S-1 1 ucp-sx1x04012013.htm FORM S-1 UCP-S-1-04.01.2013

As filed with the Securities and Exchange Commission on April 4, 2013
Registration No. 333-        
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
 Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
________________
UCP, LLC
(to be converted into UCP, Inc.)
(Exact name of registrant as specified in its charter) 
________________
Delaware
 
1531
 
30-0447004
(State or other jurisdiction of
incorporation or organization)
 
(Primary Standard Industrial
Classification Code Number)
 
(I.R.S. Employer
Identification Number)
6489 Camden Avenue, Suite 204
San Jose, CA 95120
(408) 323‑1113
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) 
_______________
Dustin L. Bogue
President and Chief Executive Officer
UCP, LLC
6489 Camden Avenue, Suite 204
San Jose, CA 95120
(408) 323‑1113
(Name, address, including zip code, and telephone number, including area code, of agent for service) 
_______________
Copies to:
J. Gerard Cummins, Esq.
Bart Sheehan, Esq.
Sidley Austin LLP
787 Seventh Avenue
New York, New York 10019
Tel (212) 839‑5300
Fax (212) 839‑5599
 
 
 
Alan F. Denenberg, Esq.
Davis Polk & Wardwell LLP
1600 El Camino Real
Menlo Park, California 94025
Tel (650) 752‑2000
Fax (650) 752‑2111
 
________________
 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.     ¨
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     ¨
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     ¨
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
o
 
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
x  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
o
 
________________

CALCULATION OF REGISTRATION FEE
Title of Each Class of
Securities to be Registered
 
Proposed Maximum Aggregate Offering Price (1)(2)
 
Amount of
 Registration Fee
Common Stock, $0.01 par value per share
 
$125,000,000

$17,050
(1) Estimated solely for purposes of determining the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes shares of common stock which may be purchased by the underwriters to cover their option to purchase additional shares of common stock.
________________

 The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 






The information in this preliminary prospectus is not complete and may be changed. Neither we nor the selling stockholder may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL 4, 2013
 
P R E L I M I N A R Y P R O S P E C T U S

Shares
UCP, Inc.
Common Stock
$ per share
This is the initial public offering of our common stock. We are selling              shares of our common stock. We currently expect the initial public offering price to be between $      and $      per share of our common stock.
We have granted the underwriters an option to purchase up to           additional shares of our common stock. PICO Holdings, Inc., or “PICO,” our sole stockholder, has granted the underwriters an option to purchase up to           additional shares of our common stock owned by PICO.
We intend to apply to list the shares of our common stock on the New York Stock Exchange under the symbol “UCP.”

 ________________________________
Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 17.
________________________________
 
We are an “emerging growth company” under the federal securities laws and are eligible for reduced reporting requirements. See “Summary—Implications of Being an Emerging Growth Company.”
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
________________________________
 
Per Share
 
Total
Public Offering Price
$
 
$
Underwriting Discount
$
 
$
Proceeds to Us (before expenses)
$
 
$
 
The underwriters expect to deliver the shares to purchasers on or about , 2013 through the book-entry facilities of The Depository Trust Company.
 
Citigroup
 
Deutsche Bank Securities
 
Zelman Partners LLC
                      
  , 2013






We are responsible for the information contained in this prospectus. We have not authorized anyone to provide you with different information, and we take no responsibility for any other information others may give you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than its date.

TABLE OF CONTENTS
 
 
Page
Summary
Risk Factors
Cautionary Note Concerning Forward-Looking Statements
Use of Proceeds
Capitalization
Dilution
Dividend Policy
Selected Consolidated Financial Data
Management’s Discussion and Analysis of Financial Condition and Results Of Operations
Market Opportunity
Our Business
Management
Executive and Director Compensation
Certain Relationships and Related Party Transactions
Conflicts of Interest
Principal and Selling Stockholders
Description of Capital Stock
Shares Eligible for Future Sale
Material Federal Income Tax Considerations
Underwriting
Legal Matters
Experts
Where You Can Find More Information
Index to Consolidated Financial Statements
 

i



We use market data and industry forecasts and projections throughout this prospectus, and in particular in the sections entitled “Summary,” “Market Opportunity” and “Our Business.” We have obtained substantially all of this information from a market study prepared for us in connection with this offering by John Burns Real Estate Consulting, LLC (“JBREC”), an independent research provider and consulting firm focused on the housing industry. We have agreed to pay JBREC a fee of $34,000 for that market study, plus an amount charged at an hourly rate for additional information we may require from JBREC from time to time in connection with that market study. Such information is included in this prospectus in reliance on JBREC’s authority as an expert on such matters. Any forecasts prepared by JBREC are based on data (including third-party data), models and experience of various professionals, and are based on various assumptions (including the completeness and accuracy of third‑party data), all of which are subject to change without notice. See “Experts.” In addition, certain market and industry data has been taken from publicly available industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. We have not independently verified the data obtained from these sources, and we cannot assure you of the accuracy or completeness of the data. Forecasts and other forward‑looking information obtained from these sources are subject to the same qualifications and additional uncertainties regarding the other forward‑looking statements in this prospectus.
Our Formation Transactions
Prior to the completion of this offering, UCP, LLC will be converted from a Delaware limited liability company into a Delaware corporation and renamed UCP, Inc. In connection with the conversion, the member’s equity of UCP, LLC will be automatically converted into shares of common stock issued by UCP, Inc. and, as a result, the sole member of UCP, LLC, will receive an aggregate of shares of common stock issued by UCP, Inc.



ii



SUMMARY

This summary highlights information contained elsewhere in this prospectus, but it does not contain all of the information that you may consider important in making your investment decision. Therefore, you should read this entire prospectus carefully, including, in particular, the “Risk Factors” section beginning on page 17 of this prospectus. As used in this prospectus, unless the context otherwise requires or indicates, references to “the Company,” “our company,” “we,” “our” and “us” (1) for the period prior to January 4, 2008, the date on which PICO (as defined below) acquired our business, refer to Union Community Partners, LLC, (2) for the period beginning January 4, 2008 and prior to completion of our formation transactions, as described herein, refer to UCP, LLC and its subsidiaries and (3) following the completion of our formation transactions, refer to UCP, Inc. and its subsidiaries; references to “PICO” refer to PICO Holdings, Inc., the sole member of UCP, LLC (together with its wholly owned subsidiaries excluding UCP, LLC).

Unless otherwise indicated, market data is derived from a market study prepared for us in connection with this offering by John Burns Real Estate Consulting, LLC (“JBREC”).

Unless the context otherwise requires, the information in this prospectus assumes that: (1) our formation transactions have been completed, (2) the shares of our common stock to be sold in this offering are sold at $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and (3) the underwriters’ option to purchase additional shares is not exercised.
Our Company
We are a homebuilder and land developer, with significant land acquisition and entitlement expertise, in growth markets in Northern California and with a growing presence in attractive markets in the Puget Sound area of Washington State. Our operations began in 2004 with the founding of Union Community Partners, LLC by Dustin L. Bogue, our President and Chief Executive Officer, and we were principally focused on acquiring land, entitling and developing it for residential construction, and selling residential lots to third-party homebuilders. In January 2008, we were acquired by PICO, a NASDAQ-listed, diversified holding company, which allowed us to accelerate the development of our business and gain access to a capital partner capable of funding our pursuit of attractive opportunities resulting from the recent residential real estate downturn. Since we were acquired by PICO, we have invested over $191.4 million acquiring ownership or control of and improving over 5,300 single-family residential lots. In 2010, we formed Benchmark Communities, LLC, or Benchmark Communities, our wholly owned homebuilding subsidiary, to design, construct and sell high quality single-family homes. As of December 31, 2012, our property portfolio consisted of 45 communities in 15 cities in Northern California and the Puget Sound area of Washington State.
In Northern California, we primarily operate in three areas: the Central Valley area (Fresno and Madera counties), the Monterey Bay area (Monterey County) and the South San Francisco Bay area (Santa Clara and San Benito counties). In Washington State, we operate in the Puget Sound area (King, Snohomish, Thurston and Kitsap counties). We believe that these areas have attractive residential real estate investment characteristics, such as favorable long-term population demographics, a demand for single-family housing that often exceeds available supply, large and growing employment bases, and high home affordability levels, as discussed further in the “Industry Overview” section of this summary and under the heading “Market Opportunity” included elsewhere in this prospectus. We continue to experience significant homebuilding and land development opportunities in our current markets and are evaluating potential expansion opportunities in other markets that we believe have attractive long-term investment characteristics.
Since 2008 and throughout the recent residential real estate downturn, we have been a significant acquiror of real estate for residential development and construction in our markets. We actively source land acquisition opportunities from a variety of parties, including land owners, land brokers, lenders and other land development and real estate companies. When we have elected to sell residential lots to third parties, our primary customers have been public and private homebuilders. Since 2008 and through December 31, 2012, we have sold 787 lots and 89 homes, generating revenue of $93.7 million across our markets.


1



_______
(1) Includes owned lots and lots that we control through purchase or option contracts.
(2) Includes 35 lots purchased in December 2007.
Our revenue increased from $2.4 million in 2010 to $58.1 million in 2012. In 2012, we sold 41 homes and 560 lots located in 10 communities in California and Washington State; and in 2011, we sold 33 homes and 118 lots located in seven communities in and around the Central Valley area, the South San Francisco Bay area and the Monterey Bay area of California. In 2012, we generated homebuilding adjusted gross margin of $4.4 million, or 30.9%, and land development adjusted gross margin of $12.5 million, or 28.4%. Homebuilding adjusted gross margin and land development adjusted gross margin are non-U.S. generally accepted accounting principles (“U.S. GAAP”) financial measures. For a discussion of these measures and a reconciliation of these measures to the most comparable U.S. GAAP financial measure, see “Selected Consolidated Financial Data—Consolidated Gross Margin and Consolidated Adjusted Gross Margin and U.S. GAAP Reconciliation.”
As of December 31, 2012, we owned or controlled 4,916 lots, which approximated an eight year supply of land based on our 2012 home and lot sales and which we believe will support our business strategy for a multi-year period. While we expect to opportunistically sell residential lots to third-party homebuilders when we believe that will maximize our returns or lower our risk, we expect that homebuilding and home sales will constitute our primary source of revenue growth. Based on current market conditions, we intend to start building homes on approximately 250 lots in California during 2013. However, this is subject to market and operating conditions, and no assurance can be given that we will begin building all of these homes during this time period.
Since we were acquired by PICO in 2008, we have operated as a wholly owned subsidiary of PICO, and upon completion of this offering, PICO will own approximately % of our outstanding common stock. John R. Hart, PICO’s President and Chief Executive Officer, is a member of our board of directors and Maxim C. W. Webb, PICO’s Chief Financial Officer, is also one of our directors. PICO seeks to invest in businesses using a disciplined, long-term risk-adverse investment approach that emphasizes preservation of capital. As a subsidiary of PICO, the development of our acquisition and financing strategies was influenced by PICO’s substantial experience as an owner of businesses in a variety of industries. We believe that we will continue to benefit from PICO’s substantial business expertise, vision, and public company experience, and that our corporate culture has benefited from the discipline of operating as a subsidiary of a public company. Upon completion of this offering, we will enter into a Transition Services Agreement with PICO, which will provide us with access to a developed public company platform for accounting, human resources and information technology functions, as we develop our own corporate infrastructure.
We have operated our business through UCP, LLC under the name Union Community Partners, which, prior to the completion of this offering, will be converted into a Delaware corporation and renamed UCP, Inc. PICO, the sole member of UCP, LLC, will receive an aggregate of shares of our common stock in connection with our conversion into a corporation.


2



Industry Overview
National Housing Market
The U.S. housing market continues to improve from the cyclical low points reached during the 2008-2009 national recession. Between the 2005-market peak and 2011, single-family housing sales declined 76%, according to data compiled by the U.S. Census Bureau, and median home prices declined 34%, as measured by the S&P Case-Shiller Index. In 2011, early signs of a recovery began to materialize in many markets around the country as a result of an improving macroeconomic backdrop and a historically high level of housing affordability. In the year ended December 31, 2012, homebuilding permits increased 29% and the median single-family home price increased 6.6% as compared to the year ended December 31, 2011. Growth in new home sales outpaced growth in existing home sales over the same period, increasing 20% for new homes versus 9% for existing homes (which were impacted by foreclosure-related sales).
Historically, strong housing markets have been associated with excellent affordability, a healthy domestic economy, positive demographic trends such as population growth and household formation, falling mortgage rates, increases in renters that qualify as home buyers, and locally based dynamics such as housing demand relative to housing supply. Many markets across the U.S. are exhibiting a number of these positive characteristics. Relative to long-term historical averages, the U.S. economy is creating more jobs than homebuilding permits issued, the inventory of new homes for sale and resale homes is well below average and affordability is near its best level in more than 30 years, as measured by the ratio of homeownership costs to household income.
Despite recent momentum, the U.S. housing market has not fully recovered from the 2008-2009 recession as consumer confidence remains below average levels, mortgage underwriting standards have tightened, and the number of delinquent homes remains elevated relative to historical averages. Additionally, real estate is a local industry and not all markets exhibit the same trends.
Northern California Housing Market

Strong job growth paired with limited supply of new and resale homes are creating an environment conducive to a housing recovery and price appreciation in Northern California.  The Northern California region includes the San Francisco Bay area economic powerhouse, which contains the San Francisco, Oakland and San Jose metropolitan areas.  Coming out of a deep and extended national recession, more than 83,000 new jobs were created in 2012 in these three metropolitan areas combined, according to the Bureau of Labor Statistics.  These metropolitan areas have somewhat different economic drivers, but a common thread is job creation in sectors that tend to be higher paying and therefore support home purchases.

Through 2015, imbalances in supply and demand are expected to drive home price appreciation in the San Francisco Bay area.  This is a typical scenario coming off the bottom of a material housing correction.  The San Francisco Bay area has a long-term shortage of housing relative to strong job creation, which supports continuing demand for homes.

During 2012, the three core Bay area metropolitan areas issued approximately 15,200 residential permits, which included just 4,600 single-family permits for detached homes and townhomes.  The balance were multifamily permits for condominiums and apartments, with the vast majority for rentals.  The three metropolitan areas created roughly 5.4 jobs for every residential permit issued in 2012, compared to a long-term national average of 1.2 jobs per permit.  Resale listings remain low, with 0.8 estimated months of supply in Oakland, 1.4 months in San Jose and 2.1 months in San Francisco, based on the 2012 resale sales rates.

Limited lot and land supplies and the political environment affecting project approvals are long-term conditions in the San Francisco Bay area, which underscores the importance of homebuilders with strong local knowledge and planning and development expertise.  Future growth areas where the construction of large numbers of single-family housing will be possible include the far East Bay area, South Santa Clara County and the Northern Central Valley.

Central California Housing Market

The Central California housing markets are showing some improvement in early 2013 with the gradual return of job growth, but trail the core San Francisco Bay area metropolitan areas.  Central California is commonly defined as a 40-60 mile wide strip that stretches 450 miles from Stockton and Mountain House at its North end to Bakersfield at its South end.  This area includes the larger metropolitan areas of Fresno, Bakersfield, Modesto, Merced, Madera and Visalia.  Top employers in this important agricultural region typically include produce and poultry, farming, packaging and shipping companies, plus local, county and state governments.


3



Job creation is gradually returning to the Central California region.  Fresno and Stockton added 4,800 and 5,900 payroll jobs, respectively, in 2012, according to the Bureau of Labor Statistics, and Modesto and Merced added 1,000 and 600 jobs, respectively, in 2012. 
In contrast to the markets at the Northern and Southern submarkets of Central California, Fresno and Madera Counties (collectively referred to herein as the Central Valley) do not rely on commuter-fueled growth from the San Francisco Bay area and Los Angeles basin. This is due to the Central Valley’s geographic distance from these core metropolitan areas and its self-sufficient economy, with significant agricultural production and a growing logistics and distribution center that capitalizes on Fresno’s centralized location within California along several major transportation corridors.  In fact, Fresno issued more single-family permits over the last six years than any other county in Northern or Central California.

Housing affordability is declining from its historic highs in the San Francisco Bay area metropolitan areas, as rising home prices reduced affordability in late 2012 and early 2013.  However, as of early 2013, affordability is still historically high in the Central Valley metropolitan areas.  JBREC anticipates that affordability in the Central Valley metropolitan areas will once again draw buyers who work in the San Francisco Bay area, given the chronic under supply of housing there. 

Puget Sound Housing Market

Strong job growth combined with limited supplies of new and resale homes are creating an environment conducive to a housing recovery and price appreciation in the Puget Sound region, led by Seattle.  The Puget Sound region is commonly defined as including the Seattle-Bellevue-Everett, Tacoma, Bremerton-Silverdale and Olympia metropolitan areas.  Seattle is the economic powerhouse of the region, with 41,500 new jobs created during 2012 for a 2.9% annual increase, according to Bureau of Labor Statistics data.  Tacoma has also seen strong job growth off a smaller base, with a 2.8% annual increase equating to 7,400 new jobs in 2012.  Olympia added 1,200 new jobs in 2012 for a 1.2% annual increase.

Seattle’s economy has significant clusters in the aerospace, clean technology, and software and information technology industries, which are associated with higher-paying jobs that can support purchases of homes.  The port is another significant economic driver, but jobs are often at lower pay rates.  Seattle’s supply of new homes tends to be limited, as the metropolitan area is broken up by water with few large land parcels available to develop the planned communities seen in other metropolitan areas.  As a result, homes tend to be relatively expensive, and prices are rising today as demand is outpacing supply.  During 2012, roughly 15,000 residential permits were issued in Seattle, for a ratio of 2.8 jobs created for every one home built.  The resale supply is very low at 1.8 months of supply as of December 31, 2012 at the resale sales rate in the twelve months ended December 31, 2012, causing potential buyers to look at the new home market.
Our Competitive Strengths
We believe the following competitive strengths will provide us with a competitive advantage in implementing our business strategy:
Substantial Presence in Attractive West Coast Markets
We currently focus on West Coast markets with high barriers to the development of residential real estate, such as geographic or political factors, and that we believe exhibit attractive residential real estate investment characteristics, such as improving levels of employment and population growth relative to national averages. Our extensive land holdings in select markets in California and Washington State provide us significant exposure to the current U.S. housing market recovery. We believe that we are well positioned if housing sales volumes or home price appreciation accelerate in the future and that any such trends would enhance our profit potential. Since inception, our focus has been on acquiring land at various stages of entitlement and development in the following areas of California: the Central Valley area, the Monterey Bay area and the South San Francisco Bay area. Beginning in 2011, we entered the Puget Sound area of Washington State. We believe that these residential real estate markets offer an attractive long-term investment opportunity due to favorable demographic trends and positive economic indicators. Currently, evidence of a housing recovery in our markets includes decreasing levels of existing home inventory, high affordability, an increasing volume of new home sales and increasing home prices. Furthermore, recent key housing data in our markets compare favorably to national averages.

