Stock Based Compensation

In 2012, the Company adopted the William Lyon Homes 2012 Equity Incentive Plan (the “Plan”). The Plan was approved by the Board of Directors and the Company’s stockholders, and is administered by the Compensation Committee of the Board. The provisions of the Plan allow for a variety of stock-based compensation awards, including stock options, stock appreciation rights, or SARs, restricted stock awards, restricted stock unit awards, deferred stock awards, deferred stock unit awards, dividend equivalent awards, stock payment awards and performance awards and other stock-based awards, to certain executives, directors, and non-executives of California Lyon. The Company believes that such awards provide a means of compensation to attract and retain qualified employees and better align the interests of our employees with those of our stockholders. Option awards are granted with an exercise price equal to the market price at the date of grant.

Under the Plan, 3,636,363 shares of the Company’s Class A common stock have been reserved for issuance. In 2015, 2014, and 2013, the Company granted an aggregate of 493,524 restricted shares, 392,126 restricted shares, and 370,959 restricted shares, respectively, of Class A common stock of the Company, and in 2015 the Company granted an aggregate of 240,000 stock options to purchase shares of Class A common stock of the Company. The options have a grant date of April 1, 2015, and have an exercise price per share of $25.82, the closing trading price of the Company's common stock on March 31, 2015. 120,000 of the options vest in three equal installments commencing on March 31, 2018, and the other 120,000 options vest in a single installment on March 31, 2018, in each case, subject to continued employment by the option holder with the Company.

The Company granted performance-based restricted stock awards to certain executive employees during each of 2015, 2014 and 2013. With respect to the performance based restricted stock awards granted during 2015, 2014, and 2013, the performance based restricted stock awards vests as follows: one-third of the shares of performance based restricted stock will vest on March 1 of each of the first, second, and third years following the grant date, and all but one of such grants were subject to the Company’s achievement of a pre-established performance target as of the end of the given fiscal year, and subject to each grantee's continued service through each vesting date. The remaining grant did not contain a pre-established performance target, but the earned shares for such award were determined by the exercise of the discretion of the Compensation Committee of Parent’s Board of Directors following the end of the 2014 fiscal year, which were determined to be at the target level. During 2015 and 2014, the Company achieved 92% and 97% of its performance targets, respectively, and all performance targets were met at maximum during 2013.

The Company also granted time-based restricted stock awards to certain executives, other employees and its non-employee directors during the year ended December 31, 2015. Substantially all employee grants are subject either to a vesting schedule pursuant to which one-third of the shares will vest on March 1st of each of 2016, 2017 and 2018, or to a vesting schedule pursuant to which one-half of the shares will vest on March 1st of each of 2016 and 2017. In addition, one employee was granted restricted shares which vest in full on the second anniversary of the grant date. With respect to the restricted stock awards granted to certain non-employee directors of the Company during the year ended December, 31, 2015, the awards vest in equal quarterly installments on each of June 1, 2015, September 1, 2015, December 1, 2015 and March 1, 2016, in each case subject to the individual's continued service to the Company through the applicable vesting date.

In addition, the Company granted time-based restricted stock awards during 2014 and 2013 to certain of its employees and to its non-employee directors, with the employee grants vesting in equal 50% annual installments over a two-year period from the grant date, other than two grants which vest in full on the second anniversary of the grant date, and with the director grants vesting in equal quarterly installments on June 1, September 1, December 1 and March 1 following the grant date, in each case subject to the individual's continued service to the Company through the applicable vesting date.

The Company uses the fair value method of accounting for stock options granted to employees which requires us to measure the cost of employee services received in exchange for the stock options, based on the grant date fair value of the award. The fair value of the awards is estimated using the Black-Scholes option-pricing model. The resulting cost is recognized on a straight line basis over the period during which an employee is required to provide service in exchange for the award, usually the vesting period.

The fair value of each employee option awarded was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions.



	Year Ended December 31, 2015	Year Ended December 31, 2014	Year Ended December 31, 2013
	Year Ended December 31, 2015	Year Ended December 31, 2014	Year Ended December 31, 2013
Expected dividend yield	—%	N/A	N/A
Risk-free interest rate	1.71%	N/A	N/A
Expected volatility	44%	N/A	N/A
Expected life (in years)	6.75	N/A	N/A

The Black-Scholes option-pricing model requires inputs such as the expected dividend yield, risk-free interest rate, expected term and expected volatility. Further, the forfeiture rate also affects the amount of aggregate compensation. These inputs are subjective and generally require significant judgment.

