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Commitments and Contingencies | 3 Months Ended
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Mar. 31, 2019
Commitments and Contingencies Disclosure [Abstract] |
Commitments and Contingencies | Commitments and Contingencies Legal Matters Lawsuits, claims and proceedings have been and may be instituted or asserted against us in the normal course of business, including actions brought on behalf of various classes of claimants. We are also subject to local, state and federal laws and regulations related to land development activities, house construction standards, sales practices, employment practices, environmental protection and financial services. As a result, we are subject to periodic examinations or inquiry by agencies administering these laws and regulations. We record a reserve for potential legal claims and regulatory matters when they are probable of occurring and a potential loss is reasonably estimable. We accrue for these matters based on facts and circumstances specific to each matter and revise these estimates when necessary. In view of the inherent difficulty of predicting outcomes of legal claims and related contingencies, we generally cannot predict their ultimate resolution, related timing or eventual loss. Accordingly, it is possible that the ultimate outcome of any matter, if in excess of a related accrual or if no accrual was made, could be material to our financial statements. For matters as to which the Company believes a loss is probable and reasonably estimable, we had no legal reserve as of March 31, 2019. As of December 31, 2018, we had a $17.5 million legal reserve related to a settlement in connection with a previously disclosed lawsuit involving a land sale that occurred in 1987. This settlement was paid on February 4, 2019. Warranty Warranty reserves are accrued as home deliveries occur. Our warranty reserves on homes delivered will vary based on product type and geographic area and also depending on state and local laws. The warranty reserve is included in accrued expenses and other liabilities on our consolidated balance sheets and represents expected future costs based on our historical experience over previous years. Estimated warranty costs are charged to cost of home sales in the period in which the related home sales revenue is recognized. We maintain general liability insurance designed to protect us against a portion of our risk of loss from warranty and construction defect-related claims. We also generally require our subcontractors and design professionals to indemnify us for liabilities arising from their work, subject to various limitations. However, such indemnity is significantly limited with respect to certain subcontractors that are added to our general liability insurance policy. Our warranty reserve and related estimated insurance recoveries are based on actuarial analysis that uses our historical claim and expense data, as well as industry data to estimate these overall costs and related recoveries. Key assumptions used in developing these estimates include claim frequencies, severities and resolution patterns, which can occur over an extended period of time. These estimates are subject to variability due to the length of time between the delivery of a home to a homebuyer and when a warranty or construction defect claim is made, and the ultimate resolution of such claim; uncertainties regarding such claims relative to our markets and the types of product we build; and legal or regulatory actions and/or interpretations, among other factors. Due to the degree of judgment involved and the potential for variability in these underlying assumptions, our actual future costs could differ from those estimated. There can be no assurance that the terms and limitations of the limited warranty will be effective against claims made by homebuyers, that we will be able to renew our insurance coverage or renew it at reasonable rates, that we will not be liable for damages, cost of repairs, and/or the expense of litigation surrounding possible construction defects, soil subsidence or building related claims or that claims will not arise out of uninsurable events or circumstances not covered by insurance and not subject to effective indemnification agreements with certain subcontractors. We also record expected recoveries from insurance carriers based on actual insurance claims made and actuarially determined amounts that depend on various factors, including the above-described reserve estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. Because of the inherent uncertainty and variability in these assumptions, our actual insurance recoveries could differ significantly from amounts currently estimated. Outstanding warranty insurance receivables were $37.5 million and $37.6 million as of March 31, 2019 and December 31, 2018, respectively. Warranty insurance receivables are recorded in receivables on the accompanying consolidated balance sheets. Warranty reserve activity consisted of the following (in thousands):
| Three Months Ended March 31,
| 2019 |  | 2018
Warranty reserves, beginning of period | $ | 71,836 |  |  | $ | 69,373 |
Warranty reserves accrued | 4,270 |  |  | 4,746 |
Warranty expenditures | (5,159 | ) |  | (3,637 | )
Warranty reserves, end of period | $ | 70,947 |  |  | $ | 70,482 |
Performance Bonds We obtain surety bonds in the normal course of business to ensure completion of certain infrastructure improvements of our projects. The beneficiaries of the bonds are various municipalities. As of March 31, 2019 and December 31, 2018, the Company had outstanding surety bonds totaling $653.9 million and $685.7 million, respectively. As of March 31, 2019 and December 31, 2018, our estimated cost to complete obligations related to these surety bonds was $415.2 million and $423.4 million, respectively. Lease Obligations Under ASC 842 we recognize a right-of-use lease asset and a lease liability for contracts deemed to contain a lease at the inception of the contract. Our lease population is fully comprised of operating leases, which are now recorded at the net present value of future lease obligations existing at each balance sheet date. At the inception of a lease, or if a lease is subsequently modified, we determine whether the lease is an operating or financing lease. Key estimates involved with ASC 842 include the discount rate used to measure our future lease obligations and the lease term, where considerations include renewal options and intent to renew. Lease right-of-use assets are included in other assets and lease liabilities are included in accrued expenses and other liabilities on our consolidated balance sheet. Operating Leases We lease certain property and equipment under non-cancelable operating leases. Office leases are for terms of up to ten years and generally provide renewal options. In most cases, we expect that, in the normal course of business, leases that expire will be renewed or replaced by other leases. Equipment leases are typically for terms of three to four years. Ground Leases In 1987, we obtained two 55-year ground leases of commercial property that provided for three renewal options of ten years each and one 45-year renewal option. We exercised the three ten year extensions on one of these ground leases extending the lease through 2071. The commercial buildings on these properties have been sold and the ground leases have been sublet to the buyers. For one of these leases, we are responsible for making lease payments to the land owner, and we collect sublease payments from the buyers of the buildings. This ground lease has been subleased through 2041 to the buyers of the commercial buildings. For the second lease, the buyers of the buildings are responsible for making lease payments directly to the land owner, however, we have guaranteed the performance of the buyers/lessees. See below for additional information on leases (dollars in thousands):
| Three Months Ended March 31, 2019
Lease cost |
Operating lease cost (included in SG&A expense) | $ | 2,044 |
Ground lease cost (included in other operations expense) | 590 |
Sublease income, ground leases (included in other operations revenue) | (598 | )
Net lease cost | $ | 2,036 |
Other information |
Cash paid for amounts included in the measurement of lease liabilities: |
Operating lease cash flows (included in operating cash flows) | $ | 1,609 |
Ground lease cash flows (included in operating cash flows) | $ | 608 |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 1,707 |
| March 31, 2019
Weighted-average discount rate: |
Operating leases | 6.0 | %
Ground leases | 10.2 | %
Weighted-average remaining lease term (in years): |
Operating leases | 6.3 |
Ground leases | 49.2 |
The future minimum lease payments under our operating leases are as follows (in thousands):
| Property, Equipment and Other Leases |  | Ground Leases (1)
Remaining in 2019 | $ | 6,347 |  |  | $ | 2,238 |
2020 | 8,322 |  |  | 2,984 |
2021 | 7,048 |  |  | 2,984 |
2022 | 5,453 |  |  | 2,984 |
2023 | 4,349 |  |  | 2,984 |
Thereafter | 8,799 |  |  | 84,266 |
| $ | 40,318 |  |  | $ | 98,440 |
(1) Ground leases are fully subleased through 2041, representing $67.4 million of the $98.4 million future ground lease obligations.

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