4



Significant Land Position Acquired at Low Cost Basis
Substantially all of our real estate inventory of 4,916 lots as of December 31, 2012 was aggregated since 2008 at what we believe are attractive prices, providing us with significant opportunity, particularly if home prices and overall housing market conditions continue to improve. Throughout the housing market downturn, we continued to implement our disciplined land acquisition methodology, which emphasizes our value-oriented investment philosophy, along with attractive underlying housing market fundamentals, such as favorable long-term demographics, demand for single-family housing that exceeds available supply, desirable educational systems and institutions, high educational attainment levels, well-developed transportation infrastructure, proximity to major trade corridors and employment centers, positive employment trends, diverse employment bases, and high barriers to the development of residential real estate, such as geographic or political factors.
As of December 31, 2012, we owned or controlled 4,916 lots, which approximated an eight year supply of land based on our 2012 home and lot sales, and which we believe will support our business strategy for a multi-year period. We believe that our extensive land holdings may reduce our exposure to potential land shortages or increasing land prices in our markets.
Growth-Focused Company with No Known Legacy Troubled Assets
We believe that our strong balance sheet and absence of known legacy troubled assets enable us to focus on future growth, as opposed to diverting resources to managing troubled assets. Because our land acquisition activity accelerated in January 2008 after we were acquired by PICO, we have no known legacy assets in markets, or at acquisition costs, that we believe are no longer commercially viable, nor do we believe that we have significant liabilities related to assets that are no longer commercially viable, unlike many competitors that were negatively impacted by the recent housing downturn. Our land inventory has been underwritten at valuations that we believe remain attractive and is located in markets on which we have strategically focused since the 2007 downturn commenced. The absence of known legacy assets and liabilities has aided us in attracting and retaining experienced and talented homebuilding and real estate development personnel. We believe that we are well-positioned to achieve economies of scale as we seek to grow our business.
Access to Privately Negotiated Land and Lot Acquisitions, and to Projects with Significant “Value-Add” Opportunities
Our market position, strong local relationships and proven land acquisition, development and homebuilding platform have allowed us to generate attractive adjusted gross margins. We benefit from the long-standing relationships our executive management team has with key land owners, brokers, lenders, and development and real estate companies in our markets that have provided us with opportunities to evaluate and privately negotiate acquisitions outside of a broader marketing process. In addition, we believe that our strong balance sheet, positive reputation as a homebuilder and land developer, and track record of acquiring over 5,300 lots since 2008 provide land sellers and brokers confidence that we will consummate transactions in a highly professional, efficient and transparent manner, which in turn strengthens these relationships for future opportunities. We believe our relationships with land owners and brokers will continue to provide opportunities to source land acquisitions privately, helping us to maintain a significant pipeline of opportunities on favorable terms and prices.
The land development process in our markets can be very complex and often requires highly-experienced individuals that can respond to numerous unforeseen challenges with a high degree of competency and integrity. We actively seek land acquisition opportunities where others might seek to avoid complexities, as we believe we can add significant value through our expertise in entitlements, re-entitlements, horizontal land planning and development, and by designing and selling homes to targeted home buyer segments that are attracted to our differentiated new home product.
Proven Land Acquisition Underwriting Methods
Our executive management team has developed a rigorous and disciplined land acquisition underwriting methodology, which has guided our land acquisition activities. Rooted in an analytical approach to decision making, our underwriting methods emphasize risk identification and mitigation, and screen for fundamental asset value with high risk-adjusted return potential. Our underwriting models help us identify, evaluate and act upon residential acquisition and development opportunities based on a variety of indicators, including demand for single-family housing that exceeds available supply, high single-family home affordability, and areas with well regarded educational systems and institutions, high educational attainment levels, accommodative transportation infrastructure, proximity to major trade corridors, positive employment trends, diverse employment bases and geographic or political barriers that limit the development of new housing.

5



Our executive management team is closely involved in the sourcing, underwriting, negotiation and closing of our land transactions. Our rigorous diligence process entails gaining a detailed understanding of the risks and profit potential of each asset, internal and third-party analysis of local supply and demand factors, internal and third-party analysis of competitive market dynamics, and analysis of broader market conditions, such as prevailing employment and demographic information.
Innovative Homebuilding Platform with Distinctive, Diverse Product Offering
We build homes through our wholly owned homebuilding subsidiary, Benchmark Communities. Benchmark Communities operates under the principle that “Everything Matters!” This principle underlies all phases of our new home process including planning, construction, sales and customer service. Based on third-party surveys and realtor feedback, our Benchmark Communities brand is recognized by home buyers for its high-quality construction materials and craftsmanship, cutting edge home design, and customer-centric service and warranty programs. Eliant Surveys, a third-party customer experience management company that has been surveying buyers of new homes for over twenty years, surveys our home buyers after closing on their home purchases. For the three months ended March 31, 2013, our initial quality and customer service scores were 95% and 92.5%, respectively, as compared to national homebuilder averages of 86.7% and 90.7% respectively.
We are diversified by product offering, which we believe broadens our exposure to the housing recovery and reduces our exposure to any particular market or customer segment. Target home buyers vary by project and geographic market, in part dictated by each particular asset, its location, topography and competitive market positioning and the amenities of the surrounding area and the community in which it is located.
Optionality Provided by Our Hybrid Homebuilding and Land Development Strategy
As a hybrid homebuilder and land developer, we are strategically positioned to either build new homes on our lots or to sell our lots to third-party homebuilders. While our business plan contemplates building new homes on the majority of our lots, we proactively monitor market conditions and our nimble operations allow us to opportunistically sell a portion of our lots to third-party homebuilders if we believe that will maximize our returns or lower our risk. We believe our ability and willingness to opportunistically build on or sell our lots to third-party homebuilders affords us the following important advantages:
exploit periods of cyclical expansion by building on our lots;
manage our operating margins and reduce operating income volatility by opportunistically selling lots as operating performance and market conditions dictate; and
manage operating risk in periods where we anticipate cyclical contraction by reducing our land supply through lot sales.
Proven and Experienced Management Team
With an average of 23 years of residential land acquisition, development and homebuilding experience, our executive management team, led by Dustin L. Bogue, our President and Chief Executive Officer, William J. La Herran, our Chief Financial Officer and Treasurer, and James W. Fletcher, our Chief Operating Officer, successfully guided our company through the deep and extensive housing depression that lasted from our inception through 2012. During this time, our executive management team executed over 40 land acquisition transactions valued at more than $191.4 million of invested capital and totaling over 5,300 lots.
Beginning in early 2008, our executive management team developed and implemented our strategy of acquiring a significant amount of residential land, at what we believe to be meaningful discounts to its long-term value, for us to build homes upon or sell to third-party homebuilders. We believe our executive management team has positioned us to benefit significantly from any continuation of the U.S. housing recovery, with positive exposure to any related home price appreciation.

Our Business Strategy
We actively source, evaluate and acquire land for residential real estate development and homebuilding. For each of our real estate assets, we periodically analyze ways to maximize value by either (i) building single-family homes and marketing them for sale under our Benchmark Communities brand, or (ii) completing entitlement work and horizontal infrastructure development and selling finished lots to third-party homebuilders. We perform this analysis using a disciplined analytical process, which we believe is a differentiating component of our business strategy.

6



We believe that we are well positioned to capitalize on any continuation of the prevailing housing market recovery through the disciplined execution of the following strategies:
Grow Revenue by Increasing Community Count
As of December 31, 2012, we owned or controlled 4,916 lots, providing us with significant lot supply, which we believe will support our business strategy for a multi-year period. We believe that our sizable inventory of well located land provides us with a significant opportunity to develop communities and design, construct, and sell homes under our Benchmark Communities brand. While we expect to opportunistically sell select residential lots to third-party homebuilders when we believe that will maximize our returns or lower our risk, we expect that homebuilding and home sales will constitute our primary means of generating revenue growth for the foreseeable future. As of December 31, 2012, we had four actively selling communities consisting of 133 lots, and we expect to open seven additional communities during 2013. However, this is subject to market and operating conditions, and no assurance can be given that we will open these communities during this time period.
Continue to Implement Return-Focused Investment and Operational Discipline
When acquiring real estate assets, we focus on seeking maximum long-term risk-adjusted returns. Our underwriting and operating philosophies emphasize capital preservation, risk identification and mitigation, and risk-adjusted returns. Our investing and operating discipline have resulted in consolidated adjusted gross margin percentages of 29% and 30.2% for the years ended December 31, 2012 and 2011, respectively. We seek to mitigate our exposure to market downturns and capitalize on market upturns through the following key strategies:
identifying the risks associated with our assets and business, including market, entitlement and environmental risks, and structuring transactions to minimize the impact of those risks;
maintaining high quality in our construction activities;
maintaining a strong balance sheet, using a prudent amount of leverage;
leveraging our purchasing power and controlling costs;
attracting highly experienced professionals and encouraging them to maintain a deep understanding and ownership of their respective disciplines;
maintaining a strong corporate culture that is based on integrity, honesty, transparency, value, quality and excellence; and
maintaining rigorous supervision over our operations.
Maximize Benefits of Hybrid Homebuilding and Land Development Model
Our business model provides the flexibility to monetize the value of our land assets either by building and selling homes through Benchmark Communities or developing land and selling lots to third-party homebuilders. When evaluating monetization strategies for our land assets, we consider each asset’s potential contribution to our overall performance, taking into account the time frame over which we may monetize the asset, rather than simply considering its ability to drive sales in a particular submarket over a short period of time. While we currently intend to monetize the majority of our land assets by building homes on our lots, we believe our hybrid homebuilding and land development model provides us with increased flexibility to seek to maximize risk-adjusted returns as market conditions warrant.
Design, Construct and Develop High Quality, Innovative Homes and Communities
We believe our target home buyers look for distinctive new homes; accordingly, we design homes in thoughtful and creative ways to create homes that we expect buyers will find highly desirable. We seek to accomplish this by collecting and analyzing information about our target home buyers and incorporating our analysis into new home designs. We source information about target home buyers from our experience selling new homes and through market research that enables us to identify design preferences that we believe will appeal to our customers. We target diverse buyer segments, including first-time buyers, first-time move-up buyers, second-time move-up buyers and move-down buyers. Most of our communities target multiple buyer segments within such community, enabling us to seek increased sales pace and reduce our dependence on any single buyer segment. For example, our East Garrison project in Monterey County, California is expected to ultimately include eight communities.

7



Each of these communities will be designed, appointed and branded to appeal to a specific buyer segment that we have identified as sizable and that offer significant potential demand. We choose the targeted buyer segments based upon internal research, multiple third-party research reports and our senior management team’s extensive experience.
We contract with high quality architects, engineers and interior designers to assist our experienced internal product development personnel in designing homes that are intended to reflect our target customers’ tastes and preferences. In addition to identifying desirable design and amenities, this process includes a rigorous value engineering strategy that allows us to seek efficiencies in the construction process.
Deliver Superior High-Touch Customer Service
We seek to make the home buying experience friendly, effective and efficient. Our integrated quality assurance and customer care functions assign the same personnel at each community the responsibility for monitoring quality control and managing customer service. As a standard practice, we communicate with each homeowner at least seven times during their first two years of ownership in an effort to ensure satisfaction with their new home. Additionally, we monitor the effectiveness of our service efforts with third-party surveys that measure our home buyers’ perception of the quality of our homes and the responsiveness of our customer service. Our customer service program seeks to optimize customer care in terms of availability, response time and effectiveness, and we believe that it reduces our exposure to future liability claims. We believe that our continuing commitment to quality and customer service provides a compelling value proposition for prospective home buyers and reduces our exposure to long-term construction defect claims.
Selectively Pursue Geographic Expansion
Our geographic expansion strategy targets markets with favorable housing demand fundamentals, including, in particular, long-term population and employment growth. Attributes that make submarkets attractive to us include constrained lot supply, high-ranking schools, affordability, and proximity to transportation corridors and retail centers, among other factors. We avoid submarkets that are challenged by impediments such as excessive residential foreclosure, excessive lot supply and unusually high unemployment. Additionally, we may evaluate the acquisition of other homebuilders or land developers when we believe we can generate operational efficiencies or enter into new markets that may offer attractive fundamentals. We believe that our acquisition by PICO and subsequent integration into PICO’s operations have provided us with first-hand knowledge of how to successfully grow through selective acquisitions.


8



Project Sales by County

The following table sets forth home and lot sales revenue and units delivered by county for our projects during the years ended December 31, 2012 and 2011.
 
Year Ended December 31,
 
2012
 
2011
 
Unit Sales
 
Units
 Delivered
 
Unit Sales
 
Units
 Delivered
 
(In thousands, except Units Delivered)
Home Sales
 
 
 
 
 
 
 
California
 
 
 
 
 
 
 
Monterey County
$
5,588

 
21

 
$
1,288

 
5

Santa Clara County
3,760

 
6

 

 

Fresno County
715

 
2

 
3,169

 
10

Madera County
665

 
3

 
3,828

 
18

San Benito County
3,332

 
9

 

 

Total Home Sales
$
14,060

 
41

 
$
8,285

 
33

 
 
 
 
 
 
 
 
Lot Sales
 
 
 
 
 
 
 
California
 
 
 
 
 
 
 
Santa Clara County
$
13,810

 
92

 
$
11,835

 
70

Fresno County
20,502

 
356

 
4,058

 
48

Washington
 
 
 
 
 
 
 
King County
9,754

 
112

 

 

Total Land Sales
$
44,066

 
560

 
$
15,893

 
118

 
 
 
 
 
 
 
 
Total Sales
$
58,126

 
601

 
$
24,178

 
151

 

9



 Description of Completed Projects and Projects under Development

The following table presents project information relating to each of our markets as of December 31, 2012 and includes information for all projects completed since our acquisition by PICO in January 2008 and projects with communities expected to open during 2013.
Location
 
Actual or Projected Year of First Delivery
 
Projected Total Number of Homes(2)
 
Cumulative Units
 Closed as of December 31, 2012
 
Backlog at December 31, 2012(3)
 
Owned Lots as of December 31, 2012(4)
 
Actual or Anticipated Sales Price
 Range
 (In thousands)
 
Home Size
 Range
 (sq. ft.)
California
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Monterey County:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SummerField, Soledad
 
2011
 
58

 
26

 
8

 
32

 
$205-$330
 
1,360-2,080
 Artisan, East Garrison
 
2013(1)
 
75

 
 
 
 
 
75

 
$487-$565
 
1,719-2,411
Heritage, East Garrison
 
2013(1)
 
71

 
 
 
 
 
71

 
$555-$640
 
2,127-2,877
Monarch, East Garrison
 
2013(1)
 
65

 
 
 
 
 
65

 
$445-$485
 
1,575-1,789
Santa Clara County:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Jasper Hill, Morgan Hill
 
2012
 
19

 
6

 
 
 
13

 
$480-$660
 
1,392-2,335
Fairview, Gilroy
 
2013(1)
 
23

 
 
 
 
 
23

 
$680-$794
 
2,710-3,346
Fresno County:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Vintage Collection, Clovis
 
2011
 
10

 
10

 
 
 
 
 
$262-$362
 
2,423-4,272
Vantage, Clovis
 
2011
 
79

 
2

 
8

 
77

 
$317-$380
 
2,257-3,331
Dakota Square, Fresno
 
2013(1)
 
169

 
 
 
 
 
169

 
$245-$361
 
1,816-2,912
Pasaro, Clovis
 
2013(1)
 
121

 
 
 
 
 
121

 
$328-$386
 
2,298-3,331
Red Hawk, Sanger
 
2013(1)
 
30

 
 
 
 
 
30

 
$380-$415
 
2,499-3,331
Madera County:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Coronado, Madera
 
2011
 
21

 
21

 
 
 
 
 
$150-$300
 
2,047-3,510
Coronado II, Madera
 
2013(1)
 
183

 
 
 
 
 
183

 
$175-$215
 
1,536-2,376
San Benito County:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Walnut Park
 
2012
 
20

 
9

 
10

 
11

 
$340-$430
 
1,536-2,376
Washington
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Thurston County:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sagewood I, Tumwater
 
2013(1)
 
97

 
 
 
 
 
97

 
$213-$233
 
1,600-2,050
Sagewood III, Tumwater
 
2013(1)
 
45

 
 
 
 
 
45

 
$273-$300
 
2,250-2,800
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company Totals:
 
 
 
1,086

 
74

 
26

 
1,012

 

 

 _______
(1) 
 
Projected year of first delivery is based upon management’s estimates and is subject to change.
(2) 
 
Projected number of homes to be built at completion is subject to change and there can be no assurance that we will build all of these homes.
(3) 
 
Backlog consists of homes under sales contracts that had not yet closed and there can be no assurance that closings of such homes will occur.
(4) 
 
Owned lots as of December 31, 2012 include owned lots in backlog as of December 31, 2012.


10



Owned and Controlled Lots

As of December 31, 2012, we owned or controlled, pursuant to purchase or option contracts, an aggregate of 4,916 lots. The following table presents certain information with respect to our owned and controlled lots as of December 31, 2012.
 
As of December 31, 2012
 
Owned
 
Controlled(1)
 
Total
Central Valley Area-California
1,880

 
599

 
2,479

Monterey Bay Area-California
1,602

 

 
1,602

South San Francisco Bay Area-California
32

 
92

 
124

Puget Sound Area-Washington
711

 

 
711

Total
4,225

 
691

 
4,916

_______
(1) Controlled lots are those subject to a purchase or option contract.

Pending Acquisitions
 
As of March 31, 2013 we had purchase or option contracts to acquire 726 residential lots (excluding lots that were controlled as of December 31, 2012). If we complete all of these acquisitions, the aggregate purchase price for these lots would be $35.5 million (net of deposits that we have paid). In most cases, we can elect not to consummate these pending acquisitions, subject only to the loss of the non-refundable deposit that we have paid. We plan to build homes on the majority of these lots and sell the remaining lots to third-party homebuilders; however, this is subject to market conditions, and no assurance can be given that we will consummate the acquisition of these lots or build homes or sell lots as currently contemplated.
 
Market
 
Total Lots Pending Acquisition
 
Communities
 
Aggregate Purchase Price
(In thousands)
Central Valley Area-California
 
258

 
3

 
$
6,825

South San Francisco Bay Area-California
 
368

 
6

 
$
24,175

Puget Sound Area-Washington
 
100

 
3

 
4,500

Total
 
726

 
12

 
$
35,500



11



Summary Risk Factors

An investment in the shares of our common stock involves a high degree of risk. You should consider carefully the risks discussed below and described more fully along with other risks under “Risk Factors” in this prospectus before investing in our common stock.
Our long‑term growth depends, in part, upon our ability to successfully identify and acquire desirable land parcels for residential buildout.
Our industry is cyclical and adverse changes in general and local economic conditions could reduce the demand for homes and, as a result, could have a material adverse effect on us.
Our geographic concentration could materially and adversely affect us if the homebuilding industry in our markets should experience a decline.
Our business and results of operations are dependent on the availability and skill of subcontractors.
Fluctuations in real estate values may require us to write‑down the book value of our real estate assets.
PICO holds a significant equity interest in our company and its interests may not be aligned with yours, and as a result of PICO’s relationship with us, conflicts of interests may arise with respect to any transactions involving or with PICO or its affiliates.
Upon completion of this offering we will enter into a Transition Services Agreement with PICO pursuant to which PICO will provide us with accounting, human resources and information technology functions. Upon expiration PICO may be unwilling to renew the agreement or only willing to renew the agreement on less favorable terms, particularly if PICO ceases to hold a material investment in our company.
We expect to use leverage in executing our business strategy, which may adversely affect the return on our assets.
We have a limited operating history and we may not be able to successfully operate our business.
There is currently no public market for shares of our common stock, a trading market for our common stock may never develop following this offering and our common stock prices may be volatile and could decline substantially following this offering.
The offering price per share of our common stock offered by this prospectus may not accurately reflect the value of your investment.

Our Principal Equityholder
Following this offering, PICO will own a majority of the voting power of our common stock. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange, or “NYSE” on which the shares of our common stock will be listed. See “Principal and Selling Stockholders.”
Our Offices
Our principal executive offices are located at 6489 Camden Avenue, Suite 204, San Jose, CA 95120. Our main telephone number is (408) 323‑1113. Our internet website is www.unioncommunityllc.com. Our homebuilding subsidiary, Benchmark Communities, also maintains an internet website at www.benchmarkcommunities.com. The information contained in, or that can be accessed through, our websites is not incorporated by reference and is not a part of this prospectus. We also lease office space in Fresno, California, and Bellevue, Washington.


12



Implications of Being an Emerging Growth Company

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” These provisions include, among other matters:
an exemption to provide fewer years of financial statements and other financial data in an initial public offering registration statement;
an exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting;
an exemption from new or revised financial accounting standards until they would apply to private companies and from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation;
reduced disclosure about the emerging growth company’s executive compensation arrangements; and
no requirement to seek non‑binding advisory votes on executive compensation or golden parachute arrangements.

We have determined to opt out of the exemption from compliance with new or revised financial accounting standards. Our decision to opt out of this exemption is irrevocable.

We have elected to adopt the reduced disclosure requirements available to emerging growth companies. As a result of these elections, the information that we provide in this prospectus may be different than the information you may receive from other public companies in which you hold equity interests. In addition, it is possible that some investors will find our common stock less attractive as a result of our elections, which may result in a less active trading market for our common stock and more volatility in our stock price.

We will remain an “emerging growth company” until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non‑affiliates exceeds $700 million as of the prior June 30, and (2) the date on which we have issued more than $1.0 billion in non‑convertible debt during the prior three‑year period.



13



The Offering
Common stock offered by us
          shares
Common stock to be outstanding immediately following this offering
          shares(1) 
Underwriters’ option
We have granted the underwriters an option to purchase up to additional shares. PICO has granted the underwriters an option to purchase up to additional shares.
Use of proceeds
We expect to receive net proceeds from this offering of approximately $      million ($      million if the underwriters exercise their option to purchase additional shares from us in full), assuming an initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us.
 
We intend to use the net proceeds from this offering primarily for the acquisition of land, including the land described above under “—Pending Acquisitions,” and for land development, home construction and other related purposes. See “Use of Proceeds.”
 
