Fair Value Disclosures

9 Months Ended

Sep. 30, 2016

Fair Value Disclosures

Fair Value Disclosures

Note 9 - Fair Value Disclosures

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) provides guidance for using fair value to measure assets and liabilities, defines fair value, establishes a framework for measuring fair value under GAAP, expands disclosures about fair value measurements, and establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The accounting standards require that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Fair value determined based on quoted market prices in active markets for identical assets and liabilities.

Level 2: Fair value determined using significant observable inputs, such as quoted prices for similar assets or liabilities or quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data, by correlation or other means.

Level 3: Fair value determined using significant unobservable inputs, such as discounted cash flows, or similar techniques.

The carrying value of cash and cash equivalents, restricted cash, receivables, and accounts payable and theSenior Secured Credit Facility approximates the fair value due to their short-term nature.

Certain assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable.

The carrying amounts and fair values of our financial liabilities as of September 30, 2016 and December 31, 2015 are as follows (in thousands):

	September 30, 2016				December 31, 2015
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Senior Notes:
7.50% Notes	$	—	$	—	$	46,793	$	45,389
8.50% Notes, net (1)		196,460		208,360		195,495		199,000
6.00% Notes, net (1)		78,798		86,840		78,558		75,368
Senior Secured Credit Facility		15,000		15,000		—		—
Contingent consideration (earn-out) (2)		2,400		2,400		7,083		7,083

⁽¹⁾ The carrying amount of the debt instruments are net of unamortized deferred financing costs and certain debt discounts.

⁽²⁾ During the nine months ended September 30, 2016, we paid $4.3 million of the earn-out. During the three months ended September 30, 2016, we also reduced the carrying amount of the earn-out by $0.4 million to its estimated fair value.

In estimating the fair value of financial liabilities, we used the following methods and assumptions:

7.50% Notes, 8.50% Notes and 6.00% Notes

As of September 30, 2016 and December 31, 2015, the fair value of the 7.50% Notes, the 8.50% Notes and the 6.00% Notes is estimated, based on quoted or estimated market prices. These fall within Level 2 of the fair value hierarchy.

Contingent Consideration (“earn-out”)

This was first recognized as part of the purchase price paid for the Royal Oak Homes and Bonterra Builders acquisitions in 2014 and 2015, respectively, and falls within Level 3 of the fair value hierarchy. For the fair value as of December 31, 2015, valuation models were used to value the earn-outs by simulating earnings, applying the terms of the earn-out in each simulated path, determining the average payment in each year across all the trials of the simulation, and calculating the sum of the present values of the payments in each year. The primary inputs and key assumptions include estimated future earnings, probabilities of achievement, earnings volatility, and the discount rate.