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 March 31, 2019 and December 31, 2018, letters of credit outstanding were $2.2 million and $2.2 million, respectively, and performance bonds outstanding totaled $5.4 million and $5.3 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 accruals are included within accrued expenses on the condensed consolidated balance sheets. Warranty activity during the three months ended March 31, 2019 and 2018 consisted of the following (in thousands):



	Three Months Ended March 31,
	2019			2018
Warranty accrual, beginning of period	$	2,980		$	2,083
Warranties issued	653			404
Changes in liability for existing warranties	(144		)	(4		)
Settlements	(862		)	(247		)
Warranty accrual, end of period	$	2,627		$	2,236

Operating Leases

The Company has leases associated with office and design center space that, at the commencement date, have a lease term of more than 12 months and are classified as operating leases. The exercise of any extension options available in such operating lease contracts is not reasonably certain.

Operating lease cost of $0.3 million for the three months ended March 31, 2019 is included in selling, general and administrative expense in the condensed consolidated statements of income. For the three months ended March 31, 2019, cash paid for amounts included in the measurement of operating lease liabilities was $0.3 million.

As of March 31, 2019, the weighted-average remaining lease term and the weighted-average discount rate used in calculating our lease liabilities were 3.9 years and 5.25%, respectively.

The future annual undiscounted cash flows in relation to the operating leases and a reconciliation of such undiscounted cash flows to the operating lease liabilities recognized in the condensed consolidated balance sheet as of March 31, 2019 are presented below (in thousands):



Remainder of 2019	$	896
2020	1,235
2021	1,011
2022	734
2023	558
Total future lease payments	$	4,434
Less: Interest	438
Present value of lease liabilities	$	3,996

The Company elected the short-term lease recognition exemption for all leases that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. For such leases, the Company does not recognize ROU assets or lease liabilities and instead recognizes lease payments in the condensed consolidated income statements on a straight-line basis. Short-term lease cost of $0.1 million for the three months ended March 31, 2019 related to such lease contracts is included in selling, general and administrative expense in the condensed consolidated statements of income.

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 March 31, 2019 and December 31, 2018, there were 2,308 and 1,843 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 March 31, 2019 provide for potential land and lot purchase payments in each year through 2022.

If each option contract in place as of March 31, 2019 was exercised, expected purchase payments would be as follows (in thousands):



	Total
Remainder of 2019	$	107,083
2020	72,595
2021	24,779
2022	1,970
Total	$	206,427

Deposits and pre-acquisition costs written off related to option contracts abandoned totaled $0.5 million and $0.1 million for the three months ended March 31, 2019 and 2018, 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 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.