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 December 31, 2018 and 2017, letters of credit outstanding were $2.2 million and $0.2 million, respectively, and performance bonds outstanding totaled $5.3 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

Warranty activity, included in accrued expenses in our consolidated balance sheets, for 2018, 2017 and 2016 consists of the following (in thousands):



	2018			2017			2016
Beginning balance	$	2,083		$	1,210		$	474
Additions	2,579			1,936			1,399
Charges	(1,682		)	(1,063		)	(663		)
Ending balance	$	2,980		$	2,083		$	1,210

Lease Commitments

The Company has leases associated with office space in Georgia, Texas, and Florida, which are classified as operating leases. Rent expense under these leases totaled $1.2 million, $0.9 million, and $0.7 million in 2018, 2017 and 2016, respectively, and is included in selling, general and administrative expense in the consolidated statements of income.

The future annual minimum lease payments under operating leases over the next five years as of December 31, 2018 are (in thousands):



2019	$	1,263
2020	1,256
2021	1,011
2022	734
2023	558
Total	$	4,822

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. Certain of our earnest money deposits are subject to first priority liens on the land that we have contracted to procure. As of December 31, 2018 and 2017, there were 1,843 and 1,724 lots under option, respectively, including option contracts for land intended to be developed into lots. The land and lot option contracts in place as of December 31, 2018 provide for potential land and lots purchase payments in each year through 2022.

If each option contract in place as of December 31, 2018 was exercised, expected purchase payments, including escalators, would be as follows (in thousands):



2019	$	114,198
2020	58,751
2021	18,601
2022	1,680
Total	$	193,230

The amounts of purchased land and lots under option contracts for the years ended December 31, 2018, 2017 and 2016 were $150.4 million, $122.3 million, and $106.5 million, respectively.

Deposits and pre-acquisition costs written off related to option contracts abandoned totaled $0.7 million, $0.2 million and $0.2 million for the years ended December 31, 2018, 2017 and 2016, respectively.

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, 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 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.