21.	Stock Based Compensation

All share and per share amounts have been adjusted for the stock dividends distributed during

2017

and

2016,

as applicable.

Determining Fair Value of Share-Based

Option

Awards

. Most options that we grant contain only a service condition (“Service-Based” option) and therefore vest over a specified number of years as long as the employee is employed by the Company. For Service-Based options, we use the Black-Scholes option pricing model to determine the grant date fair value. During

2015,

we also granted

million Market-Based options to each of the CEO and COO. These options were valued using a Monte Carlo simulation model. Refer to the “Market-Based Stock Option Awards” section below.

The fair values for Service-Based options granted for the years ended

December 31, 2018

and

2016

were estimated using the Black-Scholes option pricing model with the below weighted-average assumptions. For the year ended

December 31, 2017,

there were

options granted.

	Year Ended December 31,
	2018			2017		2016
Expected lives of options (in years)		9.1			N/A		5.0
Expected volatility		29.7	%		N/A		32.1	%
Risk free interest rate		3.0	%		N/A		1.6	%
Dividend yield rate		3.9	%		N/A		4.4	%

Based on calculations using the Black-Scholes option pricing model, the weighted-average grant date fair values of stock options granted during

2018

and

2016

were

$6.83

and

$3.74,

respectively. The expected life of options in the table above represents the weighted-average period for which the options are expected to remain outstanding and are derived primarily from historical exercise patterns. The expected volatility is determined based on our review of the implied volatility that is derived from the price of exchange traded options of the Company. The risk-free interest rate assumption is determined based upon observed interest rates appropriate for the expected term of our employee stock options. The dividend yield assumption is based on our history of dividend payouts.

Stock Option Award Activity

. Stock option activity under our option plans, restated as applicable for stock dividends, for the years ended

December 31, 2018,

2017

and

2016

were as follows.

	Year Ended December 31,
	2018					2017					2016
				Weighted-					Weighted-					Weighted-
				Average					Average					Average
	Number of			Exercise		Number of			Exercise		Number of			Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding Stock Option Activity
Outstanding, beginning of year		5,642,623		$	25.22		6,644,274		$	26.14		7,252,380		$	28.17
Granted		450,000			30.73		-			N/A		45,360			20.07
Exercised		(364,418	)		27.06		(380,786	)		24.84		-			N/A
Forfeited		(9,213	)		22.10		-			N/A		(11,340	)		26.28
Cancelled		(187,110	)		30.18		(620,865	)		35.24		(642,126	)		48.61
Outstanding, end of year		5,531,882		$	25.38		5,642,623		$	25.22		6,644,274		$	26.14

	Year Ended December 31,
	2018					2017					2016
				Weighted-					Weighted-					Weighted-
	Number of			Average		Number of			Average		Number of			Average
	Shares			Fair Value		Shares			Fair Value		Shares			Fair Value
Unvested Stock Option Activity
Outstanding, beginning of year		125,445		$	6.22		2,472,911		$	5.10		2,531,700		$	5.21
Granted		450,000			6.83		-			N/A		45,360			3.74
Vested		(118,508	)		6.67		(2,347,466	)		5.03		(91,902	)		7.53
Forfeited		(9,213	)		4.21		-			N/A		(12,247	)		5.40
Unvested, end of year		447,724		$	6.76		125,445		$	6.22		2,472,911		$	5.10

The total intrinsic value of options (difference between price per share as of the exercise date and the exercise price, times the number of options outstanding) exercised during the years ended

December 31, 2018

and

2017

was

$1.9

million and

$2.5

million, respectively.

options were exercised during the year ended

December 31, 2016.

The following table provides data for our stock options that are vested or expected to vest as of

December 31, 2018.

Exercisable or expected to vest
Number outstanding		5,124,237
Weighted-average exercise price	$	24.97
Aggregate intrinsic value (in thousands)	$	17,201
Weighted-average remaining contractual term (years)		4.55

Exercisable
Number outstanding		5,084,158
Weighted-average exercise price	$	24.98
Aggregate intrinsic value (in thousands)	$	16,982
Weighted-average remaining contractual term (years)		4.54

The aggregate intrinsic values in the tables above represent the total pretax intrinsic values (the difference between the closing price of MDC’s common stock on the last trading day of fiscal

2018

and the exercise price, multiplied by the number of in-the-money stock option shares) that would have been received by the option holders had all in-the-money outstanding stock options been exercised on

December 31, 2018.

The following table summarizes information associated with outstanding and exercisable stock options at

December 31, 2018.