We will not receive any of the net proceeds from the sale of the shares of our common stock by PICO if the underwriters exercise their option to purchase additional shares.
Dividend policy
We currently intend to retain our future earnings, if any, to finance the development and expansion of our business and, therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any of our financing instruments and such other factors as our board of directors deems relevant. See “Dividend Policy.”
New York Stock Exchange symbol
We intend to apply to list the shares of our common stock on the New York Stock Exchange under the symbol “UCP.”
Risk factors
Investing in our common stock involves a high degree of risk. For a discussion of factors you should consider in making an investment, see “Risk Factors” beginning on page 17 of this prospectus.
_______
(1) 
 
Excludes: (i) an aggregate of        restricted stock units to be granted to the members of our management team, other officers and employees and our director nominees upon the completion of this offering pursuant to our 2013 Long-Term Incentive Plan (based upon the midpoint of the price range set forth on the cover page of this prospectus); and (ii)            shares of our common stock reserved for future issuance under our 2013 Long-Term Incentive Plan. The actual number of restricted stock units will be based upon the price at which the shares are sold to the public in this offering.
 


14



Summary Consolidated Financial Data
The following sets forth our summary consolidated financial and operating data. You should read the following summary consolidated financial data in conjunction with our consolidated financial statements, the related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future.
We derived our summary consolidated statement of operations data for the years ended December 31, 2012 and 2011 and consolidated balance sheet data (excluding the as adjusted data) as of December 31, 2012 from our consolidated financial statements audited by Deloitte & Touche LLP, independent auditors, whose report with respect thereto is included elsewhere in this prospectus.
 
Year Ended December 31,
  
2012
 
2011
Statements of Operations
(In thousands)
Revenue:
 
 
 
Homebuilding
$
14,060

 
$
8,285

Land development
44,066

 
15,893

 
58,126

 
24,178

Expenses:
 
 
 
       Cost of sales - homebuilding
9,832

 
5,621

       Cost of sales - land development
32,876

 
17,280

Sales and marketing
2,875

 
1,414

General and administrative
10,103

 
6,464

 
55,686

 
30,779

Income (loss) from operations
2,440

 
(6,601
)
Other income
578

 
34

Net income (loss)
$
3,018

 
$
(6,567
)
 
 
 
 
 
Year Ended December 31,
Operating Data
2012
 
2011
Net new home orders (including backlog units)
67

 
39

Cancellation rate
22.4
%
 
10.3
%
Selling communities at end of period
4

 
2

Backlog at end of period, number of homes
26

 
6

Backlog at end of period, aggregate sales value (in thousands)
$
8,664

 
$
1,489


15




 
Year Ended December 31,
Gross Margin and Adjusted Gross Margin
 
2012
 
2011
Consolidated gross margin percentage
 
26.5
%
 
5.3
 %
Consolidated adjusted gross margin percentage(1)
 
29
%
 
30.2
 %
Homebuilding gross margin percentage
 
30.1
%
 
32.2
 %
Homebuilding adjusted gross margin percentage(1)
 
30.9
%
 
32.6
 %
Land development gross margin percentage
 
25.4
%
 
(8.7
)%
Land development adjusted gross margin percentage(1)
 
28.4
%
 
29
 %
 _______
(1) 
 
Consolidated adjusted gross margin percentage, homebuilding adjusted gross margin percentage and land development adjusted gross margin percentage are non-U.S. GAAP financial measures. For a discussion of these measures and a reconciliation of these measures to the most comparable U.S. GAAP financial measure, see “Selected Consolidated Financial Data—Consolidated Gross Margin and Consolidated Adjusted Gross Margin and U.S. GAAP Reconciliation.”
 
December 31, 2012
  
Actual
 
As Adjusted(1)
Balance Sheet Data
(In thousands)
Cash and cash equivalents
$
10,324

 
$
Real estate inventories
$
125,367

 
$
Total assets
$
137,534

 
$
Debt
$
29,112

 
$
Total liabilities
$
35,219

 
$
Member’s equity
$
102,315

 
$

Stockholders’ equity
$

 
$
 _______
(1) 
 
Gives effect to (i) our formation transactions, and (ii) the sale of shares of our common stock in this offering by us, assuming an initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us.

16



RISK FACTORS
An investment in our common stock involves a high degree of risk and should be considered highly speculative. Before making an investment decision, you should carefully consider the following risk factors, which we believe address the material risks concerning our business and an investment in our common stock, together with the other information contained in this prospectus. If any of the risks discussed in this prospectus occur, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected, in which case the trading price of our common stock could decline significantly and you could lose all or a part of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled Cautionary Note Concerning Forward-Looking Statements.
Risks Related to Our Business
The homebuilding and land development industry in the United States has recently undergone a significant downturn, and the likelihood of a continued recovery is uncertain in the current state of the economy.
The homebuilding and land development industry experienced substantial losses in connection with the recent downturn in the U.S. housing market and, in particular, in the Northern California housing market. Although the housing markets in the U.S. and Northern California markets have begun to recover, we cannot predict whether and to what extent this recovery will continue or its timing. While some of the many negative factors that contributed to the housing downturn may have moderated in 2012, several remain, and they could return and/or intensify to inhibit any future improvement in housing market conditions. These negative factors include but are not limited to (a) weak general economic and employment growth that, among other things, restrains consumer incomes, consumer confidence and demand for homes; (b) elevated levels of mortgage loan delinquencies, defaults and foreclosures that could add to a “shadow inventory” of lender-owned homes that may be sold in competition with new and other resale homes at low “distressed” prices or that generate short sales activity at such price levels; (c) a significant number of homeowners whose outstanding principal balance on their mortgage loan exceeds the market value of their home, which undermines their ability to purchase another home that they otherwise might desire and be able to afford; (d) volatility and uncertainty in domestic and international financial, credit and consumer lending markets amid slow growth or recessionary conditions in various regions around the world; and (e) tight lending standards and practices for mortgage loans that limit consumers’ ability to qualify for mortgage financing to purchase a home, including increased minimum credit score requirements, credit risk/mortgage loan insurance premiums and/or other fees and required down payment amounts, more conservative appraisals, higher loan-to-value ratios and extensive buyer income and asset documentation requirements. Additional headwinds may come from the efforts and proposals of lawmakers to reduce the debt of the federal government through tax increases and/or spending cuts, and financial markets’ and businesses’ reactions to those efforts and proposals, which could impair economic growth. Given these factors, there can be no guarantee that we will be successful in implementing our business plan or continue to operate profitably.
Our long-term growth depends, in part, upon our ability to successfully identify and acquire desirable land parcels for residential buildout.
Our future growth depends, in part, upon our ability to successfully identify and acquire attractive land parcels for development of single-family homes at reasonable prices, either by ourselves, through Benchmark Communities, or by our third-party homebuilder customers. Our ability to acquire land parcels for new single-family homes may be adversely affected by changes in the general availability of land parcels, the willingness of land sellers to sell land parcels at reasonable prices, competition for available land parcels, availability of financing to acquire land parcels, zoning and other market conditions. If the supply of land parcels appropriate for development of single-family homes is limited because of these factors, or for any other reason, our ability to grow could be significantly limited, and our revenue and gross margin could decline. To the extent that we are unable to timely purchase land parcels or enter into new contracts or options for the purchase of land parcels at reasonable prices, our revenue and results of operations could be negatively impacted.
Our industry is cyclical and adverse changes in general and local economic conditions could reduce the demand for homes and, as a result, could have a material adverse effect on us.
The residential homebuilding industry is cyclical and is highly sensitive to changes in general economic conditions such as levels of employment, consumer confidence and income, availability and cost of financing for acquisitions, construction and mortgages, interest rate levels, inflation and demand for housing. The health of the residential homebuilding industry may also be significantly affected by “shadow inventory” levels during recessionary and recovery periods.

17



“Shadow inventory” refers to the number of homes with mortgages that are in some form of distress but that have not yet been listed for sale. Shadow inventory can occur when lenders put properties that have been foreclosed or forfeited to lenders on the market gradually, rather than all at once, or delay the foreclosure process. A significant shadow inventory in our markets could, were it to be released, adversely impact home and land prices and demand for our homes and land, which would have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations. In addition, an important segment of our end-purchaser and customer base consists of first-time and second-time “move-up” buyers, who often purchase homes subject to contingencies related to the sale of their existing homes. The difficulties facing these buyers in selling their homes during recessionary periods may adversely affect our sales. Moreover, during such periods, we may need to reduce our sales prices and offer greater incentives to buyers to compete for sales that may result in reduced margins.
Our long-term growth depends, in part, upon our ability to acquire undeveloped land suitable for residential homebuilding at reasonable prices.
Competition for undeveloped land that is suitable for residential development is intense, and the risk inherent in purchasing and developing land increases as consumer demand for housing increases and drives up the price of land. The availability of partially finished developed lots and undeveloped land for purchase depends on a number of factors outside our control, including land availability in general, competition with other homebuilders and land buyers, inflation in land prices, zoning, allowable housing density, the ability to obtain building permits and other regulatory requirements. Should suitable lots or land become less available, the number of homes we may be able to build and sell could be reduced, and the cost of land could be increased, perhaps substantially, which could adversely impact us. As competition for suitable land increases, the cost of acquiring partially finished developed lots and undeveloped lots and the cost of developing owned land could rise and the availability of suitable land at acceptable prices may decline, which could adversely impact us. The availability of suitable land assets could also affect the success of our land acquisition strategy, which may impact our ability to increase the number of actively selling communities, grow our revenue and margins, and achieve or maintain profitability. Additionally, developing undeveloped land is capital intensive and time consuming. It is possible that we may develop land based upon forecasts and assumptions that prove to be inaccurate, resulting in projects that are not economically viable.
Because of the seasonal nature of our business our quarterly operating results fluctuate.

As discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Seasonality,” we have experienced seasonal fluctuations in our quarterly operating results and capital requirements that can have a material impact on our results and our consolidated financial statements. We typically experience the highest new home order activity in spring and summer, although this activity is also highly dependent on the number of active selling communities, timing of new community openings and other market factors. Since it typically takes four to six months to construct a new home, we deliver more homes in the second half of the year as spring and summer home orders convert to home deliveries. Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest in the second and third quarters, and the majority of cash receipts from home deliveries occur during the second half of the year. We expect this seasonal pattern to continue over the long‑term, although it may be affected by volatility in the homebuilding industry. We expect the traditional seasonality cycle and its impact on our results to become more prominent if and as the present housing recovery progresses and the homebuilding industry returns to a more normal operating environment, but we can make no assurances as to the degree to which our historical seasonal patterns will occur in 2013 and beyond, if at all.
If the market value of our land inventory decreases, our results of operations could be adversely affected by impairments and write-downs.
The market value of our land and housing inventories depends on market conditions. We acquire land for expansion into new markets and for replacement of land inventory and expansion within our current markets. There is an inherent risk that the value of the land owned by us may decline after purchase. The valuation of property is inherently subjective and based on the individual characteristics of each property. We may have acquired options on or bought and developed land at a cost we will not be able to recover fully or on which we cannot build and sell homes profitably. In addition, our deposits for lots controlled under purchase, option or similar contracts may be put at risk. Factors such as changes in regulatory requirements and applicable laws (including in relation to building regulations, taxation and planning), political conditions, the condition of financial markets, both local and national economic conditions, the financial condition of customers, potentially adverse tax consequences, and interest and inflation rate fluctuations subject valuations to uncertainty. Moreover, our valuations are made on the basis of assumptions that may not prove to reflect economic or demographic reality.

18



If housing demand fails to meet our expectations when we acquired our inventory, our profitability may be adversely affected and we may not be able to recover our costs when we sell and build houses.
In 2011, housing market conditions adversely impacted the anticipated timing and amount of sales at certain of our projects. We revised our expectations for the cash flows from these projects and evaluated whether each project’s expected cash flows exceeded its carrying value. As of December 31, 2011, after examining market data relating to two of our projects located in outlying areas of Fresno, California, we concluded that our expected future cash flows from these projects (which can be very difficult to project, particularly estimated land development and off-site infrastructure costs in the absence of approved entitlements) would not exceed their carrying values. Accordingly, we measured the fair values of these projects using discounted cash flow models and recorded a non-cash impairment charge of $5.2 million in cost of sales-land development for the year ended December 31, 2011. We regularly review the value of our land holdings and continue to review our holdings on a periodic basis. Further material write-downs and impairments in the value of our inventory may be required, and we may in the future sell land or homes at a loss, which could adversely affect our results of operations and financial condition.
The estimates, forecasts and projections relating to our markets prepared by JBREC are based upon numerous assumptions and may not prove to be accurate.
This prospectus contains estimates, forecasts and projections relating to our markets that were prepared for us for use in connection with this offering by JBREC, an independent research provider and consulting firm focused on the housing industry. See “Market Opportunity.” The estimates, forecasts and projections relate to, among other things, employment, demographics, household income, home sales prices and affordability. No assurance can be given that these estimates are, or that the forecasts and projections will prove to be, accurate. These estimates, forecasts and projections are based on data (including third-party data), significant assumptions, proprietary methodologies and the experience and judgment of JBREC. No assurance can be given regarding the accuracy or appropriateness of the assumptions and judgments made, or the methodologies used, by JBREC. The application of alternative assumptions, judgments or methodologies could result in materially less favorable estimates, forecasts and projections than those contained in this prospectus. Other real estate experts have different views regarding these forecasts and projections that may be more positive or negative, including in terms of the timing, magnitude and direction of future changes.
The forecasts and projections are forward-looking statements and involve risks and uncertainties that may cause actual results to be materially different from the projections. JBREC has made these forecasts and projections based on studying the historical and current performance of the residential housing market and applying JBREC’s qualitative knowledge about the residential housing market. The future is difficult to predict, particularly given that the economy and housing markets can be cyclical, subject to changing consumer and market psychology, and governmental policies related to mortgage regulations and interest rates. There will usually be differences between projected and actual outcomes, because events and circumstances frequently do not occur as expected, and the differences may be material. Accordingly, the forecasts and projections included in this prospectus might not occur or might occur to a different extent or at a different time. For the foregoing reasons, neither we nor JBREC can provide any assurance that the estimates, forecasts and projections contained in this prospectus are accurate, actual outcomes may vary significantly from those contained or implied by the forecasts and projections, and you should not place undue reliance on these estimates, forecasts and projections. Except as required by law, we are not obligated to, and do not intend to, update the statements in this prospectus to conform to actual outcomes or changes in our or JBREC’s expectations.
The homebuilding industry is highly competitive and if our competitors are more successful or offer better value to our customers our business could decline.
We operate in a very competitive environment which is characterized by competition from a number of other homebuilders and land developers in each market in which we operate. Additionally, there are relatively low barriers to entry into our business. We compete with numerous large national and regional homebuilding companies and with smaller local homebuilders and land developers for, among other things, home buyers, desirable land parcels, financing, raw materials and skilled management and labor resources. Our competitors may independently develop land and construct housing units that are superior or substantially similar to our products. Increased competition could hurt our business, as it could prevent us from acquiring attractive land parcels on which to build homes or make such acquisitions more expensive, hinder our market share expansion and cause us to increase our selling incentives and reduce our prices. An oversupply of homes available for sale and the heavy discounting of home prices by some of our competitors have adversely affected demand for homes in the market as a whole and could do so again in the future.

19



We also compete with the resale, or “previously owned,” home market which has increased significantly due to the large number of homes that have been foreclosed on or could be foreclosed on due to the recent economic downturn. If we are unable to compete effectively in our markets, our business could decline disproportionately to our competitors, and our results of operations and financial condition could be adversely affected.
We may be at a competitive disadvantage with regard to certain of our large national and regional homebuilding competitors whose operations are more geographically diversified than ours, as these competitors may be better able to withstand any future regional downturn in the housing market. We compete directly with a number of large national and regional homebuilders, many of which have longer operating histories and greater financial and operational resources than we do. Many of these competitors also have longstanding relationships with subcontractors and suppliers in the markets in which we operate. This may give our competitors an advantage in marketing their products, securing materials and labor at lower prices and allowing their homes to be delivered to customers more quickly and at more favorable prices. This competition could reduce our market share and limit our ability to expand our business as we have planned.
If home buyers are not able to obtain suitable mortgage financing, due to more stringent lending standards, rising interest rates, changes in regulation or other reasons, our results of operations may decline.
A substantial majority of home buyers finance their home purchases through lenders that provide mortgage financing. The availability of mortgage financing remains constrained, due in part to lower mortgage valuations on properties, various regulatory changes and lower risk appetite by lenders, with many lenders requiring increased levels of financial qualification, lending at lower multiples of income and requiring larger down payments. First-time home buyers are generally more affected by the availability of mortgage financing than other potential home buyers. These buyers are a key source of demand for new homes. A limited availability of home mortgage financing may adversely affect the volume of our home and land sales and the sales prices we achieve. Additionally, housing demand is adversely affected by reduced availability of mortgage financing and factors that increase the upfront or monthly cost of financing a home, such as increases in interest rates, insurance premiums, or limitations on mortgage interest deductibility. The recent decrease in the willingness and ability of lenders to make home mortgage loans, the tightening of lending standards and the limitation of financing product options, have made it more difficult for home buyers to obtain acceptable financing. Any substantial increase in mortgage interest rates or unavailability of mortgage financing may adversely affect the ability of prospective first-time and move-up home buyers to obtain financing for our homes, as well as adversely affect the ability of prospective move-up home buyers to sell their current homes. The housing industry is benefiting from the current low interest rate environment, which has allowed many home buyers to obtain mortgage financing with relatively low interest rates as compared to long-term historical averages. While the timing of any increase in interest rates is uncertain, it is widely expected that interest rates will increase, and any such increase will make mortgage financing more expensive and adversely affect the ability of home buyers to purchase our homes. The recent disruptions in the credit markets and the curtailed availability of mortgage financing has adversely affected, and is expected to continue to adversely affect, our business, prospects, liquidity, financial condition, results of operations and cash flows as compared to prior periods.
Beginning in 2008, the mortgage lending industry has experienced significant instability, beginning with increased defaults on sub-prime loans and other nonconforming loans and compounded by expectations of increasing interest payment requirements and further defaults. This in turn resulted in a decline in the market value of many mortgage loans and related securities. Lenders, regulators and others questioned the adequacy of lending standards and other credit requirements for several loan products and programs offered in recent years. Credit requirements have tightened, and investor demand for mortgage loans and mortgage-backed securities has declined. The deterioration in credit quality during the recent economic downturn caused almost all lenders to stop offering sub-prime mortgages and most other loan products that were not eligible for sale to Fannie Mae or Freddie Mac or loans that did not meet FHA and Veterans Administration requirements. Fewer loan products, tighter loan qualifications and a reduced willingness of lenders to make loans may continue to make it more difficult for certain buyers to finance the purchase of our homes. These factors may reduce the pool of qualified home buyers and make it more difficult to sell to first-time and move-up buyers who have historically made up a substantial part of our homebuilding customers. Reductions in demand adversely affected our business and financial results during the downturn, and the duration and severity of some of their effects remain uncertain. The liquidity provided by Fannie Mae and Freddie Mac to the mortgage industry has been very important to the housing market. These entities have required substantial injections of capital from the federal government and may require additional government support in the future. Several federal government officials have proposed changing the nature of the relationship between Fannie Mae and Freddie Mac and the federal government and even nationalizing or eliminating these entities entirely. If Fannie Mae and Freddie Mac were dissolved or if the federal government determined to stop providing liquidity support to the mortgage market, there would be a reduction in the availability of the financing provided by these institutions. Any such reduction would likely have an adverse effect on interest rates, mortgage availability and our sales of new homes.

