Commitments and Contingencies

Warranty

We use subcontractors for nearly all aspects of home construction. Although our subcontractors are generally required to repair and replace any product or labor defects, we are, during applicable warranty periods, ultimately responsible to the homeowner for making such repairs. As such, we record warranty reserves to cover our exposure to the costs for materials and labor not expected to be covered by our subcontractors to the extent they relate to warranty-type claims. Warranty reserves are established by charging cost of sales and crediting a warranty reserve for each home closed. Warranty reserves are recorded for warranties under our Home Builder’s Limited Warranty (“HBLW”), and our 30-year (offered on all homes sold after April 25, 1998 and on or before December 1, 2015 in all of our markets except our Texas markets), 15-year (offered on all homes sold after December 1, 2015 in all of our markets except our Texas markets) or 10-year (offered on all homes sold in our Texas markets) transferable structural warranty in Other Liabilities on the Company’s Unaudited Condensed Consolidated Balance Sheets.

The warranty reserves for the HBLW are established as a percentage of average sales price and adjusted based on historical payment patterns determined, generally, by geographic area and recent trends. Factors that are given consideration in determining the HBLW reserves include: (1) the historical range of amounts paid per average sales price on a home; (2) type and mix of amenity packages added to the home; (3) any warranty expenditures not considered to be normal and recurring; (4) timing of payments; (5) improvements in quality of construction expected to impact future warranty expenditures; and (6) conditions that may affect certain projects and require a different percentage of average sales price for those specific projects. Changes in estimates for warranties occur due to changes in the historical payment experience and differences between the actual payment pattern experienced during the period and the historical payment pattern used in our evaluation of the warranty reserve balance at the end of each quarter. Actual future warranty costs could differ from our current estimated amount.

Our warranty reserves for our transferable structural warranty programs are established on a per-unit basis. While the structural warranty reserve is recorded as each house closes, the sufficiency of the structural warranty per unit charge and total reserve is re-evaluated on an annual basis, with the assistance of an actuary, using our own historical data and trends, industry-wide historical data and trends, and other project specific factors. The reserves are also evaluated quarterly and adjusted if we encounter activity that is inconsistent with the historical experience used in the annual analysis. These reserves are subject to variability due to uncertainties regarding structural defect claims for products we build, the markets in which we build, claim settlement history, insurance and legal interpretations, among other factors.

While we believe that our warranty reserves are sufficient to cover our projected costs, there can be no assurances that historical data and trends will accurately predict our actual warranty costs.

A summary of warranty activity for the three and nine months ended September 30, 2016 and 2015 is as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2016			2015			2016			2015
Warranty reserves, beginning of period	$	15,815		$	10,638		$	14,281		$	12,671
Warranty expense on homes delivered during the period	2,755			2,263			7,276			5,847
Changes in estimates for pre-existing warranties	526			905			563			1,580
Charges related to stucco-related claims ^(a)	14,500			—			19,409			—
Settlements made during the period	(5,658		)	(3,328		)	(13,591		)	(9,620		)
Warranty reserves, end of period	$	27,938		$	10,478		$	27,938		$	10,478


(a)	Estimated stucco-related claim costs, as described below, have been included in warranty accruals.

We have received claims related to stucco installation from homeowners in certain of our communities in our Tampa and Orlando, Florida markets and have been named as a defendant in legal proceedings initiated by certain of such homeowners. These claims primarily relate to homes built prior to 2014 which have second story elevations with frame construction.

Through 2015, we repaired certain of the identified homes and accrued for the estimated future cost of repairs for the other identified homes on which repairs had yet to be completed. The aggregate amounts of such repair costs and accruals were not material, and the reserve for identified homes in need of more than minor repair at December 31, 2015 was $0.5 million. During the first half of 2016, we received an increased number of stucco-related claims in our Florida communities, and we recorded additional accruals totaling $4.9 million as a change in estimate to our warranty reserves for homes that we identified during this period as requiring more than minor repairs. At June 30, 2016, the remaining reserve was $2.9 million, covering the estimated repair costs for the approximately 178 identified homes on which repairs had yet to be completed. The $2.9 million remaining reserve did not include any estimate of the future stucco repair costs for homes for which we had not received claims.

