited to the securing collateral. However, as of March 31, 2013, loans with aggregate commitments of $17.1 million and an outstanding balance of $10.6 million were guaranteed by us and PICO. We do not expect PICO to guarantee any additional debt we may incur after completion of this offering. In the future we may incur additional recourse indebtedness in addition to debt secured by limited collateral. Our board of directors will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of additional indebtedness, including the purchase price of assets to be acquired with debt financing, the estimated market value of our assets and the ability of particular assets, and our company as a whole, to generate cash flow to cover the expected debt service. Our charter does not contain a limitation on the amount of debt we may incur and our executive management and board of directors may change our target debt levels at any time without the approval of our stockholders.

 

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Incurring substantial debt could subject us to many risks that, if realized, would adversely affect us, including the risk that:

 

   

our cash flow from operations may be insufficient to make required payments of principal of and interest on the debt which is likely to result in acceleration of the maturity of such debt;

 

   

our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that investment yields will increase with higher financing cost;

 

   

we may be required to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations and capital expenditures, future investment opportunities or other purposes; and

 

   

the terms of any refinancing may not be as favorable as the terms of the debt being refinanced.

 

If we do not have sufficient funds to repay our debt at maturity, it may be necessary to refinance the debt through additional debt or additional equity financings. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancings, increases in interest expense could adversely affect our cash flows and results of operations. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of our assets on disadvantageous terms, potentially resulting in losses. To the extent we cannot meet any future debt service obligations, we will risk losing some or all of our assets that may be pledged to secure our obligations to foreclosure. Unsecured debt agreements may contain specific cross-default provisions with respect to specified other indebtedness, giving the unsecured lenders the right to declare a default if we are in default under other loans in some circumstances. Defaults under our debt agreements could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

Access to financing sources may not be available on favorable terms, or at all, especially in light of current market conditions, which could adversely affect our ability to maximize our returns.

 

Our access to additional third-party sources of financing will depend, in part, on:

 

   

general market conditions;

 

   

the market’s perception of our growth potential;

 

   

with respect to acquisition and/or development financing, the market’s perception of the value of the land parcels to be acquired and/or developed;

 

   

our debt levels;

 

   

our expected results of operations;

 

   

our cash flow; and

 

   

the market price of our Class A common stock.

 

Recently, domestic financial markets have experienced unusual volatility, uncertainty and a tightening of liquidity in both the debt and equity capital markets. Credit spreads for major sources of capital widened significantly during the U.S. credit crisis as investors demanded a higher risk premium. Given the current volatility and weakness in the capital and credit markets, potential lenders may be unwilling or unable to provide us with financing that is attractive to us or may charge us prohibitively high fees in order to obtain financing. Consequently, there is greater uncertainty regarding our ability to access the credit market in order to attract financing on reasonable terms. Investment returns on our assets and our ability to make acquisitions could be adversely affected by our inability to secure additional financing on reasonable terms, if at all.

 

Depending on market conditions at the relevant time, we may have to rely more heavily on additional equity financings or on less efficient forms of debt financing that require a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future business opportunities and other purposes. We may not have access to such equity or debt capital on favorable terms at the desired times, or at all.

 

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Our current financing arrangements contain, and our future financing arrangements likely will contain, restrictive provisions.

 

Our current financing arrangements contain, and the financing arrangements we enter into in the future likely will contain, provisions that limit our ability to do certain things. In particular, certain of our construction and development loan agreements include provisions requiring minimum loan-to-value ratios. If the fair value of the collateral securing the loan is below the specified minimum, we may be required to make principal payments in order to maintain the required loan-to-value ratios. If we fail to meet or satisfy any of these provisions, we would be in default under these agreements, which could result in a cross-default under other debt agreements, and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral and enforce their respective interests against existing collateral. A default also could limit significantly our financing alternatives, which could cause us to curtail our investment activities and/or dispose of assets when we otherwise would not choose to do so. In addition, future indebtedness may contain financial covenants limiting our ability to, for example, incur additional debt, make certain investments, reduce liquidity below certain levels and make distributions to our stockholders, and otherwise affect our operating policies. If we default on one or more of our debt agreements, it could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

Secured indebtedness exposes us to the possibility of foreclosure on our ownership interests in our land parcels.

 

Incurring mortgage and other secured indebtedness increases our risk of loss of our ownership interests in our land parcels or other assets because defaults thereunder, and the inability to refinance such indebtedness, may result in foreclosure action initiated by lenders. To the extent we default on this debt, our lenders could foreclose on the property securing the loan. As of March 31, 2013, we had incurred mortgage indebtedness of $38 million. This debt is secured by project-level real estate (i.e., real estate held in a special purpose entity formed to hold the real estate interests for a particular project).

 

Interest expense on debt we incur may limit our cash available to fund our growth strategies.

 

As of March 31, 2013, we had approximately $48.5 million of aggregate loan commitments, of which $38 million was outstanding. As part of our financing strategy, we may incur a significant amount of additional debt. A portion of our debt has, and any additional debt we subsequently incur may have, a floating rate of interest. Higher interest rates could increase debt service requirements on our current floating rate debt and on any floating rate debt we subsequently incur, and could reduce funds available for operations, future business opportunities or other purposes. If we need to repay existing debt during periods of rising interest rates or at a time when our creditworthiness has deteriorated, we could be required to refinance our then-existing debt on unfavorable terms or liquidate one or more of our assets to repay such debt at times which may not permit realization of the maximum return on such assets and could result in a loss, either of which could materially and adversely affect our business, prospects, liquidity, financial condition and results of operations. Additionally, as of March 31, 2013, loans with an aggregate commitment of $17.1 million and an outstanding balance of $10.6 million were guaranteed by PICO. We do not expect that PICO will guarantee any additional debt we may incur after completion of this offering, and it is possible that without PICO’s credit support our cost of borrowing could increase.

 

Failure to hedge effectively against interest rate changes may adversely affect us.

 

We currently do not hedge against interest rate fluctuations. We may obtain in the future one or more forms of interest rate protection in the form of swap agreements, interest rate cap contracts or similar agreements to hedge against the possible negative effects of interest rate fluctuations. However, we cannot assure you that any hedging will adequately relieve the adverse effects of interest rate increases or that counterparties under these agreements will honor their obligations thereunder. In addition, we may be subject to risks of default by hedging

 

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counterparties. Adverse economic conditions could also cause the terms on which we borrow to be unfavorable. We could be required to liquidate one or more of our assets at times which may not permit us to receive an attractive return on our assets in order to meet our debt service obligations.

 

Risks Related to Our Organization and Structure

 

Our only material asset after completion of this offering will be our interest in UCP, LLC, and we are accordingly dependent upon distributions from UCP, LLC to pay dividends, if any, taxes and other expenses.

 

UCP, Inc. will be a holding company and will have no material assets other than its ownership of membership interests in UCP, LLC. UCP, Inc. has no independent means of generating revenue. We intend to cause UCP, LLC to make distributions to its members in an amount sufficient to cover all applicable taxes payable and dividends, if any, declared by us, as well as any payments due under the Tax Receivable Agreement, as described below. Future financing arrangements may contain negative covenants, limiting the ability of our operating subsidiaries to declare or pay dividends or make distributions. To the extent that UCP, Inc. needs funds, and UCP, LLC and/or its subsidiaries are restricted from making such distributions under applicable law or regulations, or otherwise unable to provide such funds, for example, due to restrictions in future financing arrangements that limit the ability of our operating subsidiaries to distribute funds, our liquidity and financial condition could be materially harmed.

 

We will be required to pay PICO for a portion of the benefits relating to any additional tax depreciation or amortization deductions we may claim as a result of tax basis step-ups we receive in connection with future exchanges by PICO of its UCP, LLC Series A Units for shares of our Class A common stock or from any purchase by us of a portion of PICO’s UCP, LLC Series A Units in connection with any exercise of the underwriters’ option to purchase additional shares of our Class A common stock.

 

The UCP, LLC Series A Units held by PICO upon consummation of the transactions described in “Organizational Structure” may in the future be exchanged for shares of our Class A common stock. The exchanges or any purchases by us of a portion of PICO’s UCP, LLC Series A Units in connection with any exercise of the underwriters’ option to purchase additional shares of our Class A common stock may result in increases in the tax basis of the assets of UCP, LLC that otherwise would not have been available. These increases in tax basis may reduce the amount of tax that we would otherwise be required to pay in the future, although the IRS may challenge all or part of the tax basis increases, and a court could sustain such a challenge.

 

We intend to enter into a Tax Receivable Agreement with PICO that will provide for the payment by us to PICO of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of any such increases in tax basis (or are deemed to realize in the case of certain events, as discussed below). Any actual increases in tax basis, as well as the amount and timing of any payments under the Tax Receivable Agreement, cannot be predicted reliably at this time.

 

The increase in tax basis, as well as the amount and timing of any payments under this agreement, will vary depending upon a number of factors, including the timing of exchanges, the price of shares of our Class A common stock at the time of the exchange, the extent to which such exchanges are taxable, and the amount and timing of our income. As a result of the size of the increases in the tax basis of the tangible and intangible assets of UCP, LLC attributable to our interest in UCP, LLC, during the expected term of the Tax Receivable Agreement, we expect that the payments that we may make to PICO could be substantial. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

 

We are not aware of any issue that would cause the IRS to challenge a tax basis increase; however, if the IRS were successful in making such a challenge, PICO would not reimburse us for any payments that may previously have been made under the Tax Receivable Agreement if it is later determined that we did not receive

 

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the anticipated corresponding tax benefit. As a result, in certain circumstances we could make payments to PICO under the Tax Receivable Agreement in excess of our cash tax savings. In addition, our ability to achieve benefits from any tax basis increase, and the payments to be made under the Tax Receivable Agreement, will depend upon a number of factors, as discussed above, including the timing and amount of our future income.

 

In certain cases, payments by us under the tax receivable agreement may be accelerated and/or significantly exceed the benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.

 

The Tax Receivable Agreement will provide that upon certain changes of control, or if, at any time, we either materially breach our obligations under the Tax Receivable Agreement or elect an early termination of the Tax Receivable Agreement, our (or our successor’s) obligations with respect to UCP, LLC Series A Units would be based on certain assumptions, including that (a) all the UCP, LLC Series A Units are deemed exchanged for their fair value, (b) we would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the Tax Receivable Agreement and (c) the subsidiaries of UCP, LLC will sell certain nonamortizable assets (and realize certain related tax benefits) no later than a specified date. In each of these instances (based on the foregoing assumptions), we would be required to make an immediate payment to the holders of such UCP, LLC Series A Units equal to the present value of the anticipated future tax benefits (discounted over the applicable amortization and depreciation periods for the assets the tax bases of which are stepped up (which could be as long as fifteen years in respect of intangibles and goodwill) at a uniform discount rate equal to LIBOR plus 100 basis points). The benefits would be payable even though, in certain circumstances, no UCP, LLC Series A Units are actually exchanged at the time of the accelerated payment under the Tax Receivable Agreement, thereby resulting in no corresponding tax basis step up at the time of such accelerated payment under the Tax Receivable Agreement. Accordingly, payments under the Tax Receivable Agreement may be made years in advance of the actual realization, if any, of the anticipated future tax benefits and may be significantly greater than the benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement. In these situations, our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity. We may not be able to finance our obligations under the Tax Receivable Agreement and our existing indebtedness may limit our subsidiaries’ ability to make distributions to us to pay these obligations. Assuming no material changes in the relevant tax law and based on our current operating plan and other assumptions, including our estimate of the tax basis of our assets as of March 31, 2013, if PICO were assumed to exchange all of its UCP, LLC Series A Units for shares of our Class A common stock in taxable transactions at the time of the closing of this offering for a price of $15.00 per share (the initial public offering price of our Class A common stock), we estimate that the maximum amount that we would be required to pay under the Tax Receivable Agreement could be approximately $11 million.