20



The FHA insures mortgage loans that generally have lower down payment requirements and qualification standards compared to conventional guidelines, and as a result, continue to be a particularly important source for financing the sale of our homes. In recent years, lenders have taken a more conservative view of FHA guidelines causing significant tightening of borrower eligibility for approval. In the near future, further restrictions are expected on FHA-insured loans, including limitations on seller-paid closing costs and concessions. This or any other restriction may negatively affect the availability or affordability of FHA financing, which could adversely affect our ability to sell homes. In addition, changes in federal regulatory and fiscal policies aimed at aiding the home buying market (including a repeal of the home mortgage interest tax deduction) may also negatively affect potential home buyers’ ability to purchase homes.
In each of our markets, decreases in the availability of credit and increases in the cost of credit adversely affect the ability of home buyers to obtain or service mortgage debt. Even if potential home buyers do not themselves need mortgage financing, where potential home buyers must sell their existing homes in order to buy a new home, increases in mortgage costs, lack of availability of mortgages and/or regulatory changes could prevent the buyers of potential home buyers’ existing homes from obtaining a mortgage, which would result in our potential customers’ inability to buy a new home. Similar risks apply to those buyers who are awaiting delivery of their homes and are currently in backlog. The success of homebuilders depends on the ability of potential home buyers to obtain mortgages for the purchase of homes. If our customers (or potential buyers of our customers’ existing homes) cannot obtain suitable financing, our sales and results of operations could be adversely affected.
Furthermore, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. This legislation provides for a number of new requirements relating to residential mortgages and mortgage lending practices, many of which are to be developed further by implementing rules. These include, among others, minimum standards for mortgages and lender practices in making mortgages, limitations on certain fees and incentive arrangements, retention of credit risk and remedies for borrowers in foreclosure proceedings. The effect of such provisions on lending institutions will depend on the rules that are ultimately enacted. However, these requirements, as and when implemented, are expected to reduce the availability of loans to borrowers and/or increase the costs to borrowers to obtain such loans. Any such reduction could result in a decline of our home and land sales, which could materially and adversely affect us.
Our geographic concentration could materially and adversely affect us if the homebuilding industry in our current markets should experience a decline.
Our business strategy is focused on the acquisition of suitable land and the design, construction and sale of single-family homes in residential subdivisions, including planned communities, in Northern California and Washington State. In California, we principally operate in the Central Valley area, the Monterey Bay area and the South San Francisco Bay area; in Washington State, we operate in the Puget Sound area. Because our operations are concentrated in these areas, a prolonged economic downturn in one or more of these areas, particularly within California, could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations, and a disproportionately greater impact on us than other homebuilders with more diversified operations. From 2007 to 2009, land values, the demand for new homes and home prices declined substantially in California. In addition, the state of California has experienced severe budget shortfalls in recent years and has raised taxes and certain fees to offset the deficit. If these conditions in California persist or worsen, it would have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations. If buyer demand for new homes in California or Washington State decreases, home prices could stagnate or decline, which would have a material adverse effect on us.
Any limitation on, or reduction or elimination of, tax benefits associated with owning a home would have an adverse effect upon the demand for land and homes for residential development, which could be material to our business.
Changes in federal income tax laws may affect demand for new homes and land suitable for residential development. Current tax laws generally permit significant expenses associated with owning a home, primarily mortgage interest expense and real estate taxes, to be deducted for the purpose of calculating an individual’s federal, and in many cases, state, taxable income. Various proposals have been publicly discussed to limit mortgage interest deductions and to limit the exclusion of gain from the sale of a principal residence. For instance, under the American Taxpayer Relief Act of 2012, which was signed into law in January 2013, the federal government enacted higher income tax rates and limits on the value of tax deductions for certain high-income individuals and households. If the federal government or a state government changes or further changes its income tax laws, as some lawmakers have proposed, by eliminating, limiting or substantially reducing these income tax benefits, without offsetting provisions, the after-tax cost of owning a new home would increase for many of our potential customers. Enactment of any such proposal may have an adverse effect on the homebuilding industry in general, as the loss or reduction of homeowner tax deductions could decrease the demand for new homes and land suitable for residential development.

21



Difficulty in obtaining sufficient capital could result in an inability to acquire land for our developments or increased costs and delays in the completion of development projects.
The homebuilding and land development industry is capital-intensive and requires significant up front expenditures to acquire land parcels and begin development. In addition, if housing markets are not favorable or permitting or development takes longer than anticipated, we may be required to hold our investments in land for extended periods of time. If internally generated funds are not sufficient, we may seek additional capital in the form of equity or debt financing from a variety of potential sources, including additional bank financings and/or securities offerings. The availability of borrowed funds, especially for land acquisition and construction financing, may be greatly reduced nationally, and the lending community may require increased amounts of equity to be invested in a project by borrowers in connection with both new loans and the extension of existing loans. The credit and capital markets have recently experienced significant volatility. If we are required to seek additional financing to fund our operations, continued volatility in these markets may restrict our flexibility to access such financing. If we are not successful in obtaining sufficient capital to fund our planned capital and other expenditures, we may be unable to acquire land for development or to develop housing. Additionally, if we cannot obtain additional financing to fund the purchase of land under our purchase or option contracts, we may incur contractual penalties and fees. Any difficulty in obtaining sufficient capital for planned development expenditures could also cause project delays and any such delay could result in cost increases. Any one or more of the foregoing events could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
We face potentially substantial risk with respect to our land and lot inventory.
We intend to acquire land parcels for replacement and expansion of land inventory within our current and any new markets we choose to enter. The risks inherent in purchasing and developing land parcels increase as consumer demand for housing decreases. As a result, we may buy and develop land parcels on which homes cannot be profitably built and sold. The market value of land parcels, building lots and housing inventories can fluctuate significantly as a result of changing market conditions, and the measures we employ to manage inventory risk may not be adequate to insulate our operations from a severe drop in inventory values. When market conditions are such that land values are depreciating, previously entered into option agreements may become less desirable, at which time we may elect to forego deposits, option costs and pre‑acquisition costs and terminate the agreements. Land parcels, building lots and housing inventories are illiquid assets and we may not be able to dispose of them efficiently or at all if we are in financial distress. In addition, inventory carrying costs can be significant and can result in losses in a poorly performing project or market. In the event of significant changes in economic or market conditions, we may have to sell homes at significantly lower margins or at a loss, if we are able to sell them at all.
Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties for reasonable prices in response to changing economic, financial and investment conditions may be limited and we may be forced to hold non‑income producing properties for extended periods of time.
Real estate investments are relatively difficult to sell quickly. As a result, our ability to promptly sell one or more properties in response to changing economic, financial and investment conditions is limited and we may be forced to hold non‑income producing assets for an extended period of time. We cannot predict whether we will be able to sell any property for the price or on the terms that we set or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.
Risks associated with our real estate inventories could adversely affect our business or financial results.
Risks inherent in controlling or purchasing, holding and developing land for new home construction are substantial. In certain circumstances, a grant of entitlements or development agreement with respect to a particular parcel of land may include restrictions on the transfer of such entitlements to a buyer of such land, which would negatively impact the price of such entitled land by restricting our ability to sell it for its full entitled value. In addition, inventory carrying costs can be significant and can result in reduced margins or losses in a poorly performing community or market. Developing land and constructing homes takes a significant amount of time and requires a substantial cash investment. We have substantial real estate inventories which regularly remain on our balance sheet for significant periods of time, during which time we are exposed to the risk of adverse market developments, prior to their sale. In recent periods of market weakness, we have sold homes and land for lower margins and we have recorded significant inventory impairment charges, and such conditions may recur. The recording of a significant inventory impairment could negatively affect our reported earnings per share and negatively impact the market perception of our business, leading to a decline in the price of our common stock.

22



Adverse weather and geological conditions may increase costs, cause project delays and reduce consumer demand for housing, all of which could materially and adversely affect us.
As a homebuilder and land developer, we are subject to the risks associated with numerous weather-related and geologic events, many of which are beyond our control. These weather-related and geologic events include but are not limited to droughts, floods, wildfires, landslides, soil subsidence and earthquakes. The occurrence of any of these events could damage our land parcels and projects, cause delays in completion of our projects, reduce consumer demand for housing, and cause shortages and price increases in labor or raw materials, any of which could affect our sales and profitability. Our California markets are in areas which have historically experienced significant earthquake activity and seasonal wildfires. In addition to directly damaging our land or projects, earthquakes, wildfires or other natural events could damage roads and highways providing access to those assets or affect the desirability of our land or projects, thereby adversely affecting our ability to market homes or sell land in those areas and possibly increasing the costs of homebuilding completion.
There are some risks of loss for which we may be unable to purchase insurance coverage. For example, losses associated with landslides, earthquakes and other geologic events may not be insurable and other losses, such as those arising from terrorism, may not be economically insurable. A sizeable uninsured loss could materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.
Acquisition activity could expose us to additional risks.

We may seek to acquire other homebuilders or land developers. We may be unable to achieve the anticipated benefits of any such acquisition, the anticipated benefits may take longer to realize than expected or we may incur greater costs than expected in attempting to achieve the anticipated benefits. We may not be successful in integrating any such acquisitions. For example, we may be required to integrate widely dispersed operations with different corporate cultures, operating margins, competitive environments, computer systems, compensation schemes, business plans and growth potential, which would likely require significant management time and attention. This could disrupt our ongoing operations and divert management resources that would otherwise focus on developing our existing business. Depending upon the circumstances of any particular acquisition, successful integration may depend, in large part, on retaining key personnel who have, for example, unique experience or business relationships. The loss of key personnel at any business we may acquire could result in a disruption of operations, a loss of information and business relationships, unanticipated recruitment and training costs, and otherwise diminish anticipated benefits of any such acquisitions. Acquisitions could also result in our assumption of unknown contingent liabilities, which could be material. When financing any acquisitions, we may choose to issue additional shares of our common stock, which would dilute the ownership interest of existing stockholders, or incur substantial additional indebtedness. Accordingly, any acquisition activity could expose us to significant risks, beyond those associated with operating our existing business, and may adversely affect our business, financial position and results of operation.

Our business and results of operations are dependent on the availability and skill of subcontractors.
Substantially all of our construction work is done by third-party subcontractors with us acting as the general contractor. Accordingly, the timing and quality of our construction depend on the availability and skill of our subcontractors. We do not have long-term contractual commitments with any subcontractors, and there can be no assurance that skilled subcontractors will continue to be available at reasonable rates and in our markets. Certain of the subcontractors engaged by us are represented by labor unions or are subject to collective bargaining arrangements that require the payment of prevailing wages that are higher than normally expected on a residential construction site. A strike or other work stoppage involving any of our subcontractors could also make it difficult for us to retain subcontractors for our construction work. In addition, union activity or a scarcity of skilled labor supply could result in higher costs to retain our subcontractors. The inability to contract with skilled subcontractors at reasonable costs on a timely basis could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
In addition, despite our quality control efforts, we may discover that our subcontractors were engaging in improper construction practices or installing defective materials in our homes. When we discover these issues, we, generally through our subcontractors, repair the homes in accordance with our new home warranty and as required by law. We reserve a portion of the sales price of each home we sell to satisfy warranty and other legal obligations to our home buyers. We establish these reserves based on market practices, our historical experiences, and our judgment of the qualitative risks associated with the types of homes built. However, the cost of satisfying our warranty and other legal obligations in these instances may be significantly higher than our reserves, and we may be unable to recover the cost of repair from such subcontractors. Regardless of the steps we take, we can in some instances be subject to fines or other penalties, and our reputation may be adversely affected.

23



Labor and raw material shortages and price fluctuations could delay or increase the cost of home construction, which could materially and adversely affect us.
The residential construction industry experiences serious labor and raw material shortages from time to time, including shortages in qualified tradespeople, and supplies of insulation, drywall, cement, steel and lumber. These labor and raw material shortages can be more severe during periods of strong demand for housing or during periods following natural disasters that have a significant impact on existing residential and commercial structures. Certain of our markets have recently begun to exhibit a scarcity of skilled labor relative to increased homebuilding demand in these markets. The cost of labor and raw materials may also be adversely affected during periods of shortage or high inflation. During the recent economic downturn, a large number of qualified tradespeople went out of business or otherwise exited the market. A reduction in available tradespeople will likely exacerbate labor shortages if demand for new housing continues to increase. Shortages and price increases could cause delays in and increase our costs of home construction, which in turn could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
New and existing laws and regulations or other governmental actions may increase our expenses, limit the number of homes that we can build or delay completion of our projects.
We are subject to numerous local, state, federal and other statutes, ordinances, rules and regulations concerning zoning, development, building design, construction and similar matters which impose restrictive zoning and density requirements, the result of which is to limit the number of homes that can be built within the boundaries of a particular area. Projects that are not entitled may be subjected to periodic delays, changes in use, less intensive development or elimination of development in certain specific areas due to government regulations. We may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or “slow-growth” or “no-growth” initiatives that could be implemented in the future. Local governments also have broad discretion regarding the imposition of development fees and exactions for projects in their jurisdiction. Projects for which we have received land use and development entitlements or approvals may still require a variety of other governmental approvals and permits during the development process and can also be impacted adversely by unforeseen health, safety and welfare issues, which can further delay these projects or prevent their development. As a result, home sales could decline and costs increase, which could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
We may be unable to obtain suitable bonding for the development of our housing projects.
We are often required to provide bonds to governmental authorities and others to ensure the completion of our projects. As a result of market conditions, surety providers have been reluctant to issue new bonds and some providers are requesting credit enhancements (such as guarantees, cash deposits or letters of credit) in order to maintain existing bonds or to issue new bonds. As of December 31, 2012, PICO had guaranteed our obligations under performance bonds with an aggregate amount of $6.6 million. We do not expect that PICO will guarantee any additional performance bonds we may be required to obtain after completion of this offering, and it is possible that without PICO’s credit support it will be more difficult for us to obtain performance bonding. If we are unable to obtain required bonds in the future for our projects, or if we are required to provide credit enhancements with respect to our current or future bonds, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected.
We are subject to environmental laws and regulations, which may increase our costs, result in liabilities, limit the areas in which we can build homes and delay completion of our projects.
We are subject to a variety of local, state, federal and other laws, statutes, ordinances, rules and regulations concerning the environment, hazardous materials, the discharge of pollutants and human health and safety. The particular environmental requirements which apply to any given site vary according to multiple factors, including the site’s location, its environmental conditions, the current and former uses of the site, the presence or absence of endangered plants or animals or sensitive habitats, and conditions at nearby properties. We may not identify all of these concerns during any pre-acquisition or pre-development review of project sites. Environmental requirements and conditions may result in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict development and homebuilding activity in environmentally sensitive regions or areas. We are also subject to third-party challenges, such as by environmental groups or neighborhood associations, under environmental laws and regulations to the permits and other approvals for our projects and operations. In addition, in those cases where an endangered or threatened species is involved and a related agency rule-making and litigation are ongoing, the outcome of such rule-making and litigation can be unpredictable and can result in unplanned or unforeseeable restrictions on or the prohibition of development and building activity in identified environmentally sensitive areas. For example, California listed the California Tiger Salamander, which may be present at our East Garrison property, as a state endangered species in 2010.

24



Subsequent to the state listing, our East Garrison project filed a permit application with the California Department of Fish & Game with respect to management of the California Tiger Salamander. There can be no assurance as to whether or when the California Department of Fish & Game will issue the permit, or whether any permit terms will be unexpectedly restrictive or costly, result in project delays or require changes to existing development or building plans. Currently, we are implementing ongoing management measures for the California Tiger Salamander pursuant to agreements with the U.S. Fish & Wildlife Service.

From time to time, the United States Environmental Protection Agency (the “EPA”) and similar federal, state or local agencies review land developers’ and homebuilders’ compliance with environmental laws and may levy fines and penalties for failure to strictly comply with applicable environmental laws, including those applicable to control of storm water discharges during construction, or impose additional requirements for future compliance as a result of past failures. Any such actions taken with respect to us may increase our costs and result in project delays. We expect that increasingly stringent requirements will be imposed on land developers and homebuilders in the future. We cannot assure you that environmental, health and safety laws will not change or become more stringent in the future in a manner that could have a material adverse effect on our business. Environmental regulations can also have an adverse impact on the availability and price of certain raw materials such as lumber, and on other building materials. California is especially susceptible to restrictive government regulations and environmental laws. For example, California has enacted climate change legislation which could result in additional costs to achieve energy use or energy efficiency mandates, alter community layouts, meet “green building” standards, impose carbon or other greenhouse gas reductions or offset obligations, and which could result in other costs or obligations.

Under various environmental laws, current or former owners and operators of real estate, as well as persons that have arranged for the disposal or treatment of hazardous substances at a site regardless of whether such person owned or operated such site, may be required to investigate and clean up hazardous or toxic substances or petroleum product releases, and may be held liable to a governmental entity or to third parties for related damages, including for personal injury, and for investigation and clean-up costs incurred by such parties in connection with the contamination. Environmental impacts from historical activities have been identified at some of the projects we have developed in the past and additional projects are located on land that was or may have been contaminated by previous use. Our costs of any required removal, investigation or remediation of such substances or our costs of defending against environmental claims may be substantial, and liability can be retroactive, strict, joint and several and can be imposed regardless of fault. The presence of such substances, or the failure to remediate such substances properly, may also adversely affect our ability to sell the land or to borrow using the land as security. For example, a mitigation system may be installed during the construction of a home if a cleanup does not or cannot remove all contaminants of concern, or to address a naturally occurring condition such as radon or methane. Some buyers may not want to purchase a home with a mitigation system. In addition, California imposes notification obligations with respect to environmental conditions, which may cause some persons, or their financing sources, to view subject parcels as less valuable or impaired. At our East Garrison project, disclosures in the deed and otherwise to home buyers will be extensive and impose property use restrictions due to prior operations at part of Fort Ord, a military base and a site listed on the National Priorities List. Extensive remedial and decommissioning actions have been undertaken to convert portions of Fort Ord to civilian use. Future remediation of asbestos, lead-based paints and certain wastes will be required. In addition, remediation of hazardous substances or unsafe conditions which had not previously been identified or fully abated, could be required in the future. It is possible that any remediation at our East Garrison project undertaken by us or another party, such as the federal government, could adversely affect the value of this project.

Any of the foregoing matters could adversely affect our business, prospects, liquidity, financial condition and results of operations.

Ownership, leasing or occupation of land and the use of hazardous materials carries potential environmental risks and liabilities.

We are subject to a variety of local, state and federal statutes, rules and regulations concerning land use and the protection of health and the environment, including those governing discharge of pollutants to soil, water and air, including asbestos, the handling of hazardous materials and the cleanup of contaminated sites. We may be liable for the costs of removal, investigation or remediation of man-made or natural hazardous or toxic substances located on, under or in a property currently or formerly owned, leased or occupied by us, whether or not we caused or knew of the pollution.


25



The particular impact and requirements of environmental laws that apply to any given community vary greatly according to the community site, the site’s environmental conditions and the present and former uses of the site. We expect that increasingly stringent requirements may be imposed on land developers and homebuilders in the future. Environmental laws may result in delays, cause us to implement time consuming and expensive compliance programs and prohibit or severely restrict development in certain environmentally sensitive regions or areas, such as wetlands. Concerns could arise due to post-acquisition changes in laws or agency policies, or the interpretation thereof.

Furthermore, we could incur substantial costs, including cleanup costs, fines, penalties and other sanctions and damages from third-party claims for property damage or personal injury, as a result of our failure to comply with, or liabilities under, applicable environmental laws and regulations. In addition, we are subject to third-party challenges, such as by environmental groups or neighborhood associations, under environmental laws and regulations to the permits and other approvals required for our projects and operations. These matters could adversely affect our business, prospects, liquidity, financial condition and results of operations.

We may be liable for claims for damages as a result of use of hazardous materials.

As a homebuilding and land development business with a wide variety of historic ownership, development, homebuilding and construction activities, we could be liable for future claims for damages as a result of the past or present use of hazardous materials, including building materials or fixtures known or suspected to be hazardous or to contain hazardous materials or due to use of building materials or fixtures which are associated with elevated mold. Any such claims may adversely affect our business, prospects, financial condition and results of operations. Insurance coverage for such claims may be limited or non‑existent.

We may suffer uninsured losses or suffer material losses in excess of insurance limits.

We could suffer physical damage to property and liabilities resulting in losses that may not be fully recoverable by insurance. In addition, certain types of risks, such as personal injury claims, may be, or may become in the future, either uninsurable or not economically insurable, or may not be currently or in the future covered by our insurance policies or otherwise be subject to significant deductibles or limits. Should an uninsured loss or a loss in excess of insured limits occur or be subject to deductibles, we could sustain financial loss or lose capital invested in the affected property as well as anticipated future income from that property. In addition, we could be liable to repair damage or meet liabilities caused by risks that are uninsured or subject to deductibles. We may be liable for any debt or other financial obligations related to affected property. Material losses or liabilities in excess of insurance proceeds may occur in the future.

Increases in our cancellation rate could have a negative impact on our home sales revenue and homebuilding margins.

Home order cancellations can result from a number of factors, including declines or slow appreciation in the market value of homes, increases in the supply of homes available to be purchased, increased competition, higher mortgage interest rates, home buyers’ inability to sell their existing homes, home buyers’ inability to obtain suitable financing, including providing sufficient down payments, and adverse changes in economic conditions. Upon a home order cancellation, the home buyer’s escrow deposit is returned to the home buyer (other than with respect to certain design-related deposits, which we retain). An increase in the level of our home order cancellations could have a negative impact on our business, prospects, liquidity, financial condition and results of operations.