The risk-free interest rate that we use is based on the United States Treasury yield in effect at the time of grant for zero coupon United States Treasury notes with maturities approximating each grant’s expected life. Given our limited history with employee exercise patterns, we use the “simplified” method in estimating the expected term for our employee grants. The “simplified” method is calculated as the average of the time-to-vesting and the contractual life of the options. Our expected volatility was derived from the historical volatilities of our common stock and several unrelated public companies within the homebuilding industry, because we had insufficient trading history on our common stock at the time the grants were valued. When making the selections of our peer companies within the homebuilding industry to be used in the volatility calculation, we also considered the stage of development, size and financial leverage of potential comparable companies. We estimate our forfeiture rate based on an analysis of our actual forfeitures, of which we had none, and will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior and other factors.

As of December 31, 2015, the Company has 1,614,107 shares available for grant under the Plan.

Summary of Stock Option Activity

Stock option activity under the Plan for the years ended December 31, 2015, 2014, and 2013 was as follows:



	Year Ended December 31, 2015					Year Ended December 31, 2014					Year Ended December 31, 2013
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Options outstanding at beginning of year	419,238			$	8.66	576,651			$	8.66	576,651		$	8.66
Granted (1)	240,000			$	25.82	—			N/A		—		N/A
Exercised	(47,925		)	$	8.66	(157,413		)	$	8.66	—		N/A
Canceled	—			N/A		—			N/A		—		N/A
Options outstanding at end of year	611,313			$	15.40	419,238			$	8.66	576,651		$	8.66
Options vested and expected to vest	611,313			$	15.40	419,238			$	8.66	576,651		$	8.66
Options exercisable at end of year (2)	371,313			$	8.66	419,238			$	8.66	480,571		$	8.66
Price range of options exercised	$	8.66				$	8.66				N/A
Price range of options outstanding	$8.66-$25.82					$	8.66				$	8.66


(1)	The weighted average grant date fair value of the stock options was $12.01


(2)	No options vested during the year ended December 31, 2015. The fair value of shares vested during the years ended December 31, 2014 and 2013 was $1.2 million, and $1.4 million, respectively.

The following table summarizes information about stock options granted to executives, directors, and non-executives that are outstanding and exercisable at December 31, 2015:



Outstanding						Exercisable
Exercise Price		Number of Shares	Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value		Number of Shares
$	8.66	371,313	6.75	$	2,911,094	371,313
25.82		240,000	9.25	—		—

Summary of Restricted Shares Activity

During the years ended December 31, 2015, 2014, and 2013, the Company had the following activity relating to grants of time based restricted common stock:



	Year Ended December 31, 2015				Year Ended December 31, 2014				Year Ended December 31, 2013
	Number of Shares		Weighted Avg Grant Date Fair Value		Number of Shares		Weighted Avg Grant Date Fair Value		Number of Shares		Weighted Avg Grant Date Fair Value
Non-vested shares at beginning of year	79,335		$	24.84	99,661		$	11.49	109,850		$	8.66
Granted	208,715		23.11		79,575		27.70		79,509		14.56
Vested	(55,571	)	23.24		(99,901	)	13.81		(89,698	)	10.74
Canceled (1)	(6,792	)	24.28		—		N/A		—		N/A
Non-vested shares at end of year	225,687		$	23.65	79,335		$	24.84	99,661		$	11.49

(1) Represents shares that were canceled as result of terminations of employment.

During the years ended December 31, 2015, 2014, and 2013 the Company had the following activity relating to grants of performance based restricted common stock:



	Year Ended December 31, 2015				Year Ended December 31, 2014				Year Ended December 31, 2013
	Number of Shares		Weighted Avg Grant Date Fair Value		Number of Shares		Weighted Avg Grant Date Fair Value		Number of Shares		Weighted Avg Grant Date Fair Value
Non-vested shares at beginning of year	506,846		$	23.84	291,450		$	14.03	—		$	—
Granted	284,809		23.50		312,551		29.94		291,450		14.03
Vested	(154,467	)	19.58		(97,155	)	14.03		—		—
Canceled (1)	(156,431	)	28.86		—		N/A		—		—
Non-vested shares at end of year	480,757		$	24.18	506,846		$	23.84	$	291,450	$	14.03

(1) Represents shares that were canceled as a result of achievement of performance targets as outlined in the respective grant agreement at below the maximum levels, as well as a result of terminations of employment.

In conjunction with the issuance of the equity grants in for the years ended December 31, 2015, 2014 and 2013, the Company recorded stock based compensation expense of $6.6 million, $6.1 million, and $3.8 million, respectively, which is included in general and administrative expense in the consolidated statement of operations. As of December 31, 2015, $8.0 million of total unrecognized stock based compensation expense is expected to be recognized as an expense by the Company in the future over a weighted average period of 1.1 years. The total value of restricted stock awards which fully vested during the years ended December 31, 2015, 2014 and 2013 was $6.0 million, $3.8 million, and $1.6 million, respectively. For the years ended December 31, 2015, 2014 and 2013, the Company recognized an income tax benefit of $3.5 million, $2.6 million and $0.7 million related to stock based compensation, respectively.