 

In addition, our obligations under the Tax Receivable Agreement could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control that could be in the best interests of our public stockholders.

 

We may not be able to realize all or a portion of the tax benefits that are expected to result from exchanges of UCP, LLC Series A Units for shares of our Class A common stock or from any purchase by us of a portion of PICO’s UCP, LLC Series A Units in connection with any exercise of the underwriters’ option to purchase additional shares of our Class A common stock, and payments made under the Tax Receivable Agreement itself.

 

Our ability to benefit from any depreciation or amortization deductions or to realize other tax benefits that we currently expect to be available as a result of the increases in tax basis created by exchanges of UCP, LLC Series A Units for shares of our Class A common stock or from any purchases by us of a portion of PICO’s UCP, LLC Series A Units in connection with any exercise of the underwriters’ option to purchase additional shares of our Class A common stock, and our ability to realize certain other tax benefits attributable to payments under the Tax Receivable Agreement itself, depend on a number of assumptions, including that we earn sufficient taxable

 

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income each year during the period over which such deductions are available and that there are no adverse changes in applicable law or regulations. If our actual taxable income were insufficient and/or there were adverse changes in applicable law or regulations, we may be unable to realize all or a portion of these expected benefits and our cash flows and stockholders’ equity could be negatively affected. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

 

In the event we acquire more than 50% of all outstanding units of UCP, LLC at any time after the completion of this offering we may become subject to additional state and local real estate taxes due to a reassessment of the value of our land holdings for California real estate tax purposes. We may also become subject to California and Washington state and local real estate transfer taxes.

 

We are subject to state and local real estate taxes in California on an annual basis which are assessed on the basis of the value of our land holdings in the relevant counties. Under Article XIIIA of the California Constitution (known as Proposition 13), California real estate taxes are generally based upon a property’s historic cost (subject to an inflationary increase in value not to exceed 2% per year) until the property undergoes a change in ownership or the entity owning the property undergoes a change in control.

 

Because we have acquired our lots over time, the values currently used for assessing these real estate taxes (generally, the price we paid for the lots subject to the allowable inflationary increase in value described in the preceding sentence) may not fully reflect current market values.

 

If we acquire more than 50% of all outstanding units of UCP, LLC (which might occur, for instance, upon an exchange of UCP, LLC Series A Units by PICO pursuant to the Exchange Agreement) it may be treated as triggering a “change in ownership” for such real estate tax purposes, which, in turn, will result in a reassessment of the values of our lots in California for purposes of our annual real estate tax payments. In such case, the values of our California lots would be reassessed at, and our California real estate taxes would be based on, the then current market value of such lots, which may significantly exceed the price we paid for such lots plus any previously allowed inflationary increase in value. If such reassessment results in an upward adjustment of the values of our California lots, our annual California real estate tax payments will increase. In addition, if we acquire more than 50% of the units in UCP, LLC, we may also become subject to one-time California and Washington state and local real estate transfer taxes in respect of our lots in such state. Such additional tax payments would have a negative impact on our earnings, cash flows and liquidity.

 

We have a limited operating history and we may not be able to successfully operate our business.

 

We began operations in 2004 and expanded our operations significantly after we were acquired by PICO in 2008. Given our limited operating history, you have limited historical information upon which to evaluate our prospects, including our continued ability to acquire desirable land parcels, develop such land and market our homes.

 

In addition, we cannot assure you that our past experience will be sufficient to enable us to operate our business successfully or implement our operating policies and business strategies as described in this prospectus. Furthermore, we may not be able to generate sufficient operating cash flows to pay our operating expenses or service our existing or future indebtedness. You should not rely upon our past performance, as past performance may not be indicative of our future results.

 

Termination of the employment agreements with the members of our management team could be costly and prevent a change in control of our company.

 

The employment agreements we will enter into with Dustin L. Bogue, our President and Chief Executive Officer, William J. La Herran, our Chief Financial Officer, and James W. Fletcher, our Chief Operating Officer, upon the completion of this offering each provide that if their employment with us terminates under certain

 

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circumstances, we may be required to pay them significant amounts of severance compensation, thereby making it costly to terminate their employment. Furthermore, these provisions could delay or prevent a transaction or a change in control of our company that might involve a premium paid for shares of our Class A common stock or otherwise be in the best interests of our stockholders, which could adversely affect the market price of our Class A common stock.

 

Certain anti-takeover defenses, applicable law, and provisions of our Registration Rights Agreement, Tax Receivable Agreement and Investor Rights Agreement may limit the ability of a third party to acquire control of us.

 

Our charter and bylaws and Delaware law contain provisions that may delay or prevent a transaction or a change in control of our company that might involve a premium paid for shares of our Class A common stock or otherwise be in the best interests of our stockholders, which could adversely affect the market price of our Class A common stock. Certain of these provisions are described below.

 

Selected Provisions of Our Charter and Bylaws.     Our charter and/or bylaws contain anti-takeover provisions that:

 

   

divide our directors into three classes, with the term of one class expiring each year, which could delay a change in our control;

 

   

authorize our board of directors, without further action by the stockholders, to issue up to 50,000,000 shares of preferred stock in one or more series, and with respect to each series, to fix the number of shares constituting that series and establish the rights and other terms of that series;

 

   

require that actions to be taken by our stockholders may be taken only at an annual or special meeting of our stockholders and not by written consent;

 

   

specify that special meetings of our stockholders can be called only by our board of directors, the chairman of our board of directors or our chief executive officer;

 

   

establish advance notice procedures for stockholders to submit nominations of candidates for election to our board of directors and other proposals to be brought before a stockholders meeting;

 

   

provide that our bylaws may be amended by our board of directors without stockholder approval;

 

   

allow our directors to establish the size of our board of directors by action of our board of directors, subject to a minimum of three members;

 

   

provide that vacancies on our board of directors or newly created directorships resulting from an increase in the number of our directors may be filled only by a majority of directors then in office, even though less than a quorum;

 

   

do not give the holders of our common stock cumulative voting rights with respect to the election of directors; and

 

   

prohibit us from engaging in certain business combinations with any “interested stockholder” unless specified conditions are satisfied.

 

Selected Provisions of Delaware Law.     We have opted out of Section 203 of the Delaware General Corporation Law (the “DGCL”), which regulates corporate takeovers. However, our charter contains provisions that are similar to Section 203 of the DGCL. Specifically, our charter provides that we may not engage in certain “business combinations” with any “interested stockholder” for a three-year period following the time that the person became an interested stockholder, unless:

 

   

prior to the time that person became an interested stockholder, our board of directors approved either the business combination or the transaction which resulted in the person becoming an interested stockholder;

 

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upon consummation of the transaction which resulted in the person becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding certain shares; or

 

   

at or subsequent to the time the person became an interested stockholder, the business combination is approved by our board of directors and by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder.

 

Generally, a business combination includes a merger, consolidation, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an interested stockholder is a person who, together with that person’s affiliates and associates, owns, or within the previous three years owned, 15% or more of our voting stock. However, in the case of our company, PICO and any of its affiliates and subsidiaries and any of their permitted transferees receiving 15% or more of our voting stock will not be deemed to be interested stockholders regardless of the percentage of our voting stock owned by them. This provision could prohibit or delay mergers or other takeover or change in control attempts with respect to us and, accordingly, may discourage attempts to acquire us.

 

Registration Rights Agreement, Investor Rights Agreement and Tax Receivable Agreement. Prior to the completion of this offering, we will enter into a Registration Rights Agreement, an Investor Rights Agreement and a Tax Receivable Agreement with PICO. Pursuant to the Registration Rights Agreement and Investor Rights Agreement, PICO may require us to file a registration statement with the Securities and Exchange Commission relating to the offer and sale of any Class A common stock PICO may receive pursuant to the Exchange Agreement, and PICO will have the right to nominate two individuals for election to our board of directors for as long as PICO owns 25% or more of the combined voting power of our outstanding Class A and Class B common stock and one individual for as long as it owns at least 10%. In the event that any board member nominated by PICO shall for any reason cease to serve as a member of our board of directors during his or her term of office, the resulting vacancy on the board will be filled by an individual selected by PICO. The Tax Receivable Agreement will provide that upon certain changes of control, PICO may be entitled to a significant early termination payment. For a description of these agreements see “Certain Relationships and Related Party Transactions—Registration Rights Agreement,” “—Investor Rights Agreement” and “—Tax Receivable Agreement.” These agreements could discourage someone from making a significant investment in us or discourage transactions involving a change in control.

 

We may change our operational policies, investment guidelines and our business and growth strategies without stockholder consent, which may subject us to different and more significant risks in the future.

 

Our board of directors will determine our operational policies, investment guidelines and our business and growth strategies. Our board of directors may make changes to, or approve transactions that deviate from, those policies, guidelines and strategies without a vote of, or notice to, our stockholders. This could result in us conducting operational matters, making investments or pursuing different business or growth strategies than those contemplated in this prospectus. Under any of these circumstances, we may expose ourselves to different and more significant risks in the future, which could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

The obligations associated with being a public company will require significant resources and management attention.

 

As a public company with listed equity securities, we will need to comply with new laws, regulations and requirements, including the requirements of the Securities Exchange Act of 1934, as amended, or the “Exchange Act,” certain corporate governance provisions of the Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act”, related regulations of the Securities and Exchange Commission, or the “SEC,” and requirements of the NYSE, with which we were not required to comply as a private company. The Exchange Act requires that we file annual,

 

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quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting.

 

Section 404 of the Sarbanes-Oxley Act requires our management and independent auditors to report annually on the effectiveness of our internal control over financial reporting. However, we are an “emerging growth company,” as defined in the JOBS Act, and, so for as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404.

 

Once we are no longer an emerging growth company or, if prior to such date, we opt to no longer take advantage of the applicable exemption, we will be required to include an opinion from our independent auditors on the effectiveness of our internal control over financial reporting.

 

These reporting and other obligations will place significant demands on our management, administrative, operational and accounting resources and will cause us to incur significant expenses. We may need to upgrade our systems or create new systems, implement additional financial and management controls, reporting systems and procedures, create or outsource an internal audit function, and hire additional accounting and finance staff. Pursuant to a Transition Services Agreement, PICO will, among other things, provide us with various accounting services. As a public company, PICO has significant experience with the accounting requirements applicable to public companies. Upon the expiration of this agreement, we will either need to renew it, internalize the accounting functions provided by PICO or contract with a third party for such services. This could result in increased cost, and no assurance can be given that we will be able to replicate the services provided to us by PICO. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to maintain effective internal control over financial reporting could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

If we fail to implement and maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, our stockholders could lose confidence in our financial results, which could materially and adversely affect us.

 

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. We cannot be certain that we will be successful in implementing or maintaining adequate internal control over our financial reporting and financial processes. Furthermore, as we grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. Additionally, the existence of any material weakness or significant deficiency would require management to devote significant time and incur significant expense to remediate any such material weakness or significant deficiency and management may not be able to remediate any such material weakness or significant deficiency in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause stockholders to lose confidence in our reported financial information, all of which could materially and adversely affect us.

 

We are an “emerging growth company,” and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our Class A common stock may be less attractive to investors.

 

We are an “emerging growth company,” as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to

 

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emerging growth companies, including, but not limited to, a requirement to present only two years of audited financial statements, an exemption from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act, reduced disclosure about executive compensation arrangements pursuant to the rules applicable to smaller reporting companies and no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements. We have elected to adopt these reduced disclosure requirements.

