WeTable are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, enacted in April 2012, and, for as long as we continue to be an “emerging growth company,” we have chosen to take advantage of exemptions from various reporting requirements applicable to other Exchange Act reporting companies but not to “emerging growth companies,” that permit us to present reduced executive compensation disclosures in our periodic reports. We could be an “emerging growth company” until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues are $1,000,000,000 or more or (ii) the date on which we have issued more than $1,000,000,000 of non-convertible debt during the preceding three year period. Contents

InTable 2012, equity in income (loss) from unconsolidated joint ventures was $0.4 million compared to $(5.1) million in 2011. The increase in earnings was primarily attributable to a $2.4 million charge in 2011 for our share of unconsolidated joint venture impairments compared to none in 2012, and $1.0 million of losses in 2011 related to a joint venture disposition that we completed in December 2011. There was no other significant activity pertaining to the Company’s remaining unconsolidated joint ventures. Contents

InTable accordanceof with our underlying completed operations insurance policies, completed operations claims costs are recoverable from our subcontractors or insurance carriers. Completed operations claims through July 31, 2009 are insured or reinsured with third-party insurance carriers and completed operations claims commencing August 1, 2009 are insured with third-party and affiliate insurance carriers. Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2013~~2014

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 333-177328

SHEA HOMES LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

California

95-4240219

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

655 Brea Canyon Road, Walnut, California, 91789

(Address of principal executive offices)

(909) 594-9500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No ¨

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

None of the voting or non-voting common equity of the registrant is held by a non-affiliate of the registrant. There is no publicly traded market for any class of common equity of the registrant.

Documents incorporated by reference:

None

EXPLANATORY NOTE

The registrant is a voluntary filer and is not subject to the filing requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). Although not subject to these filing requirements, the registrant has filed all Exchange Act reports for the preceding 12 months.

SHEA HOMES LIMITED PARTNERSHIP

INDEX

		Page No.
	PART I
Item 1.	Business		12
Item 1A.	Risk Factors		89
Item 1B.	Unresolved Staff Comments		2223
Item 2.	Properties		2223
Item 3.	Legal Proceedings		2223
Item 4.	Mine Safety Disclosures		2224
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		2325
Item 6.	Selected Financial Data		2325
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		2325
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		4346
Item 8.	Financial Statements and Supplementary Data		4448
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		7984
Item 9A.	Controls and Procedures		7984
Item 9B.	Other Information		7984
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance		8085
Item 11.	Executive Compensation		8186
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		8391
Item 13.	Certain Relationships and Related Transactions, and Director Independence		8593
Item 14.	Principal Accounting Fees and Services		9199
	PART IV
Item 15.	Exhibits and Financial Statement Schedules		92100

FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In addition, other statements we may make from time to time, such as press releases, oral statements made by Company officials and other reports we file with the Securities and Exchange Commission, may also contain such forward-looking statements. These forward looking statements and information relating to us are based on beliefs of management as well as assumptions made by, and information currently available to, us. When used in this document, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and “project” and similar expressions, as they relate to us are intended to identify forward-looking statements. These statements reflect our current views with respect to future events, are not guarantees of future performance and involve risks and uncertainties difficult to predict. Further, certain forward-looking statements are based upon assumptions of future events that may not prove to be accurate.

See “Item 1A: Risk Factors” of this Form 10-K for a description of risk factors that could significantly affect our financial results. In addition, the following factors could cause actual results to differ materially from results that may be expressed or implied by such forward-looking statements. These factors include, among other things:

•

changes in employment levels;

•

changes in availability of financing for homebuyers;

•

changes in interest rates;

•

changes in consumer confidence;

•

changes in levels of new and existing homes for sale;

•

changes in demographic trends;

•

changes in housing demand;

•

changes in home prices;

•

elimination or reduction of tax benefits associated with owning a home;

•

litigation risks associated with home warranty and construction defect and other claims; and

•

various other factors, both referenced and not referenced in this Form 10-K.

Many of these factors are macroeconomic in nature and are, therefore, beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results, performance or achievements may vary materially from those described in this Form 10-K as anticipated, believed, estimated, expected, intended, planned or projected. Except as required by law, we neither intend nor assume any obligation to revise or update these forward-looking statements, which speak only as of their dates.

SHEA HOMES LIMITED PARTNERSHIP

PART I

ITEM 1. BUSINESS

Overview

Shea Homes Limited Partnership, a California limited partnership (“SHLP”, the “Company”, “us”, “our”, or “we”), is one of the nation’s largest privately owned homebuilders inbased ~~the~~on ~~United States by~~ total number of home ~~closings~~deliveries and total revenues according to data compiled for Builder Magazine’s 2013 “Builder 100” ~~List~~list. We design, build and market single-family detached and/or attached homes ~~across~~in various geographic markets in California, Arizona, Colorado, Washington, Nevada, ~~and~~ Florida~~. In 2013~~, ~~we purchased property in Winchester,~~ Virginia, ~~which~~North weCarolina ~~plan to develop~~ and ~~sell homes, and entered into the Houston,~~ Texas ~~market~~. We serve a broad customer base including entry, move-up, luxury and active lifestyle buyers. We have been recognized by industry professionals and our homebuyers for quality, customer service and craftsmanship, as evidenced by our receipt of some of the homebuilding industry’s most prominent awards, including being named as “Builder of the Year” in 2007 by Professional Builder magazine and one of “America’s Best Builders” in 2005 by the National Association of Homebuilders and Builder magazine. In ~~2012,~~2011 ~~for the second year in a row,~~ and ~~the last year this award was made~~2012, Shea Homes was honored as one of the 50 top consumer brands in the country to be named a “Customer Service Champion” by J.D. Power Associates.