			Options Outstanding						Options Exercisable
					Weighted-						Weighted-
					Average						Average
					Remaining		Weighted-				Remaining		Weighted-
					Contractual		Average				Contractual		Average
			Number		Life (in		Exercise		Number		Life (in		Exercise
Range of Exercise Price			Outstanding		years)		Price		Outstanding		years)		Price
$ 15.01	-	$ 20.00		45,090		2.76	$	19.25		45,090		2.76	$	19.25
$ 20.01	-	$ 25.00		1,343,079		3.61		21.72		1,306,223		3.52		21.72
$ 25.01	-	$ 30.00		3,313,823		5.23		25.62		3,302,955		5.23		25.62
$ 30.01	-	$ 35.00		829,890		5.82		30.70		429,890		2.49		30.62
Total				5,531,882		4.90	$	25.38		5,084,158		4.54	$	24.98

Total compensation expense relating to stock options was

$1.2

million,

$0.5

million and

$5.6

million for the years ended

December 31, 2018,

2017

and

2016,

respectively. Our recognized tax benefit from this expense for the years ended

December 31, 2018,

2017

and

2016

was

$0.2

million,

$0.2

million and

$2.1

million, respectively.

As of

December 31, 2018,

$2.3

million of total unrecognized compensation cost related to stock options was expected to be recognized as an expense by the Company in the future over a weighted-average period of approximately

2.4

years.

Our realized tax benefit from stock options exercised for the years ended

December 31, 2018

and

2017

was

$0.4

million and

$1.0

million, respectively.

stock options were exercised during the year ended

December 31, 2016.

Market-Based Stock Option Awards.

May 18, 2015,

the Company granted a non-qualified stock option to each of the Chief Executive Officer and the Chief Operating Officer for

1,134,000

shares of common stock under the Company’s

2011

Equity Incentive Plan. The terms of each option provide that, over a

five

year period,

one

third

of the option shares will vest as of each of the third, fourth, and

fifth

anniversary dates of the grant of the option; provided that all unvested option shares will vest immediately in the event the closing price of the Company’s stock, as reported by the New York Stock Exchange, in any

out of

consecutive trading days closes at a price equal to or greater than

120%

of the closing price on the date of grant (the “market-based condition”). During the

2017

second

quarter, the market-based condition was achieved and, as a result, the shares fully vested and became exercisable. The option exercise price is equal to the closing price of the Company’s common stock on the date of grant, which was

$25.09

and the expiration date of each option is

May 18, 2025.

In accordance with ASC

718,

the market-based awards were assigned a fair value of

$4.96

per share (total value of

$11.2

million) on the date of grant using a Monte Carlo simulation model and, as calculated under that model, all expense was recorded on a straight-line basis through the end of the

2016

second

quarter. The following assumptions were used in the model.

Expected volatility	27.8	%
Risk free interest rate	2.2	%
Dividend yield rate	3.5	%

Restricted and Unrestricted Stock Award Activity

. Non-vested restricted stock awards, restated as applicable for stock dividends, at

December 31, 2018,

2017

and

2016

and changes during those years were as follows:

	Year Ended December 31,
	2018					2017					2016
				Weighted-					Weighted-					Weighted-
				Average					Average					Average
	Number of			Grant Date		Number of			Grant Date		Number of			Grant Date
	Shares			Fair Value		Shares			Fair Value		Shares			Fair Value
Unvested, beginning of year		293,880		$	25.80		204,753		$	21.44		110,772		$	26.71
Granted		132,606			31.87		148,722			29.61		167,079			22.00
Vested		(108,707	)		27.49		(53,125	)		24.38		(73,098	)		29.01
Forfeited		(4,900	)		31.15		(6,470	)		23.56		-			29.11
Unvested, end of year		312,879		$	27.66		293,880		$	25.80		204,753		$	21.44

Total compensation expense relating to restricted stock awards was

$3.6

million,

$2.6

million and

$1.9

million for the years ended

December 31, 2018,

2017

and

2016,

respectively. Our recognized tax benefit from this expense for the years ended

December 31, 2018,

2017

and

2016

was

$0.8

million,

$1.0

million,

$0.7

million, respectively.

December 31, 2018,

there was

$4.0

million of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized as an expense by us in the future over a weighted-average period of approximately

2.0

years. The total intrinsic value of unvested restricted stock awards (the closing price of MDC’s common stock on the last trading day of fiscal

2018

multiplied by the number of unvested awards) at

December 31, 2018

was

$8.7

million. The total intrinsic value of restricted stock which vested during each of the years ended

December 31, 2018,

2017

and

2016

was

$3.2

million,

$1.4

million and

$1.3

million, respectively.

Performance Stock Unit Awards.

