Commitments and Contingencies

9 Months Ended

Sep. 30, 2019

Commitments and Contingencies Disclosure [Abstract]

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, 2019 and December 31, 2018, letters of credit outstanding were $3.3 million and $2.2 million, respectively, and performance bonds outstanding totaled $5.2 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 and nine months ended September 30, 2019 and 2018 consisted of the following (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Warranty accrual, beginning of period	$	2,898		$	2,539		$	2,980		$	2,083
Warranties issued	930			532			2,351			1,645
Changes in liability for existing warranties	169			34			72			17
Settlements	(639		)	(455		)	(2,045		)	(1,095		)
Warranty accrual, end of period	$	3,358		$	2,650		$	3,358		$	2,650

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 and $0.9 million for the three and nine months ended September 30, 2019, respectively, is included in selling, general and administrative expense in the condensed consolidated statements of income. For the three and nine months ended September 30, 2019, cash paid for amounts included in the measurement of operating lease liabilities was $0.3 million and $0.9 million, respectively.

As of September 30, 2019, the weighted-average remaining lease term and the weighted-average discount rate used in calculating our lease liabilities were 3.5 years and 5.22%, 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 September 30, 2019 are presented below (in thousands):



Remainder of 2019	$	321
2020	1,320
2021	1,096
2022	819
2023	622
Total future lease payments	$	4,178
Less: Interest	341
Present value of lease liabilities	$	3,837

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 and $0.3 million for the three and nine months ended September 30, 2019, respectively, 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 September 30, 2019 and December 31, 2018, there were 2,855 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 September 30, 2019 provide for potential land and lot purchase payments through 2022.

If each option contract in place as of September 30, 2019 was exercised, expected purchase payments would be as follows (in thousands):



	Total
Remainder of 2019	$	52,978
2020	113,458
2021	49,861
2022	8,075
Total	$	224,372

Deposits and pre-acquisition costs written off related to option contracts abandoned totaled $0.0 million and $0.5 million for the three and nine months ended September 30, 2019, respectively. Deposits and pre-acquisition costs written off related to option contracts abandoned totaled $0.1 million and $0.2 million for the three and nine months ended September 30, 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 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.