 

We could be an emerging growth company until the last day of the fiscal year following the fifth anniversary of the completion of this offering, although a variety of circumstances could cause us to lose that status earlier. We cannot predict if investors will find our Class A common stock less attractive as a result of our taking advantage of these exemptions. If some investors find our Class A common stock less attractive as a result of our choices, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.

 

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the “Securities Act,” for complying with new or revised financial accounting standards. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have determined to opt out of such extended transition period and, as a result, we will comply with new or revised financial accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised financial accounting standards is irrevocable.

 

Changes in accounting rules, assumptions and/or judgments could materially and adversely affect us.

 

Accounting rules and interpretations for certain aspects of our operations are highly complex and involve significant assumptions and judgment. These complexities could lead to a delay in the preparation and dissemination of our financial statements. Furthermore, changes in accounting rules and interpretations or in our accounting assumptions and/or judgments, such as asset impairments, could significantly impact our financial statements. In some cases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements. Any of these circumstances could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

Any joint venture investments that we make could be adversely affected by our lack of sole decision making authority, our reliance on co-venturers’ financial condition and disputes between us and our co-venturers.

 

We may co-invest in the future with third parties through partnerships, joint ventures or other entities, acquiring noncontrolling interests in or sharing responsibility for managing the affairs of a land acquisition and/or a development. In this event, we would not be in a position to exercise sole decision-making authority regarding the acquisition and/or development, and our investment may be illiquid due to our lack of control. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present were a third-party not involved, including the possibility that partners or co-venturers might become bankrupt, fail to fund their share of required capital contributions, make poor business decisions or block or delay necessary decisions. Partners or co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. In addition, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers.

 

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An information systems interruption or breach in security could adversely affect us.

 

Pursuant to a Transition Services Agreement we will enter into upon completion of this offering, we will rely on PICO for accounting, human resources and information technology services. PICO will assist us in administering an integrated accounting, financial and operational management information system to conduct our operations. Any disruption in these systems could adversely affect our ability to conduct our business. Furthermore, any security breach of information systems or data could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, which could harm our business.

 

Risks Related to this Offering and Ownership of Our Class A Common Stock

 

There is currently no public market for shares of our Class A common stock, a trading market for our Class A common stock may never develop following this offering and our Class A common stock price may be volatile and could decline substantially following this offering.

 

Prior to this offering there has been no market for shares of our Class A common stock. Although our Class A common stock has been approved for listing on the NYSE, an active trading market for the shares of our Class A common stock may never develop or if one develops, it may not be sustained following this offering. Accordingly, no assurance can be given as to the following:

 

   

the likelihood that an active trading market for shares of our Class A common stock will develop or be sustained;

 

   

the liquidity of any such market;

 

   

the ability of our stockholders to sell their shares of Class A common stock; or

 

   

the price that our stockholders may obtain for their Class A common stock.

 

If an active market does not develop or is not maintained, the market price of our Class A common stock may decline and you may not be able to sell your shares. Even if an active trading market develops for our Class A common stock subsequent to this offering, the market price of our Class A common stock may be highly volatile and subject to wide fluctuations. Our financial performance, government regulatory action, tax laws, interest rates and market conditions in general could have a significant impact on the future market price of our Class A common stock.

 

Some of the factors that could negatively affect or result in fluctuations in the market price of our Class A common stock include:

 

   

actual or anticipated variations in our quarterly operating results;

 

   

changes in market valuations of similar companies;

 

   

changes in interest rates, mortgage regulations or land and home prices in the areas in which we operate;

 

   

adverse market reaction to the level of our indebtedness;

 

   

additions or departures of key personnel;

 

   

actions by stockholders, including PICO;

 

   

speculation in the press or investment community;

 

   

general market, economic and political conditions, including an economic slowdown or dislocation in the global credit markets, and conditions in California and Washington State in particular;

 

   

our operating performance and the performance of other similar companies;

 

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changes in accounting principles; and

 

   

passage of legislation or other regulatory developments that adversely affect us or the homebuilding and land development industry.

 

The offering price per share of our Class A common stock offered by this prospectus may not accurately reflect the value of your investment.

 

Prior to this offering there has been no market for our Class A common stock. The offering price per share of our Class A common stock offered by this prospectus was negotiated among us and the representatives of the underwriters. Among the factors considered in determining the offering price were our results of operations, our current financial condition, our future prospects, our markets, the economic conditions in and future prospects for the industry in which we compete, our management, and currently prevailing general conditions in the equity securities markets, including current market valuations of publicly traded companies considered comparable to our company. The offering price may not accurately reflect the value of our Class A common stock and may not be realized upon any subsequent disposition of the shares.

 

If you purchase Class A common stock in this offering, you will experience immediate dilution.

 

The offering price of our Class A common stock is higher than the net tangible book value per share of our Class A common stock outstanding upon the completion of this offering. Accordingly, if you purchase Class A common stock in this offering, you will experience immediate dilution of approximately $3.23 in the net tangible book value per share of our Class A common stock.

 

This means that investors that purchase shares of our Class A common stock in this offering will pay a price per share that exceeds the per share net tangible book value of our assets.

 

We do not intend to pay dividends on our Class A common stock for the foreseeable future.

 

We currently intend to retain our future earnings, if any, to finance the development and expansion of our business and, therefore, do not intend to pay cash dividends on our Class A common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any financing instruments and such other factors as our board of directors deems relevant. Accordingly, you may need to sell your shares of our Class A common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them.

 

UCP, LLC expects to make pro rata tax distributions to PICO and UCP, Inc. in a sufficient amount to allow PICO and UCP, Inc. to pay taxes on their allocable share of the taxable income of UCP, LLC. As a result of the potential differences in the amount of net taxable income allocable to UCP, Inc. and to PICO, it is expected that UCP, Inc. will receive distributions significantly in excess of UCP, Inc.’s tax liabilities and obligations to make payments under the Tax Receivable Agreement. To the extent, as currently expected, UCP, Inc. does not distribute such cash balances as dividends on its Class A common stock and instead, for example, holds such cash balances or lends them to UCP, LLC, PICO would benefit from any value attributable to such accumulated cash balances as a result of its ownership of Class A common stock following an exchange of its UCP, LLC Series A Units (including any exchange upon an acquisition of UCP, Inc.). In addition, if there is insufficient cash to make pro rata tax distributions to PICO and UCP, Inc. in an amount that would allow PICO and UCP, Inc. to pay taxes on their allocable share of the taxable income of UCP, LLC, tax distributions will be calculated and made in proportion to the unpaid tax liabilities of PICO and UCP, Inc. (with respect to their allocable shares of UCP, LLC’s taxable income). As a result of certain taxable “built-in gains” in the assets of UCP, LLC that must, by statute, be allocated solely to PICO, it is expected in that case that PICO would receive a larger proportional distribution than UCP, Inc. would and that, in some cases (for instance if all of UCP, LLC’s taxable income is allocable to PICO), UCP, Inc.

 

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could receive no tax distributions. In any case in which UCP, Inc. received a smaller proportional distribution than PICO, UCP, LLC would have an obligation to make future distributions to UCP, Inc. to eliminate the difference as soon as funds become available and UCP, LLC would be required to pay interest to UCP, Inc. at a prevailing market rate on such difference. See discussion below under “Certain Relationships and Related Party Transactions—UCP, LLC Limited Liability Company Operating Agreement.”

 

Future sales of our Class A common stock or other securities convertible into our Class A common stock could cause the market value of our Class A common stock to decline and could result in dilution of your shares.

 

Our board of directors is authorized, without your approval, to cause us to issue additional shares of our Class A common stock or to raise capital through the issuance of preferred stock (including equity or debt securities convertible into Class A common stock), options, warrants and other rights, on terms and for consideration as our board of directors in its sole discretion may determine. Sales of substantial amounts of our Class A common stock could cause the market price of our Class A common stock to decrease significantly. We cannot predict the effect, if any, of future sales of our Class A common stock, or the availability of our Class A common stock for future sales, on the value of our common stock. Sales of substantial amounts of our common stock by PICO or another large stockholder or otherwise, or the perception that such sales could occur, may also adversely affect the market price of our Class A common stock.

 

We are offering 7,750,000 shares of our Class A common stock as described in this prospectus (excluding the underwriters’ option to purchase up to 1,162,500 additional shares). Upon the completion of this offering, the members of our management team and other officers and employees will be granted an aggregate of 422,333 shares of Class A restricted stock units pursuant to our 2013 Long-Term Incentive Plan and our director nominees will be granted an aggregate of 8,000 Class A restricted stock units upon the completion of this offering pursuant to our 2013 Long-Term Incentive Plan. Further, upon the completion of this offering, PICO will beneficially own UCP, LLC Series A Units representing 57.7% of the economic interests of UCP, LLC, or 51.4% if the underwriters exercise their option to purchase additional shares of our Class A common stock in full and the net proceeds therefrom are used to repurchase a portion of PICO’s UCP, LLC Series A Units. If necessary, we will reduce the portion of the net proceeds received from any exercise of the underwriters’ option that we use to purchase a portion of PICO’s UCP, LLC Series A Units so that, after giving effect to such purchase, we will remain a “controlled company” within the meaning of the corporate governance standards of the NYSE. Under the Exchange Agreement with PICO, PICO has the right to cause UCP, Inc. to exchange PICO’s UCP, LLC Series A Units for shares of our Class A common stock on a one-for-one basis, subject to equitable adjustments for stock splits, stock dividends and reclassifications. See “Principal Stockholders.”

 

In connection with this offering, we, our officers and directors and PICO have agreed that, and purchasers of our shares through the directed share program will agree that, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of Citigroup Global Markets Inc., dispose of or hedge any shares or any securities convertible into or exchangeable for our Class A common stock, subject to certain exceptions. Citigroup Global Markets Inc. in its sole discretion may release any of the securities subject to these lock-up agreements at any time, which, in the case of officers and directors, shall be with notice. If the restrictions under the lock-up agreements are waived, shares of our Class A common stock may become available for resale into the market, subject to applicable law, which could reduce the market price for our Class A common stock.

 

We will enter into a Registration Rights Agreement with PICO with respect to the shares of our Class A common stock that may be received by PICO pursuant to the Exchange Agreement. We refer to these shares

 

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collectively as the “registrable shares.” Pursuant to the Registration Rights Agreement, we will grant PICO and its direct and indirect transferees registration rights requiring us to file a registration statement and to maintain the effectiveness of such registration statement so as to allow sales thereunder from time to time, demand registration rights to have the registrable shares registered for resale, and, in certain circumstances, the right to “piggy-back” the registrable shares in registration statements we might file in connection with any future public offering.

 

In connection with this offering, we intend to file a registration statement on Form S-8 to register the total number of shares of our Class A common stock that may be issued under our 2013 Long-Term Incentive Plan, including the Class A restricted stock units to be granted to the members of our management team, other officers and employees and our director nominees upon the completion of this offering pursuant to our 2013 Long-Term Incentive Plan.

 

Future offerings of debt securities, which would rank senior to our Class A common stock upon our bankruptcy or liquidation, and future offerings of equity securities that may be senior to our Class A common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our Class A common stock.

 

In the future, we may attempt to increase our capital resources by making offerings of debt securities or additional offerings of equity securities. Upon bankruptcy or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our Class A common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our Class A common stock, or both. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments or both that could limit our ability to make a dividend distribution to the holders of our Class A common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control. As a result, we cannot predict or estimate the amount, timing or nature of our future offerings, and purchasers of our Class A common stock in this offering bear the risk of our future offerings reducing the market price of our Class A common stock and diluting their ownership interest in our company.

 

Non-U.S. holders may be subject to United States federal income tax on gain realized on the sale or disposition of shares of our Class A common stock.