May 23, 2018,

June 20, 2017

and

July 25, 2016,

the Company granted long term performance share unit awards (“PSUs”) to each of the CEO, the COO, and the Chief Financial Officer (“CFO”) under the Company’s

2011

Equity Incentive Plan. The PSUs will be earned based upon the Company’s performance, over a

three

year period (the “Performance Period”), measured by increasing home sale revenues over a “Base Period.” Each award is conditioned upon the Company achieving an average gross margin from home sales percentage (excluding impairments) of at least

fifteen

percent (

15%

) over the Performance Period. Target goals will be earned if the Company’s

three

year average home sale revenues over the Performance Period (“Performance Revenues”) exceed the home sale revenues over the Base Period (“Base Revenues”) by at least

10%

but less than

20%.

If Performance Revenues exceed the Base Revenues by at least

but less than

10%,

50%

of the Target Goals will be earned (“Threshold Goals”). If Performance Revenues exceed the Base Revenues by at least

20%,

200%

of the Target Goals will be earned (“Maximum Goals”). For the PSUs granted in

2017

and

2018,

the number of PSUs earned shall be adjusted to be proportional to the partial performance between the Threshold Goals, Target Goals and Maximum Goals. Details for each defined term above for both grants have been provided in the table below.

					Threshold Goal			Target Goal			Maximum Goal
Awardee	Date of Award	Performance Period	Base Period	Base Period Revenues	PSUs		Home Sale Revenues	PSUs		Home Sale Revenues	PSUs		Home Sale Revenues	Fair Value per Share		Maximum Potential Expense to be Recognized*
CEO	July 25, 2016	July 1, 2016	July 1, 2015	$1.975		56,700	$2.074		113,400	$2.173		226,800	$2.370			$	4,815
COO		to	to	billion		56,700	billion		113,400	billion		226,800	billion	$	21.23		4,815
CFO		June 30, 2019	June 30, 2016			14,175			28,350			56,700					1,204
																$	10,834

CEO	June 20, 2017	April 1, 2017	April 1, 2016	$2.426		59,400	$2.547		118,800	$2.669		237,600	$2.911			$	7,142
COO		to	to	billion		59,400	billion		118,800	billion		237,600	billion	$	30.06		7,142
CFO		March 31, 2020	March 31, 2017			14,850			29,700			59,400					1,786
																$	16,070

CEO	May 23, 2018	April 1, 2018	April 1, 2017	$2.543		60,000	$2.670		120,000	$2.797		240,000	$3.052			$	6,629
COO		to	to	billion		60,000	billion		120,000	billion		240,000	billion	$	27.62		6,629
CFO		March 31, 2021	March 31, 2018			15,000			30,000			60,000					1,657
_______________________																$	14,915
* Dollars in thousands

In accordance with ASC

718,

the PSUs were valued on the date of grant at their fair value. The fair value of these grants was equal to the closing price of MDC stock on the date of grant less the discounted cash flows of expected future dividends over the respective vesting period (as these PSUs do

not

participate in dividends). The grant date fair value and maximum potential expense if the Maximum Goals were met for these awards has been provided in the table above. ASC

718

does

not

permit recognition of expense associated with performance-based stock awards until achievement of the performance targets are probable of occurring.

2016

PSU Grants

As of

December 31, 2018,

the Company determined that achievement of the Maximum Goals for these awards was probable and as such, the Company recorded share-based award expense related to the awards of

$6.3

million for the year ended

December 31, 2018.

As of

December 31, 2017,

the Company determined that achievement of the Target Goals was probable and as such, recorded share-based award expense related to the awards of

$2.7

million for the year ended

December 31, 2017.

As of

December 31, 2016,

the Company concluded that achievement of any of the performance metrics had

not

met the level of probability required to record compensation expense at that time and as such,

expense related to the grant of these awards was recognized for the year ended

December 31, 2016.

201

PSU Grants

As of

December 31, 2018,

the Company determined that achievement between the Threshold Goal and the Target Goal for these awards was probable. As such, the Company recorded share-based award expense of

$2.2

million related to the probable achievement of the Threshold Goal. Additionally, as the number of PSUs earned for these awards shall be adjusted to be proportional to the partial performance between the Threshold Goal and Target Goal, the Company recorded additional share-based award expense of

$0.8

million. Therefore, in total the Company recorded share-based award expense related to the awards of

$3.0

million for the year ended

December 31, 2018.

As of

December 31, 2017,

the Company concluded that achievement of any of the performance metrics had

not

met the level of probability required to record compensation expense at that time and as such,

expense related to the grant of these awards was recognized for the year ended

December 31, 2017.

2018

PSU Grant

s. For the PSUs granted in

May

2018,

the Company concluded that achievement of any of the performance metrics has

not

met the level of probability required to record compensation expense and, as such,

expense related to these awards has been recognized as of

December 31, 2018.