We are subject to product liability and warranty claims arising in the ordinary course of business.

As a homebuilder, we are subject to construction defect, product liability and home warranty claims, including moisture intrusion and related claims, arising in the ordinary course of business. While we maintain general liability insurance and generally seek to require our subcontractors and design professionals to indemnify us for some portion of the liabilities arising from their work, there can be no assurance that these insurance rights and indemnities will be collectable or adequate to cover any or all construction defect and warranty claims for which we may be liable. For example, contractual indemnities can be difficult to enforce, we are often responsible for applicable self-insured retentions (particularly in markets where we include our subcontractors on our general liability insurance and our ability to seek indemnity for insured claims is significantly limited), certain claims may not be covered by insurance or may exceed applicable coverage limits, and one or more of our insurance carriers could become insolvent. Further, in the United States, and California in particular, the coverage offered and the availability of general liability insurance for construction defects is currently limited and is costly. As a result, an increasing number of our subcontractors may be unable to obtain insurance, particularly in California where we have instituted an “owner controlled insurance program,” under which subcontractors are effectively insured by us.

26



If we cannot effectively recover construction defect liabilities and costs of defense from our subcontractors or their insurers, or if we have self-insured, we may suffer losses. Coverage may be further restricted and become even more costly. Such circumstances could adversely affect our business, prospects, liquidity, financial condition and results of operations.

In addition, we conduct the substantial portion of our business in California, one of the most highly regulated and litigious jurisdictions in the United States, which imposes a ten year, strict liability tail on many construction liability claims. As a result, our potential losses and expenses due to litigation, new laws and regulations may be greater than those of our competitors who have more limited California operations.
Our operating performance is subject to risks associated with the real estate industry.
Real estate investments are subject to various risks and fluctuations and cycles in value and demand, many of which are beyond our control. These events include, but are not limited to:
adverse changes in international, national or local economic and demographic conditions;
adverse changes in financial conditions of buyers and sellers of properties, particularly residential homes and land suitable for development of residential homes;
competition from other real estate investors with significant capital, including other real estate operating companies and developers and institutional investment funds;
reductions in the level of demand for and increases in the supply of land suitable for development;
fluctuations in interest rates, which could adversely affect our ability, or the ability of home buyers, to obtain financing on favorable terms or at all;
unanticipated increases in expenses, including, without limitation, insurance costs, development costs, real estate assessments and other taxes and costs of compliance with laws, regulations and governmental policies; and
changes in enforcement of laws, regulations and governmental policies, including, without limitation, health, safety, environmental, zoning and tax laws, governmental fiscal policies and the Americans with Disabilities Act of 1990.
In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in the purchase of homes or an increased incidence of home order cancellations. If we cannot successfully implement our business strategy, our business, prospects, liquidity, financial condition and results of operations will be adversely affected.
Poor relations with the residents of our communities could negatively impact sales, which could cause our revenue or results of operations to decline.
Residents of communities we develop rely on us to resolve issues or disputes that may arise in connection with the operation or development of their communities. Efforts made by us to resolve these issues or disputes could be deemed unsatisfactory by the affected residents and subsequent actions by these residents could adversely affect sales or our reputation. In addition, we could be required to make material expenditures related to the settlement of such issues or disputes or to modify our community development plans, which could adversely affect our results of operations.
If we are unable to develop our communities successfully or within expected timeframes, our results of operations could be adversely affected.
Before a community generates any revenue, time and material expenditures are required to acquire land, obtain development approvals and construct significant portions of project infrastructure, amenities, model homes and sales facilities. It can take several years from the time we acquire control of a property to the time we make our first home sale on the site. Delays in the development of communities expose us to the risk of changes in market conditions for homes. A decline in our ability to develop and market our communities successfully and to generate positive cash flow from these operations in a timely manner could have a material adverse effect on our business and results of operations and on our ability to service our debt and to meet our working capital requirements.

27



We depend on key senior management personnel and other experienced employees.
Our success depends to a significant degree upon the contributions of certain key senior management personnel including, but not limited to, Dustin L. Bogue, our President and Chief Executive Officer, William J. La Herran, our Chief Financial Officer, and James W. Fletcher, our Chief Operating Officer, each of whom would be difficult to replace. Although we will enter into employment agreements with Messrs. Bogue, La Herran and Fletcher upon the completion of this offering, there is no guarantee that these executives will remain employed by us. If any of our key senior management personnel were to cease employment with us, our operating results could suffer. Our ability to retain our key senior management personnel or to attract suitable replacements should any members of our management team leave is dependent on the competitive nature of the employment market. The loss of services from key senior management personnel or a limitation in their availability could materially and adversely impact our business, prospects, liquidity, financial condition and results of operations. Further, such a loss could be negatively perceived in the capital markets. We have not obtained key man life insurance that would provide us with proceeds in the event of death or disability of any of our key senior management personnel.
Experienced employees in the homebuilding, land acquisition and construction industries are fundamental to our ability to generate, obtain and manage opportunities. In particular, local knowledge and relationships are critical to our ability to source attractive land acquisition opportunities. Experienced employees working in the homebuilding and construction industries are highly sought after. Failure to attract and retain such personnel or to ensure that their experience and knowledge is not lost when they leave the business through retirement, redundancy or otherwise may adversely affect the standards of our service and may have an adverse impact on our business, prospects, liquidity, financial condition and results of operations. The loss of any of our key personnel could adversely impact our business, prospects, financial condition and results of operations.
Fluctuations in real estate values may require us to write-down the book value of our real estate assets.
The homebuilding and land development industries are subject to significant variability and fluctuations in real estate values. As a result, we may be required to write-down the book value of our real estate assets in accordance with U.S. GAAP, and some of those write-downs could be material. Any material write-downs of assets could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Inflation could adversely affect our business and financial results.
Inflation could adversely affect us by increasing the costs of land, raw materials and labor needed to operate our business. If our markets have an oversupply of homes relative to demand, we may be unable to offset any such increases in costs with corresponding higher sales prices for our homes. Inflation may also accompany higher interests rates, which could adversely impact potential customers’ ability to obtain financing on favorable terms, thereby further decreasing demand. If we are unable to raise the prices of our homes to offset the increasing costs of our operations, our margins could decrease. Furthermore, if we need to lower the price of our homes to meet demand, the value of our land inventory may decrease. Inflation may also raise our costs of capital and decrease our purchasing power, making it more difficult to maintain sufficient funds to operate our business.
We may become subject to litigation, which could materially and adversely affect us.
In the future we may become subject to litigation, including claims relating to our operations, security offerings and otherwise in the ordinary course of business. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. We cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby materially and adversely affecting us. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could materially and adversely impact us, expose us to increased risks that would be uninsured, and materially and adversely impact our ability to attract directors and officers.
A major health and safety incident relating to our business could be costly in terms of potential liabilities and reputational damage.
Building sites are inherently dangerous, and operating in the homebuilding and land development industry poses certain inherent health and safety risks. Due to health and safety regulatory requirements and the number of projects we work on, health and safety performance is critical to the success of all areas of our business.

28



Any failure in health and safety performance may result in penalties for non‑compliance with relevant regulatory requirements or litigation, and a failure that results in a major or significant health and safety incident is likely to be costly in terms of potential liabilities incurred as a result. Such a failure could generate significant negative publicity and have a corresponding impact on our reputation, our relationships with relevant regulatory agencies, governmental authorities and local communities, and our ability to win new business, which in turn could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Acts of war or terrorism may seriously harm our business.
Acts of war, any outbreak or escalation of hostilities between the United States and any foreign power or acts of terrorism may cause disruption to the U.S. economy, or the local economies of the markets in which we operate, cause shortages of building materials, increase costs associated with obtaining building materials, result in building code changes that could increase costs of construction, affect job growth and consumer confidence, or cause economic changes that we cannot anticipate, all of which could reduce demand for our homes and adversely impact our business, prospects, liquidity, financial condition and results of operations.
We have broad discretion to use the offering proceeds and our investment of those proceeds may not yield a favorable return.
Our management has broad discretion to spend the proceeds from this offering in ways with which you may not agree. The failure of our management to apply these funds effectively could result in unfavorable returns. This could harm our business and could cause the price of our common stock to decline.
Risks Related to our Controlling Stockholder
PICO holds a majority equity interest in our company and its interests may not be aligned with yours.
Upon the completion of this offering, PICO will beneficially own shares of our common stock, which will represent     % of our common stock outstanding immediately after this offering, or shares of our common stock, which will represent     % of our common stock if the underwriters exercise their option to purchase additional shares in full. See “Principal and Selling Stockholders.” For so long as PICO continues to beneficially own a controlling stake in us, PICO will have the power to elect and remove all of our directors and to approve any action requiring the majority approval of our stockholders. PICO will also have the power to agree to transfer its controlling stake in our company. In addition, pursuant to an Investor Rights Agreement that we will enter into with PICO immediately prior to the completion of this offering, PICO will have the right to nominate two members of our board of directors for as long as PICO owns 25% or more of our outstanding common stock and one member for as long as it owns at least 10% (in each case, excluding shares of common stock that are subject to issuance upon the exercise or exchange of rights of conversion or any options, warrants or other rights to acquire shares); and Messrs. Bogue, La Herran and Fletcher will agree to vote all shares of our common stock that they own in favor of such PICO nominees in any election of directors for as long as PICO owns at least 10%.
PICO’s interests may not be fully aligned with yours and this could lead to actions that are not in your best interests. In addition, PICO’s significant ownership in us and resulting ability to effectively control us may discourage someone from making a significant equity investment in us, or could discourage transactions involving a change in control, including transactions in which you as a holder of shares of our common stock might otherwise receive a premium for your shares over the then-current market price.
Moreover, for as long as PICO’s beneficial ownership of our common stock continues to exceed 50%, we may elect to be treated as a “controlled company” for purposes of the New York Stock Exchange, which would allow us to opt out of certain corporate governance requirements, including requirements that a majority of the board of directors consist of independent directors and that the compensation committee and nominating committee be composed entirely of independent directors. We intend to elect to be treated as a “controlled company” and, to the extent we continue to qualify, we may choose to continue to take advantage of these exemptions in the future.
As a result of PICO’s relationship with our company, conflicts of interest may arise with respect to any transactions involving or with PICO or its affiliates.
John R. Hart, a member of our board of directors, is the President and Chief Executive Officer of PICO and Maxim C. W. Webb, also a member of our board of directors, is the Chief Financial Officer of PICO. As a result of our relationship with PICO, there may be transactions between us and PICO that could present an actual or perceived conflict of interest.

29



These conflicts of interest may lead Messrs. Hart and Webb to recuse themselves from actions of our board of directors with respect to any transactions involving or with PICO or its affiliates. In addition, Mr. Hart and Mr. Webb will devote only a portion of their business time to their duties with our board of directors, and they will devote the majority of their time to their duties with PICO and other commitments. PICO or its affiliates may also pursue transactions in competition with us.
Upon completion of this offering, we will enter into a Transition Services Agreement with PICO pursuant to which PICO will provide us with accounting, human resources and information technology functions. Upon its expiration, PICO may be unwilling to renew the agreement or only willing to renew the agreement on less favorable terms, particularly if PICO ceases to hold a material investment in our company.
Upon completion of this offering, the Transition Services Agreement with PICO will provide us with access to accounting, human resources and information technology functions. Upon expiration of this agreement, even if we seek to continue to receive these services from PICO, PICO may be unwilling to renew the agreement or only willing to renew the agreement on less favorable terms. Were this to happen, it is likely that we would incur increased costs to internalize or subcontract the functions that were previously provided to us by PICO through the Transition Services Agreement.
As a “controlled company” within the meaning of the corporate governance rules of the New York Stock Exchange, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. As a result, holders of our common stock may not have the same degree of protection as that afforded to stockholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange.
We will be a “controlled company” within the meaning of the corporate governance rules of the New York Stock Exchange as a result of the ownership position and voting rights of PICO upon completion of this offering. A “controlled company” is a company of which more than 50% of the voting power is held by an individual, group or another company. More than 50% of our voting power will be held by PICO after completion of this offering. As a controlled company, we are entitled to not comply with certain corporate governance rules of the New York Stock Exchange that would otherwise require our board of directors to have a majority of independent directors and our compensation committee and our nominating and governance committee to be comprised entirely of independent directors, have written charters addressing such committee’s purpose and responsibilities and perform an annual evaluation of such committee. In addition our audit committee will not be required to include at least three members until one year of the listing date of our common stock on the New York Stock Exchange, and our audit committee will initially consist of two members. Accordingly, holders of our common stock will not have the same protection afforded to stockholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange and the ability of our independent directors to influence our business policies and affairs may be reduced.
Risks Related to Our Indebtedness
We expect to use leverage in executing our business strategy, which may adversely affect the return on our assets.
We expect to use debt to finance a portion of the cost of constructing our homes and acquiring and developing our lots. As of December 31, 2012, the aggregate commitments of our construction loans and our acquisition and development loans were $43.8 million, of which $29.1 million was outstanding. Our indebtedness is primarily comprised of project-level secured acquisition, development and constructions loans, with recourse limited to the securing collateral. However, as of December 31, 2012, loans with aggregate commitments of $17.1 million and an outstanding balance of $6.5 million were guaranteed by us and PICO. We do not expect PICO to guarantee any additional debt we may incur after completion of this offering. In the future we may incur additional recourse indebtedness in addition to debt secured by limited collateral. Our board of directors will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of additional indebtedness, including the purchase price of assets to be acquired with debt financing, the estimated market value of our assets and the ability of particular assets, and our company as a whole, to generate cash flow to cover the expected debt service. Our charter does not contain a limitation on the amount of debt we may incur and our executive management and board of directors may change our target debt levels at any time without the approval of our stockholders.
Incurring substantial debt could subject us to many risks that, if realized, would adversely affect us, including the risk that:
our cash flow from operations may be insufficient to make required payments of principal of and interest on the debt which is likely to result in acceleration of the maturity of such debt;

30



our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that investment yields will increase with higher financing cost;
we may be required to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations and capital expenditures, future investment opportunities or other purposes; and
the terms of any refinancing may not be as favorable as the terms of the debt being refinanced.
If we do not have sufficient funds to repay our debt at maturity, it may be necessary to refinance the debt through additional debt or additional equity financings. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancings, increases in interest expense could adversely affect our cash flows and results of operations. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of our assets on disadvantageous terms, potentially resulting in losses. To the extent we cannot meet any future debt service obligations, we will risk losing some or all of our assets that may be pledged to secure our obligations to foreclosure. Unsecured debt agreements may contain specific cross-default provisions with respect to specified other indebtedness, giving the unsecured lenders the right to declare a default if we are in default under other loans in some circumstances. Defaults under our debt agreements could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Access to financing sources may not be available on favorable terms, or at all, especially in light of current market conditions, which could adversely affect our ability to maximize our returns.
Our access to additional third-party sources of financing will depend, in part, on:
general market conditions;
the market’s perception of our growth potential;
with respect to acquisition and/or development financing, the market’s perception of the value of the land parcels to be acquired and/or developed;
our debt levels;
our expected results of operations;
our cash flow; and
the market price of our common stock.
Recently, domestic financial markets have experienced unusual volatility, uncertainty and a tightening of liquidity in both the debt and equity capital markets. Credit spreads for major sources of capital widened significantly during the U.S. credit crisis as investors demanded a higher risk premium. Given the current volatility and weakness in the capital and credit markets, potential lenders may be unwilling or unable to provide us with financing that is attractive to us or may charge us prohibitively high fees in order to obtain financing. Consequently, there is greater uncertainty regarding our ability to access the credit market in order to attract financing on reasonable terms. Investment returns on our assets and our ability to make acquisitions could be adversely affected by our inability to secure additional financing on reasonable terms, if at all.
Depending on market conditions at the relevant time, we may have to rely more heavily on additional equity financings or on less efficient forms of debt financing that require a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future business opportunities and other purposes. We may not have access to such equity or debt capital on favorable terms at the desired times, or at all.

31



Our current financing arrangements contain, and our future financing arrangements likely will contain, restrictive provisions.
Our current financing arrangements contain, and the financing arrangements we enter into in the future likely will contain, provisions that limit our ability to do certain things. In particular, certain of our construction and development loan agreements include provisions requiring minimum loan-to-value ratios.  If the fair value of the collateral securing the loan is below the specified minimum, we may be required to make principal payments in order to maintain the required loan-to-value ratios. If we fail to meet or satisfy any of these provisions, we would be in default under these agreements, which could result in a cross-default under other debt agreements, and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral and enforce their respective interests against existing collateral. A default also could limit significantly our financing alternatives, which could cause us to curtail our investment activities and/or dispose of assets when we otherwise would not choose to do so. In addition, future indebtedness may contain financial covenants limiting our ability to, for example, incur additional debt, make certain investments, reduce liquidity below certain levels and make distributions to our stockholders, and otherwise affect our operating policies. If we default on one or more of our debt agreements, it could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

Secured indebtedness exposes us to the possibility of foreclosure on our ownership interests in our land parcels.
Incurring mortgage and other secured indebtedness increases our risk of loss of our ownership interests in our land parcels or other assets because defaults thereunder, and the inability to refinance such indebtedness, may result in foreclosure action initiated by lenders. To the extent we default on this debt, our lenders could foreclose on the property securing the loan. As of December 31, 2012, we had incurred mortgage indebtedness of $29.1 million. This debt is secured by project-level real estate (i.e., real estate held in a special purpose entity formed to hold the real estate interests for a particular project).
Interest expense on debt we incur may limit our cash available to fund our growth strategies.
As of December 31, 2012, we had approximately $43.8 million of aggregate loan commitments, of which $29.1 million was outstanding. As part of our financing strategy, we may incur a significant amount of additional debt. A portion of our debt has, and any additional debt we subsequently incur may have, a floating rate of interest. Higher interest rates could increase debt service requirements on our current floating rate debt and on any floating rate debt we subsequently incur, and could reduce funds available for operations, future business opportunities or other purposes. If we need to repay existing debt during periods of rising interest rates or at a time when our creditworthiness has deteriorated, we could be required to refinance our then-existing debt on unfavorable terms or liquidate one or more of our assets to repay such debt at times which may not permit realization of the maximum return on such assets and could result in a loss, either of which could materially and adversely affect our business, prospects, liquidity, financial condition and results of operations. Additionally, as of December 31, 2012, loans with an aggregate commitment of $17.1 million and an outstanding balance of $6.5 million were guaranteed by PICO. We do not expect that PICO will guarantee any additional debt we may incur after completion of this offering, and it is possible that without PICO’s credit support our cost of borrowing could increase.
Failure to hedge effectively against interest rate changes may adversely affect us.
We currently do not hedge against interest rate fluctuations. We may obtain in the future one or more forms of interest rate protection in the form of swap agreements, interest rate cap contracts or similar agreements to hedge against the possible negative effects of interest rate fluctuations. However, we cannot assure you that any hedging will adequately relieve the adverse effects of interest rate increases or that counterparties under these agreements will honor their obligations thereunder. In addition, we may be subject to risks of default by hedging counterparties. Adverse economic conditions could also cause the terms on which we borrow to be unfavorable. We could be required to liquidate one or more of our assets at times which may not permit us to receive an attractive return on our assets in order to meet our debt service obligations.
Risks Related to Our Organization and Structure
We have a limited operating history and we may not be able to successfully operate our business.
We began operations in 2004 and expanded our operations significantly after we were acquired by PICO in 2008. Prior to the completion of this offering, UCP, LLC will be converted from a Delaware limited liability company into a Delaware corporation and renamed UCP, Inc. Given our limited operating history, you have limited historical information upon which to evaluate our prospects, including our continued ability to acquire desirable land parcels, develop such land and market our homes.