 

Because of our anticipated holdings in United States real property interests following the completion of the transactions described in this prospectus under “Organizational Structure,” we believe we will be and will remain a “United States real property holding corporation” for United States federal income tax purposes. As a result, a non-U.S. holder (as defined in “Material Federal Income Tax Considerations”) generally will be subject to United States federal income tax on any gain realized on a sale or disposition of shares of our Class A common stock unless our Class A common stock is regularly traded on an established securities market (such as the NYSE) and such non-U.S. holder did not actually or constructively hold more than 5% of our Class A common stock at any time during the shorter of (a) the five-year period preceding the date of the sale or disposition and (b) the non-U.S. holder’s holding period in such stock. In addition, if our Class A common stock is not regularly traded on an established securities market, a purchaser of the stock generally will be required to withhold and remit to the IRS 10% of the purchase price. A non-U.S. holder also will be required to file a United States federal income tax return for any taxable year in which it realizes a gain from the disposition of our Class A common stock that is subject to United States federal income tax. We anticipate that our Class A common stock will be regularly traded on an established securities market following this offering. However, no assurance can be given in this regard and no assurance can be given that our Class A common stock will remain regularly traded in the future. Non-U.S. holders should consult their tax advisors concerning the consequences of disposing of shares of our Class A common stock.

 

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CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

Various statements contained in this prospectus, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. These forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future production, revenue, income and capital spending. Our forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “intend,” “anticipate,” “potential,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes. The forward-looking statements in this prospectus speak only as of the date of this prospectus, and we disclaim any obligation to update these statements unless required by law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. The following factors, among others, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements:

 

   

economic changes either nationally or in the markets in which we operate, including declines in employment, volatility of mortgage interest rates and inflation;

 

   

continued or increased downturn in the homebuilding industry, either nationally or in the markets in which we operate;

 

   

continued volatility and uncertainty in the credit markets and broader financial markets;

 

   

our future operating results and financial condition;

 

   

our business operations;

 

   

changes in our business and investment strategy;

 

   

availability of land to acquire and our ability to acquire such land on favorable terms or at all;

 

   

availability, terms and deployment of capital;

 

   

continued or increased disruption in the availability of mortgage financing or the number of foreclosures in the market;

 

   

shortages of or increased prices for labor, land or raw materials used in housing construction;

 

   

delays in land development or home construction or reduced consumer demand resulting from adverse weather and geological conditions or other events outside our control;

 

   

the cost and availability of insurance and surety bonds;

 

   

changes in, or the failure or inability to comply with, governmental laws and regulations;

 

   

the timing of receipt of regulatory approvals and the opening of projects;

 

   

the degree and nature of our competition;

 

   

our leverage and debt service obligations;

 

   

our relationship, and actual and potential conflicts of interest, with PICO;

 

   

availability of qualified personnel and our ability to retain our key personnel; and

 

   

additional factors discussed under the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Our Business.”

 

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ORGANIZATIONAL STRUCTURE

 

The diagram below depicts our organizational structure immediately following this offering (assuming that the underwriters’ option to purchase additional shares of our Class A common stock is not exercised):

 

LOGO

 

(1)  

Excludes an aggregate of 430,333 Class A restricted stock units to be granted to the members of our management team, other officers and employees and our director nominees upon the completion of this offering pursuant to our 2013 Long-Term Incentive Plan.

(2)  

We carry out our business generally through a number of operating subsidiaries and project-specific subsidiaries that are directly or indirectly wholly owned by UCP, LLC. Benchmark Communities, LLC, a Delaware limited liability company, is our wholly owned homebuilding subsidiary. BMC Realty Advisors, Inc., or BMC Realty, is a California corporation and a wholly owned subsidiary through which we conduct real estate brokerage activities relating to our business.

 

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Reorganization Transactions of UCP, LLC and Incorporation of UCP, Inc.

 

UCP, LLC is a holding company for the companies that directly or indirectly own and operate our business. Prior to this offering, there were 100 UCP, LLC membership interests issued and outstanding, all of which were owned by PICO.

 

Immediately prior to this offering, UCP, LLC’s Amended and Restated Limited Liability Company Operating Agreement will be amended and restated to, among other things, designate UCP, Inc. as the sole managing member of UCP, LLC, establish the UCP, LLC Series B Units which will be held solely by UCP, Inc. and reclassify PICO’s membership interests into 10,593,000 UCP, LLC Series A Units, which will be held solely by PICO (and its permitted transferees). The UCP, LLC Series B Units will rank on a parity with the UCP, LLC Series A Units as to distribution rights and rights upon liquidation, winding up or dissolution. Following this offering, UCP, Inc. will have the right to determine the timing and amount of any distributions (other than tax distributions as described in “—Holding Company Structure” below) to be made to holders of UCP, LLC Series A Units and UCP, LLC Series B Units. Profits and losses of UCP, LLC will be allocated, and all distributions generally will be made, pro rata to the holders of UCP, LLC Series A Units and UCP, LLC Series B Units. In addition, the Second Amended and Restated Limited Liability Company Operating Agreement of UCP, LLC provides that any UCP, LLC Series A Units acquired by UCP, Inc. from PICO, whether at the time of this initial public offering or thereafter in accordance with the Exchange Agreement, will automatically, and without any further action, be reclassified as UCP, LLC Series B Units in connection with such acquisition.

 

UCP, Inc. was incorporated as a Delaware corporation on May 7, 2013. UCP, Inc. has not engaged in any business or other activities except in connection with its formation and this offering. The certificate of incorporation of UCP, Inc. at the time of the offering will authorize two classes of common stock, Class A common stock and Class B common stock, each having the terms described in “Description of Capital Stock.” Prior to completion of this offering, 100 shares of Class B common stock of UCP, Inc. will be issued to PICO, providing PICO with no economic rights but entitling PICO, without regard to the number of shares of Class B common stock held by PICO, to one vote on matters presented to stockholders of UCP, Inc. for each UCP, LLC Series A Unit held by PICO, as described in “Description of Capital Stock—Class B Common Stock.” Holders of our Class A common stock and Class B common stock will vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law.

 

We also will enter into an Exchange Agreement pursuant to which PICO (and certain of its permitted assignees) will have the right to cause UCP, Inc. to exchange PICO’s UCP, LLC Series A Units for shares of our Class A common stock on a one-for-one basis, subject to equitable adjustments for stock splits, stock dividends and reclassifications. See “Certain Relationships and Related Party Transactions—Exchange Agreement.”

 

We refer to the foregoing transactions, collectively, as the “Reorganization Transactions.”

 

Offering Transactions

 

Upon completion of this offering, UCP, Inc. will purchase a number of newly-issued UCP, LLC Series B Units equal to the number of shares of Class A common stock sold in this offering, at a purchase price per unit equal to the initial public offering price per share of Class A common stock less the underwriting discount payable thereon.

 

At any time following this offering, PICO may from time to time (subject to the terms of the Exchange Agreement) cause UCP, Inc. to exchange PICO’s UCP, LLC Series A Units for shares of Class A common stock of UCP, Inc. on a one-for-one basis, subject to equitable adjustments for stock splits, stock dividends and reclassifications. See “Certain Relationships and Related Party Transactions—Exchange Agreement.” Any UCP, LLC Series A Units being exchanged will be reclassified as UCP, LLC Series B Units in connection with such exchange. In addition, to the extent the underwriters exercise their option to purchase additional shares of our Class A common stock, we will use the net proceeds from such exercise to purchase a portion of PICO’s UCP

 

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LLC Series A Units. Exchanges by PICO of its UCP, LLC Series A Units for shares of our Class A common stock and any purchase, by us, of a portion of PICO’s UCP, LLC Series A Units in connection with any exercise by the underwriters of their option to purchase additional shares of our Class A common stock are expected to result, with respect to UCP, Inc., in increases in the tax basis of the assets of UCP, LLC that otherwise would not have been available. These increases in tax basis may reduce the amount of tax that UCP, Inc. would otherwise be required to pay in the future. These increases in tax basis may also decrease gains (or increase losses) on future dispositions of certain assets to the extent tax basis is allocated to those assets.

 

We will enter into a Tax Receivable Agreement with PICO (and certain permitted assignees thereof) that will provide for the payment from time to time by UCP, Inc. to such persons of 85% of the amount of the tax benefits, if any, that UCP, Inc. realizes as a result of (i) these increases in tax basis and (ii) certain other tax benefits related to our entering into the Tax Receivable Agreement, including tax benefits attributable to payments under the Tax Receivable Agreement. These payment obligations are obligations of UCP, Inc. and not of UCP, LLC. The Tax Receivable Agreement will also provide that upon certain changes of control or if, at any time, UCP, Inc. either materially breaches its obligations under the Tax Receivable Agreement or elects an early termination of the Tax Receivable Agreement, payments due under the Tax Receivable Agreement may be accelerated and/or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement. See “Risk Factors—Risks Related to Our Organization and Structure—In certain cases, payments by us under the Tax Receivable Agreement may be accelerated and/or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement” and “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

 

In connection with its acquisition of UCP, LLC Series B Units, UCP, Inc. will become the sole managing member of UCP, LLC at the closing of this offering. Accordingly, although UCP, Inc. will initially have a minority economic interest in UCP, LLC, UCP, Inc. will control the management of UCP, LLC (subject to certain consent rights of PICO as the holder of the UCP, LLC Series A Units, as further described in “Certain Relationships and Related Party Transactions—UCP, LLC Limited Liability Company Operating Agreement”).

 

We refer to the foregoing transactions as the “Offering Transactions.”

 

As a result of the transactions described above:

 

   

the investors in this offering will collectively own 7,750,000 shares of our Class A common stock (or 8,912,500 shares of Class A common stock if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and UCP, Inc. will hold 7,750,000 UCP, LLC Series B Units (or 8,912,500 UCP, LLC Series B Units if the underwriters exercise in full their option to purchase additional shares of Class A common stock), representing 42.3% of the total economic interest of UCP, LLC (or 48.6% of the total economic interest of UCP, LLC if the underwriters exercise in full their option to purchase additional shares);

 

   

PICO will hold 10,593,000 UCP, LLC Series A Units, representing 57.7% of the total economic interest of UCP, LLC (or 9,430,500 UCP, LLC Series A Units, representing 51.4% if the underwriters exercise in full their option to purchase additional shares of Class A common stock and the net proceeds therefrom are used to repurchase a portion of PICO’s UCP, LLC Series A Units);

 

   

the investors in this offering will collectively have 42.3% of the voting power in UCP, Inc. (or 48.6% if the underwriters exercise in full their option to purchase additional shares of Class A common stock and the net proceeds therefrom are used to repurchase a portion of PICO’s UCP, LLC Series A Units); and

 

   

PICO, through its holdings of our Class B common stock, will have 57.7% of the voting power in UCP, Inc. (or 51.4% if the underwriters exercise in full their option to purchase additional shares of Class A common stock and the net proceeds therefrom are used to repurchase a portion of PICO’s UCP, LLC Series A Units).

 

Our post-offering organizational structure will allow PICO to retain its equity ownership in UCP, LLC, an entity that is classified as a partnership for United States federal income tax purposes, in the form of UCP, LLC

 

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Series A Units. Investors in this offering will, by contrast, hold their equity ownership in UCP, Inc., a Delaware corporation that is a domestic corporation for United States federal income tax purposes, in the form of shares of Class A common stock. We believe that PICO generally finds it advantageous to hold its equity interest in an entity that is not taxable as a corporation for United States federal income tax purposes.

