COMMITMENTS AND CONTINGENCIES

Letters of Credit

During the ordinary course of business, certain regulatory agencies and municipalities require the Company to post letters of credit. Such letters of credit are issued by financial institutions and commit the issuer to pay specified amounts to the holder of the letter of credit if the holder demonstrates that the Company has failed to perform under the relevant contract. If this were to occur, the Company would be required to reimburse the issuer of the letter of credit. The expiration dates of the letters of credit coincide with the expected completion date of the related projects. If the obligations related to a project are ongoing, the letters of credit are automatically extended, without amendment, for one year. As of December 31, 2017 and December 31, 2016, letters of credit outstanding totaled $0.2 million and $0.0 million, respectively. The Company does not believe that it is likely that any material claims will be made under a letter of credit in the foreseeable future.

Warranties

Warranty activity, included in accrued expenses in our consolidated balance sheets, for 2017, 2016 and 2015 consists of the following (in thousands):



	2017			2016			2015
Beginning balance	$	1,210		$	474		$	460
Additions	1,936			1,399			667
Charges	(1,063		)	(663		)	(653		)
Ending balance	$	2,083		$	1,210		$	474

Commitments

The Company has leases associated with office space in Georgia and Texas which are classified as operating leases. Rent expense under these leases totaled $0.8 million, $0.7 million, and $0.6 million in 2017, 2016 and 2015, respectively and is included in selling, general and administrative expense in the consolidated statements of income.

The approximate annual minimum lease payments over the next five years under operating leases as of December 31, 2017 are (in thousands):



2018	$	877
2019	895
2020	934
2021	763
2022 and thereafter	1,025
	$	4,494

Land and Lot Option Contracts

In the ordinary course of business, the Company enters into land and lot option contracts in order to procure land for the construction of homes in the future. Earnest money deposits act as security for such option contracts. As of December 31, 2017 and 2016, there were 1,724 and 954 lots under option, respectively, as well as option contracts for land intended to be developed into additional lots. The land and lot option contracts in place as of December 31, 2017 provide for potential land and lots purchase payments in each year through 2021.

If each option contract in place as of December 31, 2017 was exercised, expected purchase payments would be as follows (in thousands):



	Total
2018	$	137,548
2019	47,588
2020	16,092
2021	5,765
	$	206,993

Legal Matters

Lawsuits, claims and proceedings may be instituted or asserted against us in the normal course of business. The Company is also subject to local, state and federal laws and regulations related to land development activities, house construction standards, sales practices, employment practices and environmental protection. As a result, the Company may be subject to periodic examinations or inquiry by agencies administering these laws and regulations.

The Company records a reserve for potential legal claims and regulatory matters when they are probable of occurring and a potential loss is reasonably estimable. The Company accrues for these matters based on facts and circumstances specific to each matter and revises these estimates when necessary.

In view of the inherent difficulty of predicting outcomes of legal claims and related contingencies, the Company generally cannot predict their ultimate resolution, related timing or eventual loss. If evaluations indicate loss contingencies that could be material are not probable, but are reasonably possible, the Company will disclose their nature with an estimate of the possible range of losses or a statement that such loss is not reasonably estimable. We believe that the disposition of legal claims and related contingencies will not have a material adverse effect on our results of operations and liquidity or on our financial condition.