32



In addition, we cannot assure you that our past experience will be sufficient to enable us to operate our business successfully or implement our operating policies and business strategies as described in this prospectus. Furthermore, we may not be able to generate sufficient operating cash flows to pay our operating expenses or service our existing or future indebtedness. You should not rely upon our past performance, as past performance may not be indicative of our future results.
Termination of the employment agreements with the members of our management team could be costly and prevent a change in control of our company.
The employment agreements we will enter into with Dustin L. Bogue, our President and Chief Executive Officer, William J. La Herran, our Chief Financial Officer, and James W. Fletcher, our Chief Operating Officer, upon the completion of this offering each provide that if their employment with us terminates under certain circumstances, we may be required to pay them significant amounts of severance compensation, thereby making it costly to terminate their employment. Furthermore, these provisions could delay or prevent a transaction or a change in control of our company that might involve a premium paid for shares of our common stock or otherwise be in the best interests of our stockholders, which could adversely affect the market price of our common stock.
Certain anti-takeover defenses, applicable law, and provisions of our Registration Rights Agreement and Investor Rights Agreement may limit the ability of a third party to acquire control of us.
Our charter and bylaws and Delaware law contain provisions that may delay or prevent a transaction or a change in control of our company that might involve a premium paid for shares of our common stock or otherwise be in the best interests of our stockholders, which could adversely affect the market price of our common stock. Certain of these provisions are described below.
Selected provisions of our charter and bylaws. Our charter and/or bylaws contain anti-takeover provisions that:
divide our directors into three classes, with the term of one class expiring each year, which could delay a change in our control;
authorize our board of directors, without further action by the stockholders, to issue up to shares of preferred stock in one or more series, and with respect to each series, to fix the number of shares constituting that series and establish the rights and other terms of that series;
require that actions to be taken by our stockholders may be taken only at an annual or special meeting of our stockholders and not by written consent;
specify that special meetings of our stockholders can be called only by our board of directors, the chairman of our board of directors or our chief executive officer;
establish advance notice procedures for stockholders to submit nominations of candidates for election to our board of directors and other proposals to be brought before a stockholders meeting;
provide that our bylaws may be amended by our board of directors without stockholder approval;
allow our directors to establish the size of our board of directors by action of our board of directors, subject to a minimum of three members;
provide that vacancies on our board of directors or newly created directorships resulting from an increase in the number of our directors may be filled only by a majority of directors then in office, even though less than a quorum;
do not give the holders of our common stock cumulative voting rights with respect to the election of directors; and
prohibit us from engaging in certain business combinations with any “interested stockholder” unless specified conditions are satisfied.

33



Selected provisions of Delaware law. We have opted out of Section 203 of the Delaware General Corporation Law (the “DGCL”), which regulates corporate takeovers. However, our charter contains provisions that are similar to Section 203 of the DGCL. Specifically, our charter provides that we may not engage in certain “business combinations” with any “interested stockholder” for a three-year period following the time that the person became an interested stockholder, unless:
prior to the time that person became an interested stockholder, our board of directors approved either the business combination or the transaction which resulted in the person becoming an interested stockholder;
upon consummation of the transaction which resulted in the person becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding certain shares; or
at or subsequent to the time the person became an interested stockholder, the business combination is approved by our board of directors and by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder.
Generally, a business combination includes a merger, consolidation, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an interested stockholder is a person who, together with that person’s affiliates and associates, owns, or within the previous three years owned, 15% or more of our voting stock. However, in the case of our company, PICO and any of its affiliates and subsidiaries and any of their permitted transferees receiving 15% or more of our voting stock will not be deemed to be interested stockholders regardless of the percentage of our voting stock owned by them. This provision could prohibit or delay mergers or other takeover or change in control attempts with respect to us and, accordingly, may discourage attempts to acquire us.
Registration Rights Agreement and Investor Rights Agreement. Prior to the completion of this offering, we will enter into a Registration Rights Agreement and an Investor Rights Agreement with PICO. Pursuant to these agreements, PICO may require us to file a shelf registration statement with the Securities and Exchange Commission relating to the offer and sale of our common stock held by PICO and PICO will have the right to nominate two members of our board of directors for as long as PICO owns 25% or more of our outstanding common stock and one member for as long as it owns at least 10%. These agreements could discourage someone from making a significant investment in us or discourage transactions involving a change in control.
We may change our operational policies, investment guidelines and our business and growth strategies without stockholder consent, which may subject us to different and more significant risks in the future.
Our board of directors will determine our operational policies, investment guidelines and our business and growth strategies. Our board of directors may make changes to, or approve transactions that deviate from, those policies, guidelines and strategies without a vote of, or notice to, our stockholders. This could result in us conducting operational matters, making investments or pursuing different business or growth strategies than those contemplated in this prospectus. Under any of these circumstances, we may expose ourselves to different and more significant risks in the future, which could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
The obligations associated with being a public company will require significant resources and management attention.
As a public company with listed equity securities, we will need to comply with new laws, regulations and requirements, including the requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), certain corporate governance provisions of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), related regulations of the Securities and Exchange Commission (the “SEC”) and requirements of the New York Stock Exchange, with which we were not required to comply as a private company. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting.
Section 404 of the Sarbanes-Oxley Act requires our management and independent auditors to report annually on the effectiveness of our internal control over financial reporting. However, we are an “emerging growth company,” as defined in the JOBS Act, and, so for as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404.

34



Once we are no longer an emerging growth company or, if prior to such date, we opt to no longer take advantage of the applicable exemption, we will be required to include an opinion from our independent auditors on the effectiveness of our internal control over financial reporting.
These reporting and other obligations will place significant demands on our management, administrative, operational and accounting resources and will cause us to incur significant expenses. We may need to upgrade our systems or create new systems, implement additional financial and management controls, reporting systems and procedures, create or outsource an internal audit function, and hire additional accounting and finance staff. Pursuant to a Transition Services Agreement, PICO will, among other things, provide us with various accounting services. As a public company, PICO has significant experience with the accounting requirements applicable to public companies. Upon the expiration of this agreement, we will either need to renew it, internalize the accounting functions provided by PICO or contract with a third party for such services. This could result in increased cost, and no assurance can be given that we will be able to replicate the services provided to us by PICO. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to maintain effective internal control over financial reporting could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
If we fail to implement and maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, our stockholders could lose confidence in our financial results, which could materially and adversely affect us.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. We cannot be certain that we will be successful in implementing or maintaining adequate internal control over our financial reporting and financial processes. Furthermore, as we grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. Additionally, the existence of any material weakness or significant deficiency would require management to devote significant time and incur significant expense to remediate any such material weakness or significant deficiency and management may not be able to remediate any such material weakness or significant deficiency in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause stockholders to lose confidence in our reported financial information, all of which could materially and adversely affect us.
We are an “emerging growth company,” and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, a requirement to present only two years of audited financial statements, an exemption from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act, reduced disclosure about executive compensation arrangements pursuant to the rules applicable to smaller reporting companies and no requirement to seek non‑binding advisory votes on executive compensation or golden parachute arrangements. We have elected to adopt these reduced disclosure requirements. We could be an emerging growth company until the last day of the fiscal year following the fifth anniversary of the completion of this offering, although a variety of circumstances could cause us to lose that status earlier. We cannot predict if investors will find our common stock less attractive as a result of our taking advantage of these exemptions. If some investors find our common stock less attractive as a result of our choices, there may be a less active trading market for our common stock and our stock price may be more volatile.
In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised financial accounting standards. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have determined to opt out of such extended transition period and, as a result, we will comply with new or revised financial accounting standards on the relevant dates on which adoption of such standards is required for non‑emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised financial accounting standards is irrevocable.

35



Changes in accounting rules, assumptions and/or judgments could materially and adversely affect us.
Accounting rules and interpretations for certain aspects of our operations are highly complex and involve significant assumptions and judgment. These complexities could lead to a delay in the preparation and dissemination of our financial statements. Furthermore, changes in accounting rules and interpretations or in our accounting assumptions and/or judgments, such as asset impairments, could significantly impact our financial statements. In some cases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements. Any of these circumstances could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Any joint venture investments that we make could be adversely affected by our lack of sole decision making authority, our reliance on co-venturers’ financial condition and disputes between us and our co-venturers.
We may co-invest in the future with third parties through partnerships, joint ventures or other entities, acquiring non‑controlling interests in or sharing responsibility for managing the affairs of a land acquisition and/or a development. In this event, we would not be in a position to exercise sole decision-making authority regarding the acquisition and/or development, and our investment may be illiquid due to our lack of control. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present were a third-party not involved, including the possibility that partners or co-venturers might become bankrupt, fail to fund their share of required capital contributions, make poor business decisions or block or delay necessary decisions. Partners or co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. In addition, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers.
An information systems interruption or breach in security could adversely affect us.
Pursuant to a Transition Services Agreement we will enter into upon completion of this offering, we will rely on PICO for accounting, human resources and information technology services. PICO will assist us in administering an integrated accounting, financial and operational management information system to conduct our operations. Any disruption in these systems could adversely affect our ability to conduct our business. Furthermore, any security breach of information systems or data could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, which could harm our business.
Risks Related to this Offering and Ownership of Our Common Stock
There is currently no public market for shares of our common stock, a trading market for our common stock may never develop following this offering and our common stock price may be volatile and could decline substantially following this offering.
Prior to this offering there has been no market for shares of our common stock. Although we intend to apply to list the shares of our common stock on the New York Stock Exchange, an active trading market for the shares of our common stock may never develop or if one develops, it may not be sustained following this offering. Accordingly, no assurance can be given as to the following:
the likelihood that an active trading market for shares of our common stock will develop or be sustained;
the liquidity of any such market;
the ability of our stockholders to sell their shares of common stock; or
the price that our stockholders may obtain for their common stock.
If an active market does not develop or is not maintained, the market price of our common stock may decline and you may not be able to sell your shares. Even if an active trading market develops for our common stock subsequent to this offering, the market price of our common stock may be highly volatile and subject to wide fluctuations. Our financial performance, government regulatory action, tax laws, interest rates and market conditions in general could have a significant impact on the future market price of our common stock.

36



Some of the factors that could negatively affect or result in fluctuations in the market price of our common stock include:
actual or anticipated variations in our quarterly operating results;
changes in market valuations of similar companies;
changes in interest rates, mortgage regulations or land and home prices in the areas in which we operate;
adverse market reaction to the level of our indebtedness;
additions or departures of key personnel;
actions by stockholders, including PICO;
speculation in the press or investment community;
general market, economic and political conditions, including an economic slowdown or dislocation in the global credit markets, and conditions in California and Washington State in particular;
our operating performance and the performance of other similar companies;
changes in accounting principles; and
passage of legislation or other regulatory developments that adversely affect us or the homebuilding and land development industry.
The offering price per share of our common stock offered by this prospectus may not accurately reflect the value of your investment.
Prior to this offering there has been no market for our common stock. The offering price per share of our common stock offered by this prospectus was negotiated among us and the representatives of the underwriters. Among the factors considered in determining the offering price were our results of operations, our current financial condition, our future prospects, our markets, the economic conditions in and future prospects for the industry in which we compete, our management, and currently prevailing general conditions in the equity securities markets, including current market valuations of publicly traded companies considered comparable to our company. The offering price may not accurately reflect the value of our common stock and may not be realized upon any subsequent disposition of the shares.
If you purchase common stock in this offering, you will experience immediate dilution.
The offering price of our common stock is higher than the net tangible book value per share of our common stock outstanding upon the completion of this offering. Accordingly, if you purchase common stock in this offering, you will experience immediate dilution of approximately $     in the net tangible book value per share of our common stock, based upon an assumed initial public offering price equal to $ , the midpoint of the price range set forth on the cover page of this prospectus. This means that investors that purchase shares of our common stock in this offering will pay a price per share that exceeds the per share net tangible book value of our assets.
We do not intend to pay dividends on our common stock for the foreseeable future.
We currently intend to retain our future earnings, if any, to finance the development and expansion of our business and, therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any financing instruments and such other factors as our board of directors deems relevant. Accordingly, you may need to sell your shares of our common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them.

37



Future sales of our common stock or other securities convertible into our common stock could cause the market value of our common stock to decline and could result in dilution of your shares.
Our board of directors is authorized, without your approval, to cause us to issue additional shares of our common stock or to raise capital through the issuance of preferred stock (including equity or debt securities convertible into common stock), options, warrants and other rights, on terms and for consideration as our board of directors in its sole discretion may determine. Sales of substantial amounts of our common stock could cause the market price of our common stock to decrease significantly. We cannot predict the effect, if any, of future sales of our common stock, or the availability of our common stock for future sales, on the value of our common stock. Sales of substantial amounts of our common stock by PICO or another large stockholder or otherwise, or the perception that such sales could occur, may also adversely affect the market price of our common stock.
We are offering  shares of our common stock as described in this prospectus (excluding the underwriters’ option to purchase up to additional shares). Upon the completion of this offering, the members of our management team and other officers and employees will be granted an aggregate of shares of   restricted stock units (based upon the midpoint of the price range set forth on the cover page of this prospectus) pursuant to our 2013 Long-Term Incentive Plan and our director nominees will be granted an aggregate of              restricted stock units upon the completion of this offering pursuant to our 2013 Long-Term Incentive Plan (based upon the midpoint of the price range set forth on the cover page of this prospectus). The actual number of restricted stock units will be based upon the price at which the shares are sold to the public in this offering. Further, upon the completion of this offering, PICO will beneficially own           shares of our common stock, which will represent     % of our common stock outstanding immediately after this offering, or         shares of our common stock, which will represent      % of our common stock if the underwriters exercise their option to purchase additional shares in full (in each case, based upon an assumed initial public offering price equal to $ , the midpoint of the price range set forth on the cover page of this prospectus). See “Principal and Selling Stockholders.” In connection with this offering, we, our officers and directors and PICO have agreed that, and purchasers of our shares through the directed share program will agree that, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of Citigroup Global Markets Inc., dispose of or hedge any shares or any securities convertible into or exchangeable for our common stock, subject to certain exceptions. Citigroup Global Markets Inc. in its sole discretion may release any of the securities subject to these lock-up agreements at any time, which, in the case of officers and directors, shall be with notice. If the restrictions under the lock-up agreements are waived, shares of our common stock may become available for resale into the market, subject to applicable law, which could reduce the market price for our common stock.
We will enter into a Registration Rights Agreement with PICO with respect to the shares of our common stock that it will receive as part of our formation transactions. We refer to these shares collectively as the “registrable shares.” Pursuant to the Registration Rights Agreement, we will grant PICO and its direct and indirect transferees shelf registration rights requiring us to file a shelf registration statement and to maintain the effectiveness of such registration statement so as to allow sales thereunder from time to time, demand registration rights to have the registrable shares registered for resale, and, in certain circumstances, the right to “piggy-back” the registrable shares in registration statements we might file in connection with any future public offering.
In connection with this offering, we intend to file a registration statement on Form S‑8 to register the total number of shares of our common stock that may be issued under our 2013 Long-Term Incentive Plan, including the restricted stock units to be granted to the members of our management team, other officers and employees and our director nominees upon the completion of this offering pursuant to our 2013 Long-Term Incentive Plan.
Future offerings of debt securities, which would rank senior to our common stock upon our bankruptcy or liquidation, and future offerings of equity securities that may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.
In the future, we may attempt to increase our capital resources by making offerings of debt securities or additional offerings of equity securities. Upon bankruptcy or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments or both that could limit our ability to make a dividend distribution to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control. As a result, we cannot predict or estimate the amount, timing or nature of our future offerings, and purchasers of our common stock in this offering bear the risk of our future offerings reducing the market price of our common stock and diluting their ownership interest in our company.

38



Non-U.S. holders may be subject to United States federal income tax on gain realized on the sale or disposition of shares of our common stock.
Because of our anticipated holdings in United States real property interests following the completion of our formation transactions, we believe we will be and will remain a “United States real property holding corporation” for United States federal income tax purposes. As a result, a non‑U.S. holder (as defined in “Material Federal Income Tax Considerations”) generally will be subject to United States federal income tax on any gain realized on a sale or disposition of shares of our common stock unless our common stock is regularly traded on an established securities market (such as the New York Stock Exchange) and such non‑U.S. holder did not actually or constructively hold more than 5% of our common stock at any time during the shorter of (a) the five-year period preceding the date of the sale or disposition and (b) the non-U.S. holder’s holding period in such stock. In addition, if our common stock is not regularly traded on an established securities market, a purchaser of the stock generally will be required to withhold and remit to the Internal Revenue Service (the “IRS”) 10% of the purchase price. A non‑U.S. holder also will be required to file a United States federal income tax return for any taxable year in which it realizes a gain from the disposition of our common stock that is subject to United States federal income tax. We anticipate that our common stock will be regularly traded on an established securities market following this offering. However, no assurance can be given in this regard and no assurance can be given that our common stock will remain regularly traded in the future. Non-U.S. holders should consult their tax advisors concerning the consequences of disposing of shares of our common stock.

39




CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

Various statements contained in this prospectus, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward‑looking statements. These forward‑looking statements may include projections and estimates concerning the timing and success of specific projects and our future production, revenue, income and capital spending. Our forward‑looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “intend,” “anticipate,” “potential,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes. The forward‑looking statements in this prospectus speak only as of the date of this prospectus, and we disclaim any obligation to update these statements unless required by law, and we caution you not to rely on them unduly. We have based these forward‑looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. The following factors, among others, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward‑looking statements:

economic changes either nationally or in the markets in which we operate, including declines in employment, volatility of mortgage interest rates and inflation;
continued or increased downturn in the homebuilding industry, either nationally or in the markets in which we operate;
continued volatility and uncertainty in the credit markets and broader financial markets;
our future operating results and financial condition;
our business operations;
changes in our business and investment strategy;
availability of land to acquire and our ability to acquire such land on favorable terms or at all;
availability, terms and deployment of capital;
continued or increased disruption in the availability of mortgage financing or the number of foreclosures in the market;
shortages of or increased prices for labor, land or raw materials used in housing construction;
delays in land development or home construction or reduced consumer demand resulting from adverse weather and geological conditions or other events outside our control;
the cost and availability of insurance and surety bonds;
changes in, or the failure or inability to comply with, governmental laws and regulations;
the timing of receipt of regulatory approvals and the opening of projects;
the degree and nature of our competition;
our leverage and debt service obligations;
our relationship, and actual and potential conflicts of interest, with PICO;
availability of qualified personnel and our ability to retain our key personnel; and
additional factors discussed under the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Our Business.”


40




USE OF PROCEEDS
We expect to receive net proceeds from this offering of approximately $ ($ if the underwriters exercise their option to purchase additional shares from us in full), assuming an initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us.
We intend to use the net proceeds from this offering primarily for the acquisition of land, including the land described under “Our Business-Pending Acquisitions,” and for land development, home construction and other related purposes.
Pending these uses, we intend to invest the net proceeds from this offering in a variety of capital preservation investments, including short‑term, interest‑bearing investment grade securities, money market accounts, certificates of deposit and direct or guaranteed obligations of the U.S. government.
Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $        million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of 1,000,000 shares in the number of shares offered by us, together with a concomitant $1.00 increase in the assumed initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase the net proceeds to us from this offering by approximately $        million, after deducting the underwriting discount and estimated offering expenses payable by us. Conversely, a decrease of 1,000,000 shares in the number of shares offered by us, together with a concomitant $1.00 decrease in the assumed initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would decrease the net proceeds to us from this offering by approximately $        million, after deducting the underwriting discount and estimated offering expenses payable by us. The information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.
We will not receive any of the net proceeds from any sale by PICO of its shares of our common stock pursuant to the underwriters’ option to purchase additional shares from PICO.


41



CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2012, on an actual basis and as adjusted to give effect to (i) the issuance of shares of our common stock to PICO, the sole member of UCP, LLC, in respect of the conversion of PICO’s member’s equity in UCP, LLC as part of our formation transactions and (ii) this offering, assuming an initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us and assuming no exercise by the underwriters of their option to purchase additional shares. This table should be read in conjunction with the sections entitled “Use of Proceeds,” “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements and related notes thereto included elsewhere in this prospectus.
 
 
Year Ended December 31,
 
Actual
 
As Adjusted(1)
 
($ In thousands)
 
 
 
 
Debt:
$
29,112

 


 
 
 
 
Member’s equity and stockholders’ equity:
 
 
 
Member’s equity
102,315

 
 
Common stock, $0.01 par value per share, no shares authorized and no shares issued and outstanding, actual; shares authorized and            shares issued and outstanding, as adjusted(1)

 
 
Preferred stock, $0.01 par value per share, no shares authorized and no shares issued and outstanding, actual; shares authorized and no shares issued and outstanding as adjusted

 

Additional paid-in capital

 
 
Total member’s equity
102,315

 

Total stockholders’ equity

 

Total capitalization
$
131,427

 


_______
(1) 
 
The number of outstanding shares does not include: (i) an aggregate of         restricted stock units to be granted to the members of our management team, other officers and employees and our director nominees upon the completion of this offering pursuant to our 2013 Long-Term Incentive Plan (based upon the midpoint of the price range set forth on the cover page of this prospectus); and (ii)            shares of our common stock reserved and available for future issuance under our 2013 Long-Term Incentive Plan. The actual number of restricted stock units will be based upon the price at which the shares are sold to the public in this offering.
 