 

PICO will also hold shares of Class B common stock of UCP, Inc. Although the shares of Class B common stock have no economic rights, they allow PICO to exercise voting power at UCP, Inc., the managing member of UCP, LLC, at a level that is consistent with its overall equity ownership of the business of UCP, LLC and its subsidiaries. Under the certificate of incorporation of UCP, Inc., following the offering, PICO will be entitled, without regard to the number of shares of Class B common stock held by it, to one vote for each UCP, LLC Series A Unit held by PICO. Accordingly, as PICO exchanges UCP, LLC Series A Units pursuant to the Exchange Agreement or if we purchase a portion of PICO’s UCP, LLC Series A Units in connection with any exercise by the underwriters of their option to purchase additional shares of our Class A common stock, the voting power afforded to PICO by its shares of Class B common stock will be automatically and correspondingly reduced.

 

Holding Company Structure

 

UCP, Inc. will be a holding company, and its sole material asset will be its equity interest in UCP, LLC. As the sole managing member of UCP, LLC, UCP, Inc. will control all of the business and affairs of UCP, LLC and its subsidiaries.

 

UCP, Inc. will consolidate the financial results of UCP, LLC and its subsidiaries, and the ownership interest of PICO in UCP, LLC will be reflected as a noncontrolling interest in UCP, Inc.’s consolidated financial statements.

 

Pursuant to the Second Amended and Restated Limited Liability Company Operating Agreement of UCP, LLC, UCP, Inc. has the right to determine when distributions (other than tax distributions) will be made to the members of UCP, LLC and the amount of any such distributions. If UCP, Inc. authorizes a distribution, such distribution generally will be made to the members of UCP, LLC pro rata in accordance with their respective percentage interests.

 

The holders of limited liability company interests in UCP, LLC, including UCP, Inc., will generally have to include for purposes of calculating their U.S. federal, state and local income taxes their allocable share of any taxable income of UCP, LLC. In general, taxable income of UCP, LLC will be allocated to PICO and UCP, Inc. on a pro rata basis in accordance with their respective percentage interests. However, as a result of certain taxable “built-in gains” in the assets of UCP, LLC that exist at the time of the Reorganization Transactions which, by statute, must be allocated solely to PICO, UCP, Inc. is expected at times to be allocated a disproportionately smaller amount of net taxable income and PICO is expected to be allocated a disproportionately larger amount of net taxable income. UCP, LLC is obligated, subject to available cash, applicable law and contractual restrictions (including limitations imposed by any financing agreements), to make cash distributions, which we refer to as “tax distributions,” based on certain assumptions (including a combined federal, state and local tax rate of 41% (or such other rate determined by UCP, Inc. to be the highest marginal effective rate of federal, state and local income tax applicable to corporations doing business in California or such other jurisdiction in which UCP, LLC is doing business)), to its members (including UCP, Inc.). Generally, these tax distributions will be pro rata in accordance with the respective percentage interests of PICO and UCP, Inc. and will be in an amount sufficient to allow PICO and UCP, Inc. to pay taxes on their allocable shares of the taxable income of UCP, LLC. If, however, there is insufficient cash to make pro rata tax distributions to PICO and UCP, Inc. in an amount that would allow PICO and UCP, Inc. to pay taxes on their allocable shares of the taxable income of UCP, LLC, PICO and UCP, Inc. would receive distributions in proportion to their respective tax liabilities based upon their allocable shares of UCP, LLC’s taxable income. It is expected in that case that PICO would receive a larger proportional distribution than UCP, Inc. would receive and, in some cases (for instance if all of the taxable income is allocable

 

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to PICO), UCP, Inc. could receive no tax distributions. In any case in which UCP, Inc. received a smaller proportional distribution than PICO, UCP, LLC would have an obligation to make future distributions to UCP, Inc. to eliminate the difference as soon as funds become available and UCP, LLC would be required to pay interest to UCP, Inc. at a prevailing market rate on such difference.

 

As a result of the potential differences in the amount of net taxable income allocable to UCP, Inc. and to PICO described above, it is expected that UCP, Inc. will receive tax distributions significantly in excess of UCP, Inc.’s tax liabilities and obligations to make payments under the Tax Receivable Agreement. To the extent, as currently expected, UCP, Inc. does not distribute such cash balances as dividends on our Class A common stock and instead, for example, holds such cash balances or lends them to UCP, LLC, PICO would benefit from any value attributable to such accumulated cash balances as a result of its ownership of our Class A common stock following an exchange of its UCP, LLC Series A Units (including any exchange upon an acquisition of UCP, Inc.). See discussion below under “Certain Relationships and Related Party Transactions—UCP, LLC Limited Liability Company Operating Agreement.”

 

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USE OF PROCEEDS

 

We expect to receive net proceeds from this offering of approximately 105.6 million ($121.8 million if the underwriters exercise their option to purchase additional shares of Class A common stock from us in full), after deducting the underwriting discount and estimated offering expenses payable by us.

 

We intend to use the net proceeds from this offering, exclusive of the net proceeds from any exercise of the underwriters’ option to purchase additional shares of Class A common stock, to purchase a number of newly-issued UCP, LLC Series B Units equal to the number of shares of Class A common stock sold in this offering, at a purchase price per unit equal to the initial public offering price per share of Class A common stock less the underwriting discount payable thereon. UCP, LLC intends to use such proceeds for general corporate purposes, such as the acquisition of land, including the land described under “Our Business—Owned and Controlled Lots,” and for land development, home construction and other related purposes. If the underwriters exercise their option to purchase additional shares of Class A common stock, UCP, Inc. will use the net proceeds from such exercise to purchase a portion of PICO’s UCP, LLC Series A Units at a price per UCP, LLC Series A unit equal to the net proceeds received by us per Class A common stock sold in this offering. If necessary, we will reduce the portion of the net proceeds received from any exercise of the underwriters’ option that we use to purchase a portion of PICO’s UCP, LLC Series A Units so that, after giving effect to such purchase, we will remain a “controlled company” within the meaning of the corporate governance standards of the NYSE.

 

Pending these uses, we intend to invest the net proceeds from this offering in a variety of capital preservation investments, including short-term, interest-bearing investment grade securities, money market accounts, certificates of deposit and direct or guaranteed obligations of the U.S. government.

 

Though we will receive the net proceeds from any sale of shares of our Class A common stock pursuant to the underwriters’ option to purchase additional shares of our Class A common stock, we will use such proceeds to purchase a portion of PICO’s UCP, LLC Series A Units; accordingly, any such proceeds will not be available to us to acquire or develop land, construct homes or otherwise invest in our business. To the extent we reduce the portion of any such proceeds used to purchase UCP, LLC Series A Units from PICO, such amounts will be available to us for investment in our business.

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of March 31, 2013 on an actual basis, pro forma to give effect to the Reorganization Transactions described in this prospectus under “Organizational Structure” and pro forma, as adjusted to give further effect to the sale of 7,750,000 shares of Class A common stock in this offering, at the initial public offering price of $15.00 per share, after deducting the underwriting discount and estimated offering expenses payable by us and assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock. This table should be read in conjunction with the sections entitled “Organizational Structure,” “Use of Proceeds,” “Unaudited Pro Forma Financial Information,” “Selected Consolidated Financial and Operating Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes thereto included elsewhere in this prospectus.

 

     As of March 31, 2013  
     UCP,
LLC,

Actual(1)
     UCP,  Inc.
Pro
Forma
    UCP,  Inc.,
Pro
Forma,

as
Adjusted
 
     (unaudited)  
     (in thousands, except share data)  

Debt

   $ 37,958       $ 37,958      $ 37,958   

Member’s equity and stockholders’ equity:

       

Member’s equity

     110,232         —   (2)      —     

Class A common stock, par value $0.01 per share, no shares authorized and no shares issued and outstanding, actual; 500,000,000 shares authorized and no shares issued and outstanding pro forma; 500,000,000 shares authorized and 7,750,000 shares issued and outstanding pro forma, as adjusted

     —           —          78 (3) 

Class B common stock, par value $0.01 per share, no shares authorized and no shares issued and outstanding actual; 1,000,000 shares authorized and 100 shares issued and outstanding pro forma and pro forma, as adjusted

     —              (4)         (4) 

Preferred stock, par value $0.01 per share, no shares authorized and no shares issued and outstanding, actual; 50,000,000 shares authorized and no shares issued and outstanding pro forma and pro forma, as adjusted

     —           —          —     

Additional paid-in capital

     —           50,923 (5)      95,472 (6) 

Accumulated deficit

     —           (4,560 )(7)      (4,560 )(7) 
  

 

 

    

 

 

   

 

 

 

Total member’s equity

     110,232         —          —     
  

 

 

    

 

 

   

 

 

 

Total equity attributable to UCP, Inc.

     —           46,363        90,990   

Noncontrolling interest

     —           63,659 (8)      124,656 (8) 
  

 

 

    

 

 

   

 

 

 

Total capitalization

   $ 148,190       $ 147,980      $ 253,604   
  

 

 

    

 

 

   

 

 

 

 

(1)   

Since we were acquired by PICO in January 2008, we have operated our business through UCP, LLC. As of March 31, 2013, UCP, LLC directly or indirectly held all of our assets and was responsible for all of our liabilities, and UCP, Inc., which was formed on May 7, 2013, did not exist. Accordingly, the actual capitalization as of March 31, 2013 presents that of UCP, LLC.

(2)   

Gives effect to the reclassification of member’s equity in connection with the Reorganization Transactions. After the Reorganization Transactions, we will separately present paid-in capital, additional paid-in capital and accumulated earnings or deficit.

 

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(3)   

Gives effect to the issuance of 7,750,000 shares of Class A common stock, par value $0.01 per share. This assumes no exercise by the underwriters of their option to purchase additional shares of Class A common stock.

(4)   

Gives effect to the issuance of 100 shares of Class B common stock, par value $0.01 per share to PICO pursuant to the Reorganization Transactions.

(5)  

Gives effect to the allocation of a portion of UCP, LLC’s member’s equity to additional paid-in capital of UCP, Inc., calculated by taking UCP, Inc.’s 42.3% ownership of UCP, LLC upon completion of this offering, multiplied by UCP, LLC’s member’s equity adjusted for UCP, LLC’s accumulated deficit as follows (in thousands):

 

     Historical
Amounts
of UCP,
LLC
    UCP,  Inc.’s
Ownership
Percentage

of UCP,
LLC
    Allocated
Amount of
Additional
Paid-in
Capital to
UCP, Inc.
 

Gross UCP, LLC member’s equity

   $ 120,527        42.3   $ 50,923   

Accumulated deficit

     (10,295     42.3     (4,350
  

 

 

     

 

 

 

UCP, LLC member’s equity

   $ 110,232        $ 46,573   
  

 

 

     

 

 

 

 

(6)   

Gives effect to the allocation of a portion of the net proceeds from this offering to additional paid-in capital and noncontrolling interest and the effects of the Reorganization Transactions as follows (in thousands):

 

Initial public offering price

   $ 15.00   

Shares of Class A common stock issued in this offering

     7,750   
  

 

 

 

Gross proceeds

   $ 116,250   

Underwriting discount

     (8,138

Other offering expenses

     (2,488
  

 

 

 

Net proceeds

   $ 105,624   

Less: amount allocated to noncontrolling interest based on PICO’s 57.7% ownership of UCP, LLC upon completion of this offering

     (60,997

Less: par value of Class A common stock (7,750 shares times par value of $0.01 per share)

     (78
  

 

 

 

Net proceeds allocated to additional paid-in capital

   $ 44,549   

Add: Allocated to additional paid-in capital from Reorganization Transactions (see note 5 above)

     50,923   
  

 

 

 

Total additional paid-in capital

   $ 95,472   
  

 

 

 

 

(7)  

Gives effect to the allocation of UCP, LLC’s accumulated deficit based on UCP, Inc.’s 42.3% ownership of UCP, LLC upon completion of this offering and $210,000 of nonrecurring expense related to the Reorganization Transactions recorded directly to UCP, Inc.’s accumulated deficit as follows (in thousands):

 

     Historical
Amounts
of UCP,
LLC
     UCP,  Inc.’s
Ownership
Percentage

of UCP, LLC
    Allocated to
Accumulated
Deficit of
UCP, Inc.
 

