COMMITMENTS AND CONTINGENCIES

Letters of Credit and Performance Bonds

During the ordinary course of business, certain regulatory agencies and municipalities require the Company to post letters of credit or performance bonds related to development projects. As of September 30, 2018 and December 31, 2017, letters of credit outstanding totaled $0.2 million and $0.2 million, respectively, and performance bonds outstanding totaled $5.8 million and $3.6 million, respectively. The Company does not believe that it is likely that any material claims will be made under a letter of credit or performance bond in the foreseeable future.

Warranties

The Company offers homebuyers a comprehensive third-party warranty on each home. Homes are generally covered by a one-year warranty for defects and products used, two years for electrical, mechanical and plumbing systems, and ten years for qualified and defined structural defects. Developed lot sales are generally covered by a customary one-year warranty on excavation and retaining walls.

The Company accrues an estimate of its exposure to warranty claims based on both current and historical home sales data and warranty costs incurred. Warranty accruals are included within accrued expenses on the condensed consolidated balance sheets.

Warranty activity consists of the following (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Beginning balance	$	2,539		$	1,503		$	2,083		$	1,210
Additions	569			362			1,697			1,116
Charges	(458		)	(324		)	(1,130		)	(785		)
Ending balance	$	2,650		$	1,541		$	2,650		$	1,541

Lease Commitments

The Company has leases associated with office and design center space which are classified as operating leases. Rent expense under these leases is included in selling, general and administrative expense in the condensed consolidated statements of income.

The future annual minimum lease payments under operating leases as of September 30, 2018 are (in thousands):



	Total
Remainder of 2018	$	278
2019	1,023
2020	1,033
2021	795
2022	582
2023 and thereafter	443
Total	$	4,154

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 contracts. As of September 30, 2018 and December 31, 2017, there were 2,672 and 1,724 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 September 30, 2018 provide for potential land and lot purchase payments in each year through 2022.

If each option contract in place as of September 30, 2018 was exercised, expected purchase payments would be as follows (in thousands):



	Total
Remainder of 2018	$	61,746
2019	134,550
2020	27,650
2021	12,244
2022	1,680
Total	$	237,870

Legal Matters

Lawsuits, claims and proceedings may be instituted or asserted against the Company 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, title company regulations, 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 an accrual 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.