42




DILUTION
Purchasers of shares of our common stock in this offering will incur an immediate and substantial dilution in net tangible book value per share of their shares of our common stock from the assumed initial public offering price, based upon the midpoint of the price range set forth on the cover page of this prospectus.
The difference between the per share offering price paid by purchasers of our common stock in this offering and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to purchasers in this offering. Net tangible book value per share is determined by dividing our net tangible book value, which is our total tangible assets less total liabilities, by the number of outstanding shares of our common stock.
As of December 31, 2012, our net tangible book value was approximately $ , or $ per share of our common stock (pro forma for the conversion of PICO’s equity in UCP, LLC into shares of our common stock). After giving effect to our formation transactions, the sale of shares of our common stock in this offering at an assumed initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, the receipt by us of the net proceeds from this offering and the deduction of the underwriting discount and estimated offering expenses payable by us, our pro forma net tangible book value as of December 31, 2012 would have been approximately $ , or $ per share of our common stock. This amount represents an immediate increase in net tangible book value of approximately $ per share of our common stock to our existing stockholders and an immediate dilution in net tangible book value of approximately $ per share of our common stock, or approximately %, to purchasers in this offering.
The following table illustrates the dilution to purchasers in this offering on a per share basis:

Assumed initial public offering price per share
$
     Net tangible book value per share as of December 31, 2012(1)
$
     Pro forma increase in net tangible book value per share attributable to purchasers in this offering
$
Pro forma net tangible book value per share immediately after this offering
$
Dilution in pro forma net tangible book value per share to purchasers in this offering
$
_______
(1) 
 
Pro forma for the conversion of PICO’s member’s equity in UCP, LLC into shares of our common stock.

 Each $1.00 increase (decrease) in the assumed initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma net tangible book value per share immediately after this offering by $ per share and the dilution in pro forma net tangible book value per share to purchasers in this offering by $ per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us.

We may also increase or decrease the number of shares we are offering. An increase of 1,000,000 shares in the number of shares of our common stock offered by us, together with a concomitant $1.00 increase in the assumed initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase the pro forma net tangible book value per share immediately after this offering and the dilution in pro forma net tangible book value per share to purchasers in this offering by $ and $ , respectively, after deducting the underwriting discount and estimated offering expenses payable by us. Conversely, a decrease of 1,000,000 shares in the number of shares of our common stock offered by us, together with a concomitant $1.00 decrease in the assumed initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would decrease the pro forma net tangible book value per share immediately after this offering and the dilution in pro forma net tangible book value per share to purchasers in this offering by $ and $ , respectively, after deducting the underwriting discount and estimated offering expenses payable by us.

The following table sets forth, as of December 31, 2012, on the pro forma basis as described above, the differences between the number of shares of our common stock purchased from us, the total consideration paid to us and the average price per share paid to us by PICO (pro forma for the conversion of PICO’s equity into shares of common stock) and by purchasers in this offering, before deducting the underwriting discount and estimated offering expenses payable by us, at an assumed initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus.
 

43



 
Shares Purchased
 
Total Consideration
  
Number
 
Percent
 
Amount
 
Percent
 
Average Price
 Per Share
Existing stockholder(1)
 
 
%

 
$
 
%

 
$
Purchasers in this offering
 
 
 
 
 
 
 
 
 
Total
 
 
100.0
%
 
$
 
100.0
%
 
$
_______
(1) 
 
Pro forma for the conversion of PICO’s member’s equity into shares of common stock.

If the underwriters exercise their option to purchase additional shares from us and PICO in full, the following will occur:
the number of outstanding shares of our common stock will increase to ;
the number of shares of our common stock owned by PICO will decrease to            shares, or approximately % of the total number of outstanding shares of our common stock;
the number of shares of our common stock held by purchasers in this offering will increase to            shares, or approximately % of the total number of outstanding shares of our common stock; and
the pro forma net tangible book value per share immediately after this offering will be increased (decreased) by $ per share and the dilution in pro forma net tangible book value per share to purchasers in this offering by $ per share.




44




DIVIDEND POLICY
We currently intend to retain future earnings, if any, to finance the development and expansion of our business and, therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any financing instruments and such other factors as our board of directors deems relevant. Accordingly, you may need to sell your shares of our common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them. See “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock—We do not intend to pay dividends on our common stock for the foreseeable future.” In addition, certain provisions of agreements relating to our indebtedness may limit or prohibit the payment of any dividends in the future, and while none of these provisions would currently prohibit us from paying a dividend it is possible that they could do so in the future.



45



SELECTED CONSOLIDATED FINANCIAL DATA
 
The following sets forth our selected consolidated financial and operating data. You should read the following selected consolidated financial data in conjunction with our consolidated financial statements, the related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future.
We derived our statement of operations data for the years ended December 31, 2012 and 2011 and consolidated balance sheet data as of December 31, 2012 and 2011 from our consolidated financial statements audited by Deloitte & Touche LLP, independent auditors, whose report with respect thereto is included elsewhere in this prospectus.
 
Year Ended December 31,
  
2012
 
2011
Statements of Operations
(In thousands)
Revenue:
 
 
 
Homebuilding
$
14,060

 
$
8,285

Land development
44,066

 
15,893

 
58,126

 
24,178

Expenses:
 
 
 
Cost of sales - homebuilding
9,832

 
5,621

Cost of sales - land development
32,876

 
17,280

Sales and marketing
2,875

 
1,414

General and administrative
10,103

 
6,464

 
55,686

 
30,779

Income (loss) from operations
2,440

 
(6,601
)
Other income
578

 
34

Net income (loss)
$
3,018

 
$
(6,567
)
 
 
 
 
 
Year Ended December 31,
Operating Data
2012
 
2011
Net new home orders (including backlog units)
67

 
39

Cancellation rate
22.4
%
 
10.3
%
Selling communities at end of period
4

 
2

Backlog at end of period, number of homes
26

 
6

Backlog at end of period, aggregate sales value (in thousands)
$
8,664

 
$
1,489

 
Year Ended December 31,
  
2012
 
2011
Balance Sheet Data
(In thousands)
Cash and cash equivalents
$
10,324

 
$
2,276

Real estate inventories
$
125,367

 
$
121,347

Total assets
$
137,534

 
$
125,571

Debt
$
29,112

 
$
30,034

Total liabilities
$
35,219

 
$
32,579

Member’s equity
$
102,315

 
$
92,992




46



Consolidated Gross Margin and Consolidated Adjusted Gross Margin and U.S. GAAP Reconciliation
 
Year Ended
 December 31, 2012
 
%
 
Year Ended
 December 31, 2011
 
%
Consolidated Gross Margin and Consolidated Adjusted Gross Margin
(In thousands)
 
 
 
(In thousands)
 
 
Revenue
$
58,126

 
100
%
 
$
24,178

 
100
 %
Cost of sales - consolidated
42,708

 
73.5
%
 
22,901

 
94.7
 %
Consolidated gross margin
15,418

 
26.5
%
 
1,277

 
5.3
 %
 Add: interest expense in cost of sales
760

 
1.3
%
 
511

 
2.1
 %
Add: impairment and abandonment charges
665

 
1.1
%
 
5,522

 
22.8
 %
Consolidated adjusted gross margin
$
16,843

 
29
%
 
$
7,310

 
30.2
 %
 
 
 
 
 
 
 
 
Homebuilding Gross Margin and Homebuilding Adjusted Gross Margin
 
 
 
 
 
 
 
Revenue - Homebuilding
$
14,060

 
100
%
 
$
8,285

 
100
 %
Cost of sales - homebuilding
9,832

 
69.9
%
 
5,621

 
67.8
 %
Homebuilding gross margin
4,228

 
30.1
%
 
2,664

 
32.2
 %
Add: interest expense in cost of sales - homebuilding
122

 
0.9
%
 
35

 
0.4
 %
 
 
 
 
 
 
 
 
Homebuilding adjusted gross margin
$
4,350

 
30.9
%
 
$
2,699

 
32.6
 %
 
 
 
 
 
 
 
 
Land Development Gross Margin and Land Development Adjusted Gross Margin
 
 
 
 
 
 
 
Revenue - Land development
$
44,066

 
100
%
 
$
15,893

 
100
 %
Cost of sales - land development
32,876

 
74.6
%
 
17,280

 
108.7
 %
Land development gross margin
11,190

 
25.4
%
 
(1,387
)
 
(8.7
)%
Add: interest expense in cost of sales - land development
638

 
1.4
%
 
476

 
3
 %
Add: impairment and abandonment charges
665

 
1.5
%
 
5,522

 
34.7
 %
Land development adjusted gross margin
$
12,493

 
28.4
%
 
$
4,611

 
29
 %

Consolidated adjusted gross margin, homebuilding adjusted gross margin and land development adjusted gross margin are non-U.S. GAAP financial measures. We use adjusted gross margin information as a supplemental measure when evaluating our operating performance. We believe this information is meaningful, because it isolates the impact that leverage and non-cash impairment and abandonment charges have on gross margin. However, because adjusted gross margin information excludes interest expense and impairment and abandonment charges, all of which have real economic effects and could materially impact our results, the utility of adjusted gross margin information as a measure of our operating performance is limited. In addition, other companies may not calculate gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance. See the table above for a reconciliation of consolidated adjusted gross margin, homebuilding adjusted gross margin and land development adjusted gross margin to consolidated gross margin, homebuilding gross margin and land development gross margin, respectively, which are the most comparable U.S. GAAP financial measures.

47



MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following in conjunction with the sections of this prospectus entitled Risk Factors, Cautionary Note Concerning Forward‑Looking Statements, Selected Consolidated Financial Data and Our Business and our consolidated financial statements and related notes thereto included elsewhere in this prospectus. This discussion contains forward‑looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward‑looking statements due to a number of factors, including those discussed in the section entitled Risk Factors and elsewhere in this prospectus.
We are a homebuilder and land developer, with significant land acquisition and entitlement expertise, in growth markets in Northern California and with a growing presence in attractive markets in the Puget Sound area of Washington State. Our operations began in 2004 with the founding of Union Community Partners, LLC by Dustin L. Bogue, our President and Chief Executive Officer, and we were principally focused on acquiring land, entitling and developing it for residential construction, and selling residential lots to third-party homebuilders. In January 2008, we were acquired by PICO, a NASDAQ-listed, diversified holding company, which allowed us to accelerate the development of our business and gain access to a capital partner capable of funding our pursuit of attractive opportunities resulting from the recent residential real estate downturn. Since we were acquired by PICO, we have invested over $191.4 million acquiring ownership or control of and improving over 5,300 single-family residential lots. In 2010, we formed Benchmark Communities, our wholly owned homebuilding subsidiary, to design, construct and sell high quality single-family homes. Since 2008, we have acquired or acquired control of (through executed purchase or option contracts) a total of approximately 4,493 residential lots in Northern California and approximately 823 lots in the Puget Sound area of Washington State. As of December 31, 2012, our property portfolio consisted of 45 communities in 15 cities in Northern California and the Puget Sound area of Washington State. Four of these communities are actively selling and include over 133 lots at various stages of development. Our operations are organized into two reportable segments: homebuilding and land development.
During the year ended December 31, 2012, the overall U.S. housing market continued to show signs of improvement, largely driven by decreasing home inventories, high affordability, improving employment, increasing consumer confidence and more positive consumer sentiment for the overall U.S. economy, as discussed further under the caption “Market Opportunity” included elsewhere in this prospectus. Individual markets continue to experience varying results as local home inventories, affordability, and economic and employment factors strongly influence each local market. We improved on many operating metrics during the year ended December 31, 2012 as compared to 2011, including increased net new home orders (including backlog), backlog (value), backlog (units), average sales price of backlog, revenue in our home building and land development segments, and homebuilding and land development adjusted gross margins. During 2012, we benefited from a low interest rate environment, which allowed many home buyers to obtain mortgage financing with relatively low interest rates as compared to long-term historical averages. A material increase in interest rates would adversely affect the ability of home buyers to purchase our homes. While we expect to opportunistically sell select residential lots to third-party homebuilders when we believe it is attractive to do so, we expect that homebuilding and home sales will be our primary means of generating revenue growth for the foreseeable future.
Basis of Presentation
Our consolidated financial statements include our accounts and the accounts of our wholly‑owned subsidiaries and have been prepared in accordance with U.S. GAAP as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).
Results of Operations
In 2011 and 2012, we sourced, underwrote and acquired real estate in our target markets to increase our land inventory and ability to either build and sell homes through Benchmark Communities or develop land and sell lots to third-party homebuilders. We actively acquire and develop lots in California and Washington State in an effort to maintain and grow our lot supply. In addition to expanding our business in existing markets in California and Washington State, we continue to evaluate opportunities to expand into other markets with favorable housing demand fundamentals, including, in particular, long-term population and employment growth.
During the year ended December 31, 2012, we acquired 162 lots in four communities and signed purchase or option contracts to acquire an additional 23 lots in one community. During the first quarter of 2013, we entered into purchase contracts to acquire an additional 726 lots in 4 new communities in Northern California and Washington State.

48



We seek to increase our number of active selling communities in an effort to grow our net new home orders, backlog and ultimately home deliveries. We began selling at two new communities during 2012, one in Santa Clara County, California and one in Fresno County, California. We experienced a 71.8% increase in net new home orders (including backlog) from 39 to 67, an increase in backlog (units) from 6 to 26 and an increase in backlog (value) from $1.5 million to $8.7 million for the year ended December 31, 2012, as compared to 2011. Revenue in our homebuilding segment was $14.1 million for the year ended December 31, 2012, representing an increase of $5.8 million, or 70%, when compared to the year ended December 31, 2011, due to a 24% increase in the number of homes delivered from 33 to 41 and an increase in the average sales price of homes delivered from $251,000 to $343,000, representing an increase of $92,000, or 37%, in 2012.
We refer to our financial statement line items in the explanation of our period over period changes in results of operations. Below are general definitions of what those line items include and represent.
Revenue
Homebuilding revenue is recognized after construction is completed, a sufficient down payment has been received, title has transferred to the home buyer, collection of the purchase price is reasonably assured and we have no continuing involvement. Sales incentives are a reduction of revenue when the sale is recorded.

Similarly, land development revenue is recognized after a sufficient down payment has been received, title has transferred to the buyer, collection of the purchase price is reasonably assured and we have no continuing involvement in the property.
Cost of Sales and Expenses
Cost of sales-homebuilding includes the allocation of construction costs of each home and all applicable land acquisition, real estate development and related common costs based upon the relative-sales-value of the home, and is recorded upon close of escrow of each home.
Cost of sales-land development includes land acquisition and development costs, capitalized interest, impairment and abandonment charges, and real estate taxes, and is recorded upon close of escrow of each lot.
Sales and marketing expense includes direct selling expenses, such as internal and external commissions, sales and marketing expenses (e.g. advertising and the cost of model homes), and sales office costs, and is recorded in the period incurred.
General and administrative expense includes corporate overhead expenses, such as salaries, benefits, office expenses, outside professional services, insurance and travel expenses, and is recorded in the period incurred.
Other Income
Other income consists of interest income, lease income, non-refundable deposits earned on sales that do not close, income from easements and certain payments received as compensation for utility infrastructure.
In the following discussion, “backlog” refers to homes under sales contracts that have not yet closed at the end of the relevant period, “cancellation rate” refers to sales contracts canceled divided by sales contracts executed during the relevant period and “net new home orders” refers to new home sales contracts reduced by the number of sales contracts canceled during the relevant period. Sales contracts relating to homes in backlog may be canceled by the purchaser for a number of reasons. Upon a cancellation, the home buyer’s escrow deposit is returned to the home buyer (other than with respect to certain design-related deposits, which we retain). Accordingly, backlog may not be indicative of our future revenue.
The consolidated financial data presented below is not necessarily indicative of the results to be expected for any future period.

49



Consolidated Financial Data
 
Year Ended
December 31,
 
 
 
2012
 
2011
 
Change
 
(In thousands)
Revenue:
 
 
 
 
 
Homebuilding
$
14,060

 
$
8,285

 
$
5,775

Land development
44,066

 
15,893

 
28,173

 
58,126

 
24,178

 
33,948

Cost of sales:
 
 
 
 
 
Homebuilding
9,832

 
5,621

 
4,211

Land development
32,876

 
17,280

 
15,596

 
42,708

 
22,901

 
19,807

Gross margin
15,418

 
1,277

 
14,141

Expenses:
 
 
 
 
 
Sales and marketing
2,875

 
1,414

 
1,461

General and administrative
10,103

 
6,464

 
3,639

 
12,978

 
7,878

 
5,100

Total costs and expenses
55,686

 
30,779

 
24,907

Income (loss) from operations
2,440

 
(6,601
)
 
9,041

Other income
578

 
34

 
544

Net income (loss)
$
3,018

 
$
(6,567
)
 
$
9,585


Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011

Net New Home Orders and Backlog
 
 
Year Ended
 December 31,
 
 
 
 
2012
 
2011
 
Increase
Net new home orders (including backlog)
67

 
39

 
28

Cancellation rate
22.4
%
 
10.3
%
 
12.1
%
Selling communities at end of period
4

 
2

 
2

Backlog (in thousands)
$
8,664

 
$
1,489

 
$
7,175

Backlog (units)
26

 
6

 
20

Average sales price of backlog (in thousands)
$
333

 
$
248

 
$
85

 
Net new home orders (including backlog) for the year ended December 31, 2012 increased by 28 homes to 67 as compared to 39 homes for the year ended December 31, 2011. Our cancellation rate for the year ended December 31, 2012 increased by 12.1%, to 22.4%, as compared to 10.3% for the year ended December 31, 2011. The increase in our cancellation rate was primarily due to a larger proportion of buyers with whom we entered into sales contracts being unable to obtain mortgage financing with which to consummate the sale during 2012 as compared to 2011.
Backlog (units) as of December 31, 2012 increased by 20 homes to 26, as compared to 6 homes as of December 31, 2011, primarily driven by the 72% increase in net new home orders (including backlog) for the year ended December 31, 2012. Backlog (value) as of December 31, 2012 increased by $7.2 million to $8.7 million, as compared to $1.5 million as of December 31, 2011. The increase in backlog (value) reflects an increase in backlog (units) and an increase in the average sales price of backlog. Our average sales price of backlog as of December 31, 2012 increased by $85,000 to $333,000, as compared to $248,000 as of December 31, 2011, due to the introduction of new homes at new communities with higher average sales prices during 2012.
 Our real estate sales depend upon numerous factors and, as such, the timing and volume of real estate sales in any one quarter is unpredictable. Historically, the level of real estate sales has fluctuated from period to period. Accordingly, it should not be assumed that the level of sales or growth as reported will be maintained in future years.


50



In the following discussion, gross margin is defined as revenue less cost of sales, and gross margin percentage is defined as gross margin divided by revenue.

Revenue

Total revenue for the year ended December 31, 2012 increased by $33.9 million, or 140%, to $58.1 million, as compared to $24.2 million for the year ended December 31, 2011. The increase in revenue was primarily the result of additional home and lot sales attributable to several factors, including a recovering housing market both in our markets and nationally, which has led to an increased demand for homes by home buyers and lots by homebuilders in most of our markets.

Revenue - homebuilding for the year ended December 31, 2012 increased by $5.8 million, or 70%, to $14.1 million, as compared to $8.3 million for the year ended December 31, 2011. This increase was primarily the result of an increase in the number of homes sold to 41 for the year ended December 31, 2012, as compared to 33 homes for the year ended December 31, 2011 and an increase in the average selling price of our homes to approximately $343,000 for the year ended December 31, 2012 as compared to approximately $251,000 for the year ended December 31, 2011. This increase in average selling price was primarily the result of more sales during the year ended December 31, 2012 at communities located in areas with higher home prices as compared to the year ended December 31, 2011.

Revenue - land development for the year ended December 31, 2012 increased by $28.2 million, or 177%, to $44.1 million, as compared to $15.9 million for the year ended December 31, 2011. This increase was primarily the result of an increase in the number of lots sold to 560 for the year ended December 31, 2012, as compared to 118 lots for the year ended December 31, 2011.

Cost of Sales

Cost of sales - homebuilding for the year ended December 31, 2012 increased by $4.2 million, or 75%, to $9.8 million, as compared to $5.6 million for the year ended December 31, 2011, primarily due to the 24% increase in the number of homes sold and the 41% increase in average cost per home sold ($240,000 per home in 2012 and $170,000 per home in 2011).