Accumulated deficit

   $ 10,295         42.3   $ 4,350   

Nonrecurring expenses

          210   
       

 

 

 
        $ 4,560   
       

 

 

 

 

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(8)   

The portion of UCP, LLC’s member’s equity allocated to the noncontrolling interest included in the UCP, Inc. pro forma is $63,659 and is calculated by taking PICO’s 57.7% ownership of UCP, LLC upon completion of this offering, multiplied by UCP, LLC’s member’s equity of $110,232. The adjustment for the noncontrolling interest included in the UCP, Inc. pro forma, as adjusted is $124,656 and is computed by combining the amount of noncontrolling interest from footnote 6 above of $60,997 and $63,659. PICO will also hold all of the Class B common stock outstanding upon completion of this offering.

 

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DILUTION

 

Purchasers of shares of our Class A common stock in this offering will incur an immediate and substantial dilution in net tangible book value per share of their shares of our Class A common stock from the initial public offering price.

 

The difference between the per share offering price paid by purchasers of our Class A common stock in this offering and the pro forma net tangible book value per share of our Class A common stock after this offering constitutes the dilution to purchasers in this offering. Net tangible book value per share is determined by dividing our net tangible book value, which is our total tangible assets less total liabilities, by the number of outstanding shares of our Class A common stock.

 

As of March 31, 2013, our net tangible book value was approximately $110.2 million, or $10.41 per share of our Class A common stock (pro forma for the exchange of all of PICO’s UCP, LLC Series A Units into shares of our Class A common stock). After giving effect to the transactions described in this prospectus under “Organizational Structure,” the sale of shares of our Class A common stock in this offering at the initial public offering price of $15.00 per share, the receipt by us of the net proceeds from this offering and the deduction of the underwriting discount and estimated offering expenses payable by us, our pro forma net tangible book value as of March 31, 2013 would have been approximately $215.9 million, or $11.77 per share of our Class A common stock. This amount represents an immediate increase in net tangible book value of approximately $1.36 per share of our common stock to our existing stockholder and an immediate dilution in net tangible book value of approximately $3.23 per share of our Class A common stock, or approximately 22%, to purchasers in this offering.

 

The following table illustrates the dilution to purchasers in this offering on a per share basis:

 

Initial public offering price per share

     $ 15.00   

Net tangible book value per share as of March 31, 2013(1)

  $ 10.41      

Pro forma increase in net tangible book value per share attributable to purchasers in this offering

    1.36      
 

 

 

    

Pro forma net tangible book value per share immediately after this offering

       11.77   
    

 

 

 

Dilution in pro forma net tangible book value per share to purchasers in this offering

     $ 3.23   
    

 

 

 

 

(1)  

Assuming all of PICO’s UCP, LLC Series A Units were exchanged for shares of our Class A common stock on a one-for-one basis.

 

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The following table sets forth, as of March 31, 2013, on the pro forma basis as described above, the differences between the number of shares of our common stock purchased from us, the total consideration paid to us and the average price per share paid to us by PICO (pro forma for the exchange of PICO’s UCP, LLC Series A Units into shares of Class A common stock) and by purchasers in this offering, before deducting the underwriting discount and estimated offering expenses payable by us, at the initial public offering price of $15.00 per share (in millions except shares and per share amounts).

 

     Shares Purchased     Total Consideration  
     Number      Percent     Amount
(Dollars in
Thousands)
     Percent     Average Price
Per Share
 

Existing stockholder(1)

     10,593,000         57.7   $ 120,527         50.9   $ 11.38   

Purchasers in this offering

     7,750,000         42.3        116,250         49.1   $ 15.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     18,343,000         100.0   $ 236,777         100.0  

 

(1)  

Pro forma for the exchange of all of PICO’s UCP, LLC Series A Units into shares of our Class A common stock.

 

If the underwriters exercise their option to purchase additional shares of Class A common stock in full and we use all of the net proceeds from such exercise to purchase a portion of PICO’s UCP, LLC Series A Units, the following will occur:

 

   

the number of outstanding shares of our Class A common stock would not change;

 

   

the number of Series A Units of UCP, LLC held by PICO would be reduced by 1,162,500, leaving PICO with approximately 51.4% of the voting power of UCP, Inc. and represent approximately 51.4% of the economic interest in UCP, LLC; and

 

   

the pro forma net tangible book value per share of our Class A common stock immediately after this offering will be increased by $2.25 per share and the dilution in pro forma net tangible book value per share to purchasers in this offering by $2.35 per share.

 

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

 

The following unaudited pro forma consolidated balance sheet as of March 31, 2013 and the unaudited pro forma consolidated statements of operations for the year ended December 31, 2012 and the three months ended March 31, 2013 present our consolidated financial position and results of operations after giving pro forma effect to the Reorganization Transactions and Offering Transactions described in “Organizational Structure,” including the sale of 7,750,000 shares of Class A common stock in this offering (excluding shares issuable upon any exercise of the underwriters’ option to purchase additional shares of our Class A common stock) and the application of the net proceeds from this offering, as if all such transactions had been completed as of March 31, 2013 with respect to the unaudited pro forma consolidated balance sheet and as of January 1, 2012, with respect to the unaudited pro forma consolidated statement of operations for the year ended December 31, 2012 and the three months ended March 31, 2013. The unaudited pro forma consolidated financial information reflects pro forma adjustments that are described in the accompanying notes and are based on available information and certain assumptions we believe are reasonable, but are subject to change. We have made, in our opinion, all adjustments that are necessary to present fairly the pro forma financial information.

 

The unaudited pro forma financial information should be read together with the information set forth under the headings “Organizational Structure,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes included elsewhere in this prospectus.

 

The pro forma adjustments principally give effect to:

 

   

the Reorganization Transactions and Offering Transactions described in “Organizational Structure,” including (i) the reclassification of PICO’s membership interests in UCP, LLC into 10,593,000 UCP, LLC Series A Units (which number of UCP, LLC Series A Units represents PICO’s pro rata ownership interest in UCP, LLC) and establishment of UCP, LLC Series B Units to be issued to UCP, Inc. (with the number of UCP, LLC Series B Units to be issued to UCP, Inc. equaling the number of shares of Class A common stock issued in this offering and representing UCP, Inc.’s pro rata ownership interest in UCP, LLC), pursuant to the Second Amended and Restated Limited Liability Company Operating Agreement of UCP, LLC; (ii) the consolidation of UCP, LLC and its consolidated subsidiaries into UCP, Inc.’s financial statements pursuant to ASC 810 and the resulting increase of additional paid-in capital and an allocation of a portion of UCP, LLC’s equity to the noncontrolling interest; (iii) the conversion of UCP, Inc.’s outstanding common stock (all of which is held by PICO) into 100 shares of Class B common stock pursuant to UCP, Inc.’s amended and restated certificate of incorporation; (iv) the issuance by UCP, Inc. of 7,750,000 shares of Class A common stock in this offering; and (v) UCP, Inc.’s purchase of a number of newly-issued UCP, LLC Series B Units from UCP, LLC equal to the number of shares of Class A common stock issued in this offering, at a purchase price per Series B Unit equal to the initial public offering price per share of Class A common stock less the underwriting discount payable thereon (for information regarding the UCP, LLC Series A Units and the UCP, LLC Series B Units see “Certain Relationships and Related Party Transactions—UCP, LLC Limited Liability Company Operating Agreement” and for information regarding our Class A common stock and our Class B common stock see “Description of Capital Stock—Class A Common Stock” and “—Class B Common Stock”);

 

   

with regard to the unaudited pro forma consolidated statements of operations, a provision for corporate income taxes on the income attributable to UCP, Inc. at an effective rate of 41%, which includes a provision for U.S. federal income taxes and assumes the highest statutory rates apportioned to each state and/or local jurisdiction, offset by a full valuation allowance due to a cumulative pre-tax book loss over the prior three year period;

 

   

the grant to Messrs. Bogue, La Herran and Fletcher and certain of our other employees and directors of 430,333 Class A restricted stock units under our 2013 Long-Term Incentive Plan in connection with this offering;

 

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increased compensation expense in connection with entering into employment agreements with Messrs. Bogue, La Herran and Fletcher;

 

   

increased compensation expense in connection with certain of our other employees and directors (though we expect to incur these base salary increases, they are not contractually specified in employment agreements or otherwise); and

 

   

nonrecurring costs associated with the Reorganization Transactions, which relate primarily to the audit of UCP, Inc., preparation of the Tax Receivable Agreement, Exchange Agreement and UCP, LLC’s Second Amended and Restated Limited Liability Company Operating Agreement, and are an adjustment only to the accumulated deficit on our unaudited pro forma consolidated balance sheet.

 

Unless we purchase a portion of PICO’s UCP, LLC Series A Units in connection with any exercise by the underwriters of their option to purchase additional shares of our Class A common stock, the Reorganization Transactions and the Offering Transactions will not result in an immediate step-up in the tax basis in our share of the tangible and intangible assets of UCP, LLC. However, any future exchanges by PICO of Series A Units for shares of our Class A common stock pursuant to the Exchange Agreement are expected to increase the tax basis in our share of the tangible and intangible assets of UCP, LLC. A significant portion of the step-up in tax basis is expected to be amortizable for tax purposes over a period of approximately 15 years. We will enter into a Tax Receivable Agreement that will provide for the payment by us to PICO of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of any increase in tax basis caused by PICO’s exchange of UCP, LLC Series A Units for shares of our Class A common stock. UCP, Inc. and its Class A common stockholders will benefit from the remaining 15% of cash savings, if any, in income tax that is realized by UCP, Inc. The term of the Tax Receivable Agreement will commence upon consummation of this offering and will continue until all such tax benefits have been utilized or expired, unless a change of control occurs, we materially breach our obligations under the Tax Receivable Agreement or we exercise our right to terminate the Tax Receivable Agreement, and in each case, we pay PICO a required amount based on the present value of payments remaining based on estimates of amounts to be made under the agreement. For additional information regarding our Tax Receivable Agreement, see “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

 

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The unaudited pro forma financial information is presented for informational purposes only and should not be considered indicative of actual results of operations that would have been achieved had the Reorganization Transactions and the Offering Transactions been consummated on the dates indicated, and do not purport to be indicative of statements of financial condition or results of operations as of any future date or any future period.

 

UCP, Inc.

Unaudited Pro Forma Consolidated Balance Sheet

As of March 31, 2013

(In thousands, except share and per share data)

 

    UCP, LLC
Historical(1)
    Reorganization
Adjustments
    UCP, Inc.
Pro Forma(2)
    Offering
Adjustments
    UCP, Inc.
Pro Forma

as  Adjusted
 

Assets:

         

Cash and cash equivalents

  $ 8,884      $ —        $ 8,884      $ 106,547 (3)    $ 115,431   

Real estate inventories

    143,799        —          143,799        —          143,799   

Fixed assets, net

    754        —          754        —          754   

Receivables

    780        —          780        —          780   

Other assets

    2,295        —          2,295        (923 )(3)      1,372   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    156,512        —          156,512        105,624        262,136   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Member’s/Stockholders’ Equity:

         

Accounts payable and accrued liabilities

    8,322        210 (4)      8,532        —          8,532   

Debt

    37,958        —          37,958        —          37,958   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    46,280        210        46,490        —          46,490   

Member’s equity

    110,232        (110,232 )(5)      —          —          —     

Class A common stock, par value $0.01 per share

    —          —          —          78 (6)      78   

Class B common stock, par value $0.01 per share

    —             (7)        —       

Additional paid-in capital

    —          50,923 (8)      50,923        44,549 (6)      95,472   

Accumulated deficit

    —          (4,560 )(9)      (4,560     —          (4,560
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Member’s equity/total equity attributable to UCP, Inc.