During the third quarter of 2016, we continued to receive stucco-related claims for homes in certain of our Florida communities, identified 199 additional homes that require more than minor stucco repairs and completed repairs on 112 homes. We also continued to review the stucco issues and to collect and analyze information to enable us to reasonably estimate the overall cost of stucco-related repairs to homes in our Florida communities. During the course of our review, we analyzed a number of factors, including: (1) the date of delivery of each home in our Florida communities and the expiration date of the 10-year statutory period of repose and contractual warranty period with respect to each such home; (2) the number of each type of home (i.e., one story, 1.5 stories or 2 stories); (3) our stucco-related claims experience with respect to each type of home and each individual community; and (4) other relevant factors and observations gained from the field.

Based on the progress of our review and analysis, we believe that we have accumulated an adequate understanding of, and sufficient experience with, the stucco-related issues to enable us to reasonably estimate the overall cost of stucco-related repairs to homes in our Florida communities. As a result, during the third quarter of 2016, we recorded an additional accrual of $14.5 million as a change in estimate to our warranty reserves for the overall cost of stucco-related repairs. At September 30, 2016, the remaining reserve for the overall cost of stucco-related repairs was $15.1 million. This remaining reserve represents (1) our estimate of the stucco repair costs for the 265 identified homes in our Florida communities on which repairs have not yet been completed as of September 30, 2016 and (2) our estimate of the stucco repair costs for homes in our Florida communities that we have not yet identified as needing repairs but that may require repairs in the future.

Our review of the stucco-related issues in our Florida communities is ongoing. Our estimate, as of September 30, 2016, of our overall stucco repair costs is based on our judgment and various assumptions. Due to the degree of judgment and the potential for variability in our underlying assumptions, as we obtain additional information, we may revise our estimate, including to reflect additional estimated future stucco repairs costs, which revision could be material.

During the third quarter of 2016, we also continued our investigation of the extent to which we may be able to recover a portion of our stucco repair and claims handling costs from other sources, including our direct insurers, the subcontractors involved with the construction of the homes and their insurers. As of September 30, 2016, we are unable to estimate an amount, if any, that we believe is probable that we will recover from these sources and, accordingly, we have not recorded a receivable for estimated recoveries nor included an estimated amount of recoveries in determining our warranty reserves.

Performance Bonds and Letters of Credit

At September 30, 2016, the Company had outstanding approximately $145.8 million of completion bonds and standby letters of credit, some of which were issued to various local governmental entities that expire at various times through September 2024. Included in this total are: (1) $102.1 million of performance and maintenance bonds and $29.3 million of performance letters of credit that serve as completion bonds for land development work in progress; (2) $7.1 million of financial letters of credit, of which $5.3 million represent deposits on land and lot purchase agreements; and (3) $7.3 million of financial bonds.

Land Option Contracts and Other Similar Contracts

At September 30, 2016, the Company also had options and contingent purchase agreements to acquire land and developed lots with an aggregate purchase price of approximately $589.8 million. Purchase of properties under these agreements is contingent upon satisfaction of certain requirements by the Company and the sellers.

Legal Matters

In addition to the legal proceedings related to stucco, the Company and certain of its subsidiaries have been named as defendants in certain other legal proceedings which are incidental to our business. While management currently believes that the ultimate resolution of these other legal proceedings, individually and in the aggregate, will not have a material effect on the Company’s financial position, results of operations and cash flows, such legal proceedings are subject to inherent uncertainties. The Company has recorded a liability to provide for the anticipated costs, including legal defense costs, associated with the resolution of these other legal proceedings. However, the possibility exists that the costs to resolve these legal proceedings could differ from the recorded estimates and, therefore, have a material effect on the Company’s net income for the periods in which they are resolved. At September 30, 2016 and December 31, 2015, we had $0.3 million and $0.6 million reserved for legal expenses, respectively.