Cost of sales - land development for the year ended December 31, 2012 increased by $16 million, or 90%, to $32.9 million, as compared to $17.3 million for the year ended December 31, 2011, primarily due to the 375% increase in the number of lots sold, which was partially offset by the 60% decrease in average cost per lot sold ($59,000 per lot in 2012 and $146,000 per lot in 2011).

Cost of sales - land development includes impairment charges on projects where we have determined that expected future cash flows are less than carrying values. In 2011, housing market conditions adversely impacted the anticipated timing and amount of sales at certain of our projects. We revised our expectations for the cash flows from these projects and evaluated whether each project’s expected cash flows exceeded its carrying value. As of December 31, 2011, after examining market data relating to two of our projects located in outlying areas of Fresno, California, we concluded that our expected future cash flows from these projects (which can be very difficult to project, particularly estimated land development and off-site infrastructure costs in the absence of approved entitlements) would not exceed their carrying values. Accordingly, we measured the fair values of these projects using discounted cash flow models and recorded a non-cash impairment charge of $5.2 million in cost of sales - land development for the year ended December 31, 2011. There were no impairment charges recorded for the year ended December 31, 2012. Cost of sales - land development includes abandonment charges for capitalized costs associated with projects that we previously expected to fully developed but that we have determined are no longer economically viable. Abandonment charges were $665,000 for the year ended December 31, 2012 and $338,000 for the year ended December 31, 2011, primarily related to our decision to abandon one of the two projects located in outlying areas of Fresno, California referenced above.

51



Gross Margin and Adjusted Gross Margin
 
Year Ended December 31,
 
2012
 
2011
Consolidated gross margin percentage
26.5
%
 
5.3
%
Consolidated adjusted gross margin percentage(1)
29
%
 
30.2
%
Homebuilding gross margin percentage
30.1
%
 
32.2
%
Homebuilding adjusted gross margin percentage(1)
30.9
%
 
32.6
%
Land development gross margin percentage
25.4
%
 
(8.7
)%
Land development adjusted gross margin percentage(1)
28.4
%
 
29
%
_______
(1) 
 
Consolidated adjusted gross margin percentage, homebuilding adjusted gross margin percentage and land development adjusted gross margin percentage are non-U.S. GAAP financial measures. For a discussion of these measures and a reconciliation of adjusted gross margin numbers to the most comparable U.S. GAAP financial measure, see “Selected Consolidated Financial Data—Consolidated Gross Margin and Consolidated Adjusted Gross Margin and U.S. GAAP Reconciliation.”
The decrease in our homebuilding gross margin percentages was primarily the result of increased cost of sales - homebuilding during 2012 as compared to 2011, attributable mainly to higher basis in homes sold during 2012. Land development adjusted gross margin percentages were essentially the same in 2012 and 2011. Land development gross margin percentage was substantially higher in 2012 as compared to 2011, attributable mainly to significantly more non-cash impairment and abandonment charges incurred during 2011 as compared to 2012 as described above.
Selling, Marketing and General and Administrative
 
Year Ended
December 31,
 
As a Percentage  of
 Total Revenue
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
 
 
 
 
Sales and marketing
$
2,875

 
$
1,414

 
4.9
%
 
5.8
%
General and administrative (“G&A”)
10,103

 
6,464

 
17.4
%
 
26.7
%
Total sales and marketing and G&A
$
12,978

 
$
7,878

 
22.3
%
 
32.6
%

Sales and marketing expense for the year ended December 31, 2012 increased by $1.5 million, or 103%, to $2.9 million, as compared to $1.4 million for the year ended December 31, 2011. The increase in sales and marketing expense was primarily attributable to the 24% increase in the number of homes sold for the year ended December 31, 2012 and an increase in sales and marketing personnel and infrastructure in anticipation of new community openings. Sales and marketing expense was 5% and 6% of total revenue for the years ended December 31, 2012 and 2011, respectively. General and administrative expense for the year ended December 31, 2012 increased $3.6 million, or 56%, to $10.1 million, as compared to $6.5 million for the year ended December 31, 2011. The increase was primarily attributable to increased headcount and offices in our homebuilding operations. Our general and administrative expense was 17% and 27% of total revenue for the years ended December 31, 2012 and 2011, respectively.

During the years ended December 31, 2012 and 2011 our general and administrative expense included $1.2 million and $900,000, respectively, of expense allocated to us by PICO for certain corporate services and other expenses. These allocations include costs related to corporate services, such as executive management, information technology, legal, finance and accounting, human resources, risk management, tax and treasury. Such costs were allocated based on the nature of the cost being allocated. We believe the basis on which the expenses have been allocated is a reasonable reflection of the benefit received by us and complies with applicable accounting guidance. However, actual expenses may have been different from allocated expenses if we had operated as a stand alone entity and differences might be material. In addition, as a separate public company, we expect our annual general and administrative expenses to increase due to greater accounting and other expenses related to corporate governance, SEC reporting and other compliance matters. Upon completion of this offering, we will enter into a Transition Services Agreement with PICO, pursuant to which PICO will provide us with accounting, human resources and information technology services and we will pay PICO a fee for these services.


52



Other Income

Other income for the year ended December 31, 2012 increased by $544,000 to $578,000, as compared to $34,000 for the year ended December 31, 2011, primarily as a result of the recognition of income during 2012 on an easement we granted to a third-party and reimbursement of expenses we incurred in connection with developing utility infrastructure.

Net Income/(Loss)

As a result of the foregoing factors, net income for the year ended December 31, 2012 was $3 million compared to a net loss for the year ended December 31, 2011 of $6.6 million.
Lots Owned and Controlled
The table below summarizes our lots owned and controlled as of the dates presented:
 
 
Year Ended
December 31,
 
Increase (Decrease)
 
2012
 
2011
 
Amount
 
%
Lots Owned
 
 
 
 
 
 
 
Central Valley Area-California
1,880

 
2,197

 
(317
)
 
(14.4
)%
Monterey Bay Area-California
1,602

 
1,688

 
(86
)
 
(5.1
)%
South San Francisco Bay Area-California
32

 
33

 
(1
)
 
(3
)%
Puget Sound Area-Washington State
711

 
733

 
(22
)
 
(3
)%
Total
4,225

 
4,651

 
(426
)
 
(9.2
)%
Lots Controlled(1)
 
 
 
 
 
 
 
Central Valley Area-California
599

 
1,083

 
(484
)
 
(44.7
)%
Monterey Bay Area-California

 

 

 
 %
South San Francisco Bay Area-California
92

 
147

 
(55
)
 
(37.4
)%
Puget Sound Area-Washington State

 

 

 
 %
Total
691

 
1,230

 
(539
)
 
(43.8
)%
Total Lots Owned and Controlled(1)
4,916

 
5,881

 
(965
)
 
(16.4
)%
  _______
(1) 
 
Lots controlled includes lots subject to purchase or option contracts.
 

Liquidity and Capital Resources
Overview
Our principal uses of capital for the year ended December 31, 2012 were operating expenses, land purchases, land development, home construction and the payment of routine liabilities. We used funds received from PICO and those generated by operations and available borrowings to meet our short‑term working capital requirements.
Cash flows for each of our communities depend on the community’s stage in the development cycle and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, entitlements and other approvals, and construction of model homes and homes for sale, roads, utilities, general landscaping and other amenities. Because these costs are a component of our real estate inventories and not recognized in our statement of operations until we sell a home, we incur significant cash outlays prior to recognizing earnings. In the later stages of community development or expansion, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflows associated with homebuilding and land development took place previously.
From a liquidity perspective, we are constructing homes in our communities and actively acquiring and developing lots in our markets. As demand for new homes improves and we continue to expand our business, we expect that cash outlays for land purchases and land development will exceed our cash generated by operations. During the year ended December 31, 2012, we sold 41 homes, purchased 162 lots and spent $39.3 million on land development and construction.

53



We believe we have a conservative strategy for company‑wide cash management, including those related to cash outlays for land and inventory acquisition and development. We ended 2012 with $10.3 million of cash and cash equivalents, an $8 million increase from December 31, 2011, primarily as a result of homebuilding and land development sales of $58.1 million, offset by land acquisitions and land development expenditures of $39.3 million and a $6.3 million net repayment of outstanding debt. We intend to generate cash from the sale of our real estate inventories net of loan release payments on our debt, but we intend to redeploy the net cash generated from the sale of real estate inventories to open additional communities and acquire and develop lots, as well as for other operating purposes.
In addition to expanding our business in existing markets in California and Washington State, we seek to identify major markets with favorable housing demand fundamentals, including long-term population and employment growth, that we may choose to enter. Additionally, we may evaluate the acquisition of other homebuilders or developers that we believe we can generate operational efficiencies or enter into new markets that may offer attractive fundamentals.
We intend to use debt and equity as part of our ongoing financing strategy, coupled with redeployment of cash flows from operations, to provide us with the financial flexibility to access capital on attractive terms. In that regard, we expect to employ prudent levels of leverage to finance the acquisition and development of our lots and construction of our homes. All of our debt is secured by mortgages on particular assets and a portion is recourse to us. In the future, we may use additional recourse indebtedness. As of December 31, 2012, we had approximately $43.8 million of aggregate loan commitments, of which $29.1 million was outstanding. At such date, we were party to five project‑specific revolving loans and several other loan agreements related to the acquisition and development of lots and the construction of model homes and homes for sale. Our executive management and board of directors will consider a number of factors when evaluating our level of indebtedness and when making decisions about additional indebtedness, including the purchase price of assets to be acquired with debt financing, the expected duration and the estimated market value of our assets and the ability of particular assets, and our company as a whole, to generate cash flow to cover the expected debt service. As a means of sustaining our long‑term financial health and limiting our exposure to unforeseen dislocations in the debt and financing markets, we currently expect to remain conservatively capitalized. However, our charter does not contain a limitation on the amount of debt we may incur and our executive management team and board of directors may change our debt levels at any time without the approval of our stockholders.
We intend to finance future acquisitions and developments with the most advantageous source of capital available to us at the time of the transaction, which may include a combination of common and preferred equity, secured and unsecured corporate level debt, property‑level debt and mortgage financing and other public, private or bank debt.
We believe that our cash on hand, anticipated cash from operations and the net proceeds from this offering will be sufficient to fund our operations for at least the next twelve months.
Secured Acquisition and Development Loans and Construction Loans
As of December 31, 2012, we were party to several secured acquisition and development loan agreements to purchase and develop land. In addition, we were party to several secured construction loan agreements for the construction of model and production homes. As of December 31, 2012, the aggregate commitment of our acquisition and development loans and our construction loans was $43.8 million, of which $29.1 million was outstanding. We are obligated to repay acquisition and development loans as lots are released from the lien of the mortgage securing the loans based upon a specific release price, as defined in each respective loan agreement. We are obligated to repay construction loans with proceeds from home sales as homes are sold based upon a specific release price, as defined in each respective loan agreement. These loans generally mature during 2013 and 2014. Interest on the loans is paid monthly at rates between 4.5% and 10% per annum. Our debt is comprised of both floating and fixed rate debt instruments.
Our indebtedness is primarily comprised of project-level secured acquisition, development and constructions loans incurred by our wholly owned subsidiaries, with recourse limited to the securing collateral. However, as of December 31, 2012, construction loans with an aggregate commitment of $17.1 million and an outstanding balance of $6.5 million were guaranteed by UCP, LLC and PICO.

54



We believe that our leverage ratios provide useful information to the users of our financial statements regarding our financial position and cash and debt management. The ratio of debt‑to‑capital and the ratio of net debt‑to‑capital are calculated as follows (dollars in thousands):
 
 
At December 31,
 
2012
 
2011
Debt
$
29,112

 
$
30,034

Member’s equity
102,315

 
92,992

Total capital
$
131,427

 
$
123,026

Ratio of debt-to-capital
22.2
%
 
24.4
%
 
 
 
 
Debt
$
29,112

 
$
30,034

Less: cash and cash equivalents
10,324

 
2,276

Net debt
18,788

 
27,758

Member’s equity
102,315

 
92,992

Total capital
$
121,103

 
$
120,750

Ratio of net debt-to-capital(1)
15.5
%
 
23.0
%
_______
(1) 
 
The ratio of net debt-to-capital is computed as the quotient obtained by dividing net debt (which is debt less cash and cash equivalents) by the sum of net debt plus member’s equity. The most directly comparable U.S. GAAP financial measure is the ratio of debt-to-capital. We believe the ratio of net debt-to-capital is a relevant financial measure for investors to understand the leverage employed in our operations and as an indicator of our ability to obtain financing. We reconcile this non-U.S. GAAP financial measure to the ratio of debt-to-capital in the table above.
 
 
Cash Flows-Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011
For the year ended December 31, 2012 as compared to the year ended December 31, 2011, the comparison of cash flows is as follows:
Net cash provided by operating activities was $8.8 million in 2012, an increase of $22 million from cash used of $13.2 million in 2011. Cash provided by operations in 2012 was primarily a result of $58.1 million in cash provided by sales of real estate inventories, offset by $39.3 million in cash we spent on purchases and development of real estate inventories and the construction of homes, and cash we spent to pay for operating expenses. The cash used in our operations in 2011 was primarily a result of $24.2 million in cash provided by sales of real estate inventories, offset by $34.2 million in cash we spent on purchases and development of real estate inventories and the construction of residential properties, and the cash we spent to pay operating expenses.
The net cash we used in investing activities was $712,000 in 2012 as compared to $96,000 in 2011. The increase in cash used in 2012 resulted from additional purchases of fixed assets, such as computer hardware and software and various office furniture and equipment.
Net cash used in our financing activities was $37,000 in 2012 compared to cash provided of $14 million in 2011. The increase in cash used was primarily a result of (i) a decrease of $5.9 million in the net cash contributions we received from PICO, (ii) an increase of $9.9 million in the repayment of debt, (iii) offset by an increase of $1.9 million from additional borrowings.
Off‑Balance Sheet Arrangements and Contractual Obligations
In the ordinary course of business, we may enter into purchase or option contracts to procure lots for development and construction of homes or for sale to third-party homebuilders. We are subject to customary obligations associated with entering into contracts for the purchase of land. These contracts typically require a cash deposit and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements by the sellers, including obtaining applicable property and development entitlements.

55



We may also utilize purchase or option contracts with land sellers as a method of acquiring land in staged takedowns, to help us manage the financial and market risk associated with land holdings, and to reduce the use of funds from our corporate financing sources. Purchase or option contracts generally require a non‑refundable deposit for the right to acquire lots over a specified period of time at pre‑determined prices. We generally have the right to terminate our obligations under both purchase or option contracts by forfeiting our cash deposit with no further financial responsibility to the land seller. As of December 31, 2012, we had outstanding $1.1 million of non‑refundable cash deposits pertaining to purchase or option contracts for 205 lots with an aggregate remaining purchase price of approximately $13.9 million (net of deposits).
Our use of contracts providing us an option to purchase land depends on, among other things, the availability of land sellers willing to enter into option takedown arrangements, the availability of capital to financial intermediaries to finance the development of land, general housing market conditions, and local market dynamics.
Contractual Obligations Table
The following table summarizes our future estimated cash payments under existing contractual obligations as of December 31, 2012, including estimated cash payments due by period. Our purchase obligations primarily represent commitments to purchase real estate inventories under land purchase contracts with non‑refundable deposits and commitments for subcontractor labor and material to be utilized in the normal course of business (in thousands):  
 
 
Payments Due by Period
Contractual Obligations
 
Total
 
Less Than
 1 Year
 
1-3 Years
 
4-5 Years
 
After
 5 Years
Long-term debt principal payments(1)
 
$
29,112

 
$
15,448

 
$
13,152

 
$
28

 
$
484

Long-term debt interest payments
 
1,532

 
1,241

 
224

 
34

 
33

Operating leases(2)
 
777

 
305

 
472

 
 
 
 
Purchase obligations(3)
 
28,667

 
28,667

 
 
 
 
 
 
Total
 
$
60,088

 
$
45,661

 
$
13,848

 
$
62

 
$
517

 _______
(1) 
 
Long-term debt represents our acquisition and development loans. The majority of the contractual maturities of the debt is in the less than one, and one to three years category; however, some of the real estate inventories securing the loans may be sold in less time and consequently repayment will be required earlier than scheduled. For a more detailed description of our debt, please see note five of the notes to our consolidated financial statements included elsewhere in this prospectus.
(2) 
 
For a more detailed description of our operating leases, please see note seven of the notes to our consolidated financial statements included elsewhere in this prospectus.
(3) 
 
Includes: (i) $20.1 million of the remaining purchase price (net of deposits) for real estate under purchase contracts (including $6.2 million relating to real estate undergoing our internal feasibility review and for which no non-refundable deposits have been made); and (ii) $8.6 million of subcontractor labor and material commitments and open vendor contracts as of December 31, 2012 (assuming the related projects are completed in full). For a more detailed description of our purchase or option contracts, please see the discussion set forth above in this “Off-Balance Sheet Arrangements and Contractual Obligations” section and notes 1 and 6 of the notes to our consolidated financial statements included elsewhere in this prospectus.
 
 
Inflation
Our business can be adversely impacted by inflation, primarily from higher land, financing, labor, material and construction costs. In addition, inflation can lead to higher mortgage rates, which can significantly affect the affordability of mortgage financing to home buyers. While we attempt to pass on cost increases to customers through increased prices, when weak housing market conditions exist, we are often unable to offset cost increases with higher selling prices.
Seasonality
Historically, the homebuilding industry experiences seasonal fluctuations in quarterly operating results and capital requirements. We typically experience the highest new home order activity in spring and summer, although this activity is also highly dependent on the number of active selling communities, timing of new community openings and other market factors. Since it typically takes four to six months to construct a new home, we generally deliver more homes in the second half of the year as spring and summer home orders convert to home deliveries. Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest in the second and third quarters, and the majority of cash receipts from home deliveries occur during the second half of the year. We expect this seasonal pattern to continue over the long‑term, although it may be affected by volatility in the homebuilding industry.

56



Critical Accounting Policies, Estimates and Judgments
The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenue and expenses and the related disclosures of any contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those which impact our most critical accounting policies. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions. We believe that the following accounting policies are those that are most critical to the portrayal of our financial condition and results of operations and require the more significant judgments and estimates:
Implications of Being an Emerging Growth Company
We are an “emerging growth company,” as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” These provisions include:
a requirement to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in an initial public offering registration statement;
an exemption to provide less than five years of selected financial data in an initial public offering registration statement;
an exemption from the auditor attestation requirement of Section 404 of the Sarbanes‑Oxley Act in the assessment of the emerging growth company’s internal control over financial reporting;
an exemption from the adoption of new or revised financial accounting standards until they would apply to private companies;
an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer.
an ability to provide reduced disclosure about executive compensation arrangements; and
an exemption from the requirement to seek non-binding advisory votes on executive compensation or golden parachute agreements.
We have determined to opt out of the exemption from compliance with new or revised financial accounting standards. As a result, we will comply with new or revised financial accounting standards on the relevant dates on which adoption of such standards is required for non‑emerging growth companies. Our decision to opt out of this exemption is irrevocable.
We have elected to adopt the reduced disclosure requirements described above. As a result of these elections, the information that we provide in this prospectus may be different than the information you may receive from other public companies in which you hold equity interests. In addition, it is possible that some investors will find our common stock less attractive as a result of our elections, which may result in a less active trading market for our common stock and more volatility in our stock price.
We will remain an “emerging growth company” until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non‑affiliates exceeds $700 million as of the prior June 30, and (2) the date on which we have issued more than $1 billion in non‑convertible debt during the prior three‑year period.


57



Segment Reporting

We operate two principal businesses: homebuilding and land development. We have determined that our homebuilding operations and our land development operations are our operating segments. Our homebuilding operations construct and sell single-family homes primarily in California. We determined that our homebuilding reportable segment includes real estate of similar economic characteristics, including similar historical and expected future long-term gross margin percentages, similar product types, production processes and methods of distribution. Our land development operations develop and sell lots primarily in California. We determined that our land development reportable segment includes real estate of similar economic characteristics, including similar historical and expected future long-term gross margin percentages, similar product types, production processes and methods of distribution.
Real Estate Inventories and Cost of Sales
We capitalize pre-acquisition costs, the purchase price of real estate, development costs and other allocated costs, including interest, during development and home construction. Applicable costs incurred after development or construction is substantially complete are charged to sales and marketing or, general and administrative as appropriate. Pre-acquisition costs, including non-refundable land deposits, are expensed to cost of sales when we determine continuation of the related project is not probable.
 
Land, development and other common costs are typically allocated to real estate inventories using the relative-sales-value method. Direct home constructio