    110,232        (63,869     46,363        44,627        90,990   

Noncontrolling interest

    —          63,659 (10)      63,659        60,997 (6)      124,656   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and member’s/ stockholders’ equity

  $ 156,512      $ —        $ 156,512      $ 105,624      $ 262,136   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

Since we were acquired by PICO in January 2008, we have operated our business through UCP, LLC. As of March 31, 2013, UCP, LLC directly or indirectly held all of our assets and was responsible for all of our liabilities, and UCP, Inc., which was formed on May 7, 2013, did not exist. Accordingly, the unaudited pro forma consolidated balance sheet as of March 31, 2013 presents the historical financial position of UCP, LLC.

(2)  

UCP, Inc. was formed on May 7, 2013 and will have no material assets or results of operations until the completion of this offering and therefore its historical financial position is not shown in a separate column in this unaudited pro forma consolidated balance sheet. Upon completion of this offering, assuming the underwriters do not exercise their option to purchase additional shares of Class A common stock, UCP, Inc.’s only material asset will be its ownership of approximately 42.3% of UCP, LLC, and its only business will be to act as the sole managing member of UCP, LLC. Accordingly, pursuant to ASC 810, UCP, Inc. will consolidate the financial results of UCP, LLC into its financial statements.

(3)   

At the initial public offering price of $15.00 per share, and assuming no exercise of the underwriters’ option to purchase additional shares of Class A common stock, UCP, Inc. expects to receive net proceeds from this

 

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offering of $105.6 million, after deducting an aggregate underwriting discount of $8.1 million and estimated other offering expenses of $2.5 million, of which $923,000 have previously been incurred and capitalized and included in other assets in UCP, Inc.’s consolidated balance sheet. The following table reconciles the gross proceeds from this offering to the net cash proceeds to UCP, Inc. (in thousands):

 

Initial public offering price

   $ 15.00   

Shares of Class A common issued in this offering

     7,750   
  

 

 

 

Gross proceeds

   $ 116,250   

Underwriting discount

     (8,138)   

Other offering expenses

     (2,488)   
  

 

 

 

Net cash proceeds

   $ 105,624   

Offering expenses already incurred

     923   
  

 

 

 

Net cash provided to UCP, Inc.

   $ 106,547   
  

 

 

 

 

(4)  

Represents a $210,000 liability for the nonrecurring expenses related to our Reorganization Transactions.

(5)   

Upon completion of the Reorganization Transactions, we will no longer report member’s equity in our consolidated balance sheets. After the Reorganization Transactions, we will separately present paid-in capital, additional paid-in capital and accumulated earnings or deficit. See notes 6, 8 and 9 below.

(6)  

Reflects the issuance of 7,750 shares of Class A common stock in this offering and resulting allocations to additional paid-in capital and noncontrolling interest. The allocation of a portion of the net proceeds from this offering to noncontrolling interest follows the accounting guidance in ASC 810-10-45-23, which requires the change in UCP, Inc.’s controlling financial ownership interest in UCP, LLC (as a result of UCP, Inc. using the net proceeds from this offering to acquire newly-issued Series B Units of UCP, LLC) to be recorded as an equity transaction, such that noncontrolling interest, which represents PICO’s direct ownership interest in UCP, LLC, is adjusted to reflect the decrease in PICO’s proportionate ownership interest in UCP, LLC (in thousands):

 

Net cash proceeds (as calculated in footnote 3 above)

  $ 105,624   

Less: amount allocated to noncontrolling interest based on PICO’s 57.7% ownership of UCP, Inc.

    (60,997

Less: par value of Class A common stock (7,750 shares times par value of $0.01 per share)

    (78
 

 

 

 

Amount allocated to additional paid-in capital

  $ 44,549   
 

 

 

 

 

(7)   

Represents the par value of 100 shares of Class B common stock that we will issue to PICO in the Reorganization Transactions.

(8)  

Gives effect to the allocation of a portion of UCP, LLC’s member’s equity to additional paid-in capital, calculated by taking UCP, Inc.’s 42.3% ownership of UCP, LLC upon completion of this offering, multiplied by UCP, LLC’s member’s equity adjusted for UCP, LLC’s accumulated deficit as follows (in thousands):

 

     Historical
Amounts
of UCP,
LLC
    UCP,  Inc.’s
Ownership
Percentage

of UCP,
LLC
    Allocated
Amount of
Additional
Paid-in
Capital to
UCP, Inc.
 

Gross UCP, LLC member’s equity

   $   120,527        42.3   $ 50,923   

Accumulated deficit

     (10,295     42.3     (4,350
  

 

 

     

 

 

 

UCP, LLC member’s equity

   $ 110,232        $ 46,573   
  

 

 

     

 

 

 

 

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(9)   

Gives effect to the allocation of a portion of UCP, LLC’s accumulated deficit based on UCP, Inc.’s 42.3% ownership of UCP, LLC upon completion of this offering, and recognition $210,000 of nonrecurring expense related to the Reorganization Transactions recorded in UCP, Inc.’s accumulated deficit

 

     Historical
Amount of
UCP, LLC
     UCP,  Inc.’s
Ownership
Percentage

of UCP,
LLC
    Allocated to
Accumulated
Deficit of UCP,
Inc.  for
Reorganization
Adjustments
 

Accumulated deficit

   $ 10,295         42.3   $ 4,350   

Nonrecurring expenses

          210   
       

 

 

 
        $ 4,560   
       

 

 

 

 

(10)   

Gives effect to the allocation of a portion of UCP, LLC’s member’s equity to noncontrolling interest, calculated by taking PICO’s 57.7% ownership of UCP, LLC upon completion of this offering, multiplied by the member’s equity of $110,232. PICO will also hold all of the Class B common stock upon completion of this offering.

 

UCP, Inc.

Unaudited Pro Forma Consolidated Statements of Operations

Three Months Ended March 31, 2013

(In thousands, except share and per share data)

 

     UCP, LLC
Historical(1)
    Reorganization
Adjustments
     UCP, Inc.
Pro Forma(2)
    Offering
Adjustments
    UCP, Inc.
Pro Forma

as  Adjusted
 

Revenues:

           

Homebuilding

   $ 4,333      $ —         $ 4,333      $ —        $     4,333   

Land Development

     7,470        —           7,470        —          7,470   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     11,803        —           11,803        —          11,803   

Costs and Expenses:

           

Cost of sales—homebuilding

     3,460        —           3,460        —          3,460   

Cost of sales—land development

     4,580        —           4,580        —          4,580   

Sales and marketing

     1,132        —           1,132        —          1,132   

General and administrative

     3,480        —           3,480        1,019 (3)      4,499   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total Expenses:

     12,652        —           12,652        1,019        13,671   

Pre-tax loss from operations

     (849     —           (849     (1,019     (1,868

Income tax (provision) benefit

     —          —           —          (4 )   

Other income

     39        —           39        —          39   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net loss

     (810     —           (810     (1,019     (1,829

Net loss attributable to noncontrolling interest

     —          —           (468     (589 )(5)      (1,057
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net loss attributable to UCP, Inc.

   $ —          —           (342     (430     (772
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Weighted average shares of Class A common stock outstanding(6)

           

Basic

              —     
           

 

 

 

Diluted

              —     
           

 

 

 

Net loss per Class A common stock outstanding(6)

           
           

 

 

 

Basic

            $ —     
           

 

 

 

Diluted

            $ —     
           

 

 

 

 

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UCP, Inc.

Unaudited Pro Forma Consolidated Statements of Operations

Year Ended December 31, 2012

(In thousands, except share and per share data)

 

    UCP, LLC
Historical(1)
    Reorganization
Adjustments
    UCP, Inc.
Pro Forma(2)
    Offering
Adjustments
    UCP, Inc. Pro
Forma

as Adjusted
 

Revenues:

         

Homebuilding

  $ 14,060        —        $ 14,060        —        $ 14,060   

Land Development

    44,066        —          44,066        —          44,066   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    58,126        —          58,126        —          58,126   

Costs and Expenses:

         

Cost of sales—homebuilding

    9,832        —          9,832        —          9,832   

Cost of sales—land development

    32,876        —          32,876        —          32,876   

Sales and marketing

    2,875        —          2,875        —          2,875   

General and administrative

    10,103        —          10,103        6,320 (3)      16,423   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Expenses:

    55,686        —          55,686        6,320        62,006   

Pre-tax income from operations

    2,440        —          2,440        (6,320     (3,880

Income tax (provision) benefit

    —          —          —             (4)   

Other income

    578        —          578        —          578   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    3,018        —          3,018        (6,320     (3,302

Net income (loss) attributable to noncontrolling interest

    —          —          1,743        (3,650 )(5)      (1,907
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to UCP, Inc.

  $ —          —          1,275        (2,670     (1,395
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of Class A common stock outstanding(6)

         

Basic

            —     
         

 

 

 

Diluted

            —     
         

 

 

 

Net income (loss) available to Class A common stock outstanding(6)

         
         

 

 

 

Basic

          $ —     
         

 

 

 

Diluted

          $ —     
         

 

 

 

 

(1)  

Since we were acquired by PICO in January 2008, we have operated our business through UCP, LLC. During the year ended December 31, 2012 and the three months ended March 31, 2013, UCP, LLC directly or indirectly held all of our assets and was responsible for all of our liabilities, and UCP, Inc., which was formed on May 7, 2013, did not exist. Accordingly, the unaudited pro forma consolidated statements of operations for the year ended December 31, 2012 and the three months ended March 31, 2013 present the historical results of UCP, LLC.

(2)  

UCP, Inc. was formed on May 7, 2013 and will have no material assets or results of operations until the completion of this offering and therefore its results of operations are not shown in a separate column in these unaudited pro forma statements of operations.

(3)   

Represents total increase in compensation expense we expect to incur following the completion of this offering, as follows:

 

   

an increase of $92,500 and $370,000 for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively, in aggregate base salary payable to Messrs. Bogue, La Herran and Fletcher pursuant to their employment agreements;

 

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an increase of $45,000 and $180,000 for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively, in aggregate base salary payable to certain employees other than Messrs. Bogue, La Herran and Fletcher (although these base salary increases have been approved by our board of directors and we expect to incur these increased costs, they are not contractually specified in employment agreements);

 

   

subject to approval by our compensation committee, an aggregate increase in cash bonuses of approximately $102,000 and $410,000 for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively, in the aggregate payable to Messrs. Bogue, La Herran and Fletcher (we computed these amounts pursuant to the employment agreements we will enter into with each of these executives upon completion of this offering and assuming that the performance goals or objectives to be established by our compensation committee were met, accordingly, these amounts are the amounts of cash bonuses that we would have paid in each period presented had the employment agreements been in place as of January 1, 2012 and the performance goals or objectives been achieved; we expect that any future bonuses paid pursuant to these agreements for future periods will be computed in the same manner);

 

   

subject to approval by our compensation committee, an aggregate increase in cash bonuses of approximately $70,000 and $280,000 for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively, in the aggregate payable to certain employees other than Messrs. Bogue, La Herran and Fletcher (although these cash bonuses have been approved by our board of directors (subject to approval by our compensation committee) and we expect to incur these costs, they are not contractually specified in employment agreements);

 

   

An increase in non-cash stock-based compensation expense of approximately $664,000 and $4.9 million for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively, in the aggregate relating to the vesting of the awards under our 2013 Long-Term Incentive Plan made in connection with this offering to Messrs. Bogue, La Herran and Fletcher, our directors and certain other employees; and

 

   

An increase in cash compensation of approximately $45,000 and $180,000 for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively in the aggregate payable to our non-employee directors (excluding Messrs. Hart and Webb, who will waive any directors’ fees and grants that would otherwise be payable or made, as the case may be, to them in connection with their service on our board of directors for as long as PICO beneficially owns shares of any class of our common stock).

 

We have not made an adjustment for accounting, human resources and information technology costs. We expect the amounts we will pay PICO for these services pursuant to the Transition Services Agreement will be similar to the amount of costs that PICO historically has allocated to us for similar services. For additional information about the Transition Services Agreement and the fees due thereunder, see “Certain Relationships and Related Party Transactions—Transition Services Agreement” included elsewhere in this prospectus. In addition, beyond the increased compensation expense described above, as a separate public company, we expect our general and administrative expenses to increase in an amount that we cannot determine at this time due to greater expenses related to corporate governance, SEC reporting and other compliance matters.

 

(4)   

Following the Reorganization Transactions and Offering Transactions, UCP, Inc. will be subject to U.S. federal, state and local income taxation with respect to its allocable share of any taxable income of UCP, LLC (which will be allocated based on UCP, Inc.’s 42.3% ownership of UCP, LLC, assuming no exercise of the underwriters’ option to purchase additional shares of Class A common stock). However, for the three months ended March 31, 2013 and the year ended December 31, 2012, the Company’s pro forma results included a tax benefit offset by a full valuation allowance due to a cumulative pre-tax book loss over the prior three year period. As a result, the unaudited pro forma consolidated statements of operations reflect no income tax benefit for the reported losses. The unaudited pro forma consolidated financial information assumes that there are no payments under the Tax Receivable Agreement during the applicable periods. For a discussion of the financial accounting treatment of the Tax Receivable Agreement see “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Income Taxes and Tax Receivable Agreement” and “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

 

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(5)   

As described in “Organizational Structure,” after the Reorganization Transactions and the Offering Transactions, assuming the underwriters do not exercise their option to purchase additional shares of Class A common stock, UCP, Inc.’s only material asset will be its ownership of UCP, LLC Series B Units representing 42.3% of the total economic interest of UCP, LLC, and its only business will be to act as the sole managing member of UCP, LLC. Accordingly, pursuant to ASC 810, UCP, Inc. will consolidate the financial results of UCP, LLC into its financial statements. The ownership interest of the other member of UCP, LLC, PICO, will be accounted for as a noncontrolling interest in UCP, Inc.’s consolidated financial statements after this offering. As such, the amount in the table above represents adjustments to reflect noncontrolling interest resulting from PICO’s ownership interest of 100% of the UCP, LLC Series A Units. Immediately following this offering, the noncontrolling interest will be approximately 57.7%. Net loss attributable to the noncontrolling interest represents 57.7%, or $589,000, of net loss of $1 million for the three months ended March 31, 2013 and 57.7%, or $3.6 million, of net loss of $6.3 million for the year ended December 31, 2012.

(6)   

Pro forma basic and diluted net loss per share of Class A common stock equals the pro forma net loss attributable to UCP, Inc. divided by the weighted-average number of shares of Class A common stock outstanding during the period (excluding, as described below, the Class A common stock that we issue in this offering). We have made no adjustment for the reclassification of PICO’s membership interests in UCP, LLC into 10.6 million UCP, LLC Series A Units that are exchangeable on a one-for-one basis for shares of Class A common stock or for 430,333 shares of Class A common stock that we will issue upon vesting of Class A restricted stock units that we will issue in connection with this offering when calculating net loss per diluted share of Class A common stock, as the effect of such shares on the loss per share of Class A common stock would be anti-dilutive and accordingly, the pro forma weighted-average basic number of shares of Class A common stock is equal to the pro forma weighted-average diluted number of shares of Class A common stock. In future periods, PICO’s 10.6 million UCP, LLC Series A Units that are exchangeable on a one-for-one basis for shares of Class A common stock and the 430,333 shares of Class A common stock that we will issue upon vesting of Class A restricted stock units that we will issue in connection with this offering will be included when determining diluted earnings per share of Class A common stock if the inclusion of such shares would be dilutive.

 

We have excluded from our computation of the unaudited pro forma basic and diluted loss per share all of the shares of Class A common stock to be issued in this offering because the net proceeds from this offering are expected to be used for general corporate purposes, such as the acquisition of land, including the land described under “Our Business—Owned and Controlled Lots,” and for land development, home construction and other related purposes. Given there were no shares of Class A common stock outstanding prior to completion of this offering and we have excluded all shares of Class A common stock to be issued in this offering, there are no shares of Class A common stock outstanding on a pro forma basis for purposes of calculating pro forma net loss per share data. Class B common stock has also not been included, as it does not participate in any earnings or loss.

 

The following table sets forth information about our outstanding Class A common stock:

 

Historical and weighted-average number of shares of Class A common stock outstanding

     —   (1) 

Shares of Class A common stock issued in this offering the proceeds from which will not be used for general corporate purposes

     —     

Pro forma and pro forma as adjusted shares of Class A common stock issued and outstanding

     —     
  

 

 

 

Pro forma and pro forma as adjusted basic and diluted shares outstanding

     —     
  

 

 

 

 

(1)   

Prior to completion of this offering, we operated as a limited liability company whose membership interests were entirely owned by PICO. Accordingly, we had no outstanding shares prior to completion of this offering.

 

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DIVIDEND POLICY

 

We currently intend to retain future earnings, if any, to finance the development and expansion of our business and, therefore, do not intend to pay cash dividends on our Class A common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any financing instruments and such other factors as our board of directors deems relevant. Accordingly, you may need to sell your shares of our Class A common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them. See “Risk Factors—Risks Related to this Offering and Ownership of Our Class A Common Stock—We do not intend to pay dividends on our Class A common stock for the foreseeable future.” In addition, certain provisions of agreements relating to our indebtedness may limit or prohibit the payment of any dividends in the future, and while none of these provisions would currently prohibit us from paying a dividend it is possible that they could do so in the future. Class B common stock will not be entitled to any dividends. Subject to applicable law and restrictions contained in any financing instruments, we intend to cause UCP, LLC to make distributions to its members in an amount sufficient to cover all applicable taxes payable and dividends, if any, declared by us, as well as any payments due under the Tax Receivable Agreement.

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

 

The following sets forth our selected consolidated financial and operating data. The data presented below is that of UCP, LLC. UCP, LLC will be considered our predecessor for accounting purposes, and its consolidated financial statements will be our historical consolidated financial statements following this offering. You should read the following selected consolidated financial data in conjunction with our consolidated financial statements, the related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future.

 

We derived our statement of operations data for the years ended December 31, 2012 and 2011 and consolidated balance sheet data as of December 31, 2012 and 2011 from the consolidated financial statements of UCP, LLC audited by Deloitte & Touche LLP, independent auditors, whose report with respect thereto is included elsewhere in this prospectus. We derived our statement of operations data for the three months ended March 31, 2013 and 2012 and consolidated balance sheet data as of March 31, 2013 from the unaudited condensed consolidated financial statements of UCP, LLC (included elsewhere in this prospectus) which include all adjustments, consisting of normal recurring adjustments, which management considers necessary for a fair presentation of the financial position and the results of operations for such periods. Results for the interim periods are not necessarily indicative of the results for the full year.

 

     Three Months Ended
March 31,
    Year Ended
December 31,
 
     2013     2012     2012     2011  
     (unaudited)              
  

 

 

 
     (in thousands)  

Statements of Operations

        

Revenue:

        

Homebuilding

   $ 4,333      $ 1,533      $ 14,060      $ 8,285   

Land development

     7,470        2,002        44,066        15,893   
  

 

 

   

 

 

   

 

 

   

 

 

 
     11,803        3,535        58,126        24,178   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Cost of sales—homebuilding

     3,460        1,062        9,832        5,621   

Cost of sales—land development

     4,580        1,349        32,876        17,280   

Sales and marketing

     1,132        221        2,875        1,414   

General and administrative

     3,480        2,208        10,103        6,464   
  

 

 

   

 

 

   

 

 

   

 

 

 
     12,652        4,840        55,686        30,779   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (849     (1,305     2,440        (6,601

Other income

     39        208        578        34   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (810   $ (1,097   $ 3,018      $ (6,567
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Data

        

Homebuilding

        

Net new home orders

     62        7        61        39   

New homes delivered

     12        6        41        33   

Average sale price of homes delivered

   $ 361,078      $ 255,455      $ 342,921      $ 251,058   

Cancellation rate

     11.4     0.0     12.9     13.3

Average selling communities during the period

     4        2        3        3   

Selling communities at end of period

     5        2        4        2   

Backlog(1) at end of period, number of homes

     76        7        26        6   

Backlog at end of period, aggregate sales value (in thousands)

   $ 26,705      $ 1,598      $ 9,182      $ 1,463   

Land development

        

Lots delivered

     54        26        560        118   

Average sale price of lots delivered

   $ 138,333      $ 77,000      $ 78,689      $ 134,686   

Backlog(1) at end of period, number of lots

     114        —          90        26   

Backlog at end of period, aggregate sales value (in thousands)

   $ 11,465      $ —        $ 6,750      $ 2,002   

 

(1)   

Backlog consists of homes or lots under sales contracts that have not yet closed, and there can be no assurance that closings of such contracts will occur.

 

75


Table of Contents
     Three Months Ended
March 31,
     Year Ended
December 31,
 
     2013      2012      2011  
             (unaudited)  
     (in thousands)  

Balance Sheet Data

        

Cash and cash equivalents

   $ 8,884       $ 10,324       $ 2,276   

Real estate inventories

     143,799         125,367         121,347   

Fixed assets, net

     754         680         115   

Receivables

     780         243         884   

Other assets

     2,295         920         949   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 156,512       $ 137,534       $ 125,571   

Liabilities and Member’s Equity

        

Accounts payable and accrued liabilities

   $ 8,322       $ 6,107       $ 2,545   

Debt

     37,958         29,112         30,034   
  

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 46,280       $ 35,219       $ 32,579   

Member’s equity

   $ 110,232       $ 102,315       $ 92,992   

 

Consolidated Gross Margin and Consolidated Adjusted Gross Margin and U.S. GAAP Reconciliation

 

    Three
Months
Ended
March 31,
2013
    %     Three
Months
Ended
March 31,
2012
    %     Year
Ended
December
31, 2012
    %     Year
Ended
December
31, 2011
    %  
Consolidated Gross Margin and Consolidated
Adjusted Gross Margin
  (in
thousands)
   

 

    (in
thousands)
   

 

    (in
thousands)
   

 

    (in
thousands)
   

 

 

Revenue

  $ 11,803        100.0   $ 3,535        100.0   $ 58,126        100.0   $ 24,178        100.0

Cost of sales—consolidated

    8,040        68.1     2,411        68.2     42,708        73.5     22,901        94.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated gross margin

    3,763        31.9     1,124        31.8     15,418        26.5     1,277        5.3

Add: interest expense in cost of sales

    64        0.5     56        1.6     760        1.3     511        2.1

Add: impairment and abandonment charges

    9        0.1     59        1.7     665        1.1     5,522        22.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated adjusted gross margin

  $ 3,836        32.5   $ 1,239        35.0   $ 16,843        29.0   $ 7,310        30.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Homebuilding Gross Margin and Homebuilding Adjusted Gross Margin

               

Revenue—Homebuilding

  $ 4,333        100.0   $ 1,533        100.0   $ 14,060        100.0   $ 8,285        100.0

Cost of sales—homebuilding

    3,460        79.9     1,062        69.3     9,832        69.9