1SHLP was formed January 4, 1989, pursuant to an agreement of partnership, as most recently amended August 6, 2013, by and between J.F. Shea, G.P., a Delaware general partnership, as general partner, and our limited partners who are comprised of entities and trusts, including J.F. Shea Co., Inc. (“JFSCI”), under the common control of Shea family members (collectively, the “Partners”). J.F. Shea, G.P., is 96% owned by JFSCI. SHLP is one of a group of companies owned by the Shea family (collectively, the “Shea Family Owned Companies”). Since 1881 in Portland, Oregon, beginning with only a plumbing contractor business, the Shea family has expanded to start and currently owns and operates various businesses, including homebuilding, heavy construction, venture capital, home mortgage, insurance and commercial property. The Shea Family Owned Companies have grown but remained privately held by the Shea family. The Shea family began building homes in 1968 through JFSCI and, in 1989, moved homebuilding under the Shea Homes brand to the newly formed SHLP, an entity still under the broader umbrella of JFSCI.

Since our founding more than 45 years ago, Shea Homes has delivered almost 94,000 homes, including deliveries from unconsolidated joint ventures, and has expanded significantly to become one of the most well-regarded homebuilders in the markets in which we compete:

•

1968: Residential homebuilding division was formed, operating in southern California;

•

1970: Residential homebuilding division delivered first homes in northern California;

•

1985: Opened San Diego division;

•

1989: Acquired Knoell Homes and opened Arizona division;

•

1996: Opened Denver division and acquired a portfolio of assets in California from Chevron Land;

•

1997: Purchased Mission Viejo Company and its land holdings in California and Colorado from Philip Morris;

•

1998: Purchased UDC Homes, Inc. and launched the Shea Homes Active Lifestyle Communities (“SHALC”) division and the Trilogy Brand;

•

2001: SHALC division began operations in Washington;

•

2006: Acquired homebuilding land, commercial land and income properties that comprised the Denver Tech Center;

•

2007: SHALC division began operations in Florida;

•

2009: Launched the SPACES Brand;

•

2010: SHALC division began operations in Nevada;

•

2013: Opened Houston division; launched Shea3D™ product line; and SHALC division began operations in Virginia; and

•

2014: SHALC division began operations in North Carolina.

SHLP was formed January 4, 1989, pursuant to an agreement of partnership, as most recently amended March 11, 2013, by and between J.F. Shea, G.P., a Delaware general partnership, as general partner, and the Company’s limited partners who are comprised of entities and trusts, including J.F. Shea Co., Inc. (“JFSCI”), under the common control of Shea family members (collectively, the “Partners”). J.F. Shea, G.P., is 96% owned by JFSCI. SHLP is one of a group of companies owned by the Shea family (collectively, the “Shea Family Owned Companies”). Since 1881 in Portland, Oregon, beginning with only a plumbing contractor business, the Shea family has expanded to start and currently owns and operates various businesses, including homebuilding, heavy construction, venture capital, home mortgage, insurance and commercial property. The Shea Family Owned Companies have grown but remained privately held by the Shea family. The Shea family began building homes in 1968 through JFSCI and, in 1989, homebuilding under the Shea Homes brand was moved to the newly formed SHLP, an entity still under the broader umbrella of JFSCI.

Since its formation over 40 years ago, Shea Homes has expanded significantly through acquisitions, developments, and joint ventures to become one of the most well-regarded homebuilders in the markets in which it competes:

• 1968: Residential homebuilding division was formed, operating in southern California;

• 1970: Residential homebuilding division closes first homes in northern California;

• 1985: Opened San Diego division;

• 1989: Acquired Knoell Homes and opened Arizona division;

• 1996: Opened Denver division and acquired a portfolio of assets in California from Chevron Land;

• 1997: Purchased Mission Viejo Company and its land holdings in California and Colorado from Philip Morris;

• 1998: Purchased UDC Homes, Inc. and launched the Shea Homes Active Lifestyle Communities (“SHALC”) division and the Trilogy Brand;

• 2001: SHALC division began operations in Washington;

• 2006: Acquired homebuilding land, commercial land and income properties that comprised the Denver Tech Center;

• 2007: SHALC division began operations in Florida;

• 2009: Launched the SPACES Brand;

• 2010: SHALC division began operations in Nevada;

• 2013: Opened Houston division; SHALC division began operations in Virginia; and launched new Shea3D™ product line.

Markets and Products

For the year ended December 31, ~~2013~~2014, we operated an average of 5864 consolidated active selling communities in California, Arizona, Colorado, Washington, Nevada and Florida, and ~~began~~were in the process of commencing operations in Texas, North Carolina and Virginia. When determining markets to enter, we evaluate various factors, including local economic and real estate conditions, historical and projected population and job growth trends, number of housing starts, ~~building~~land ~~lot~~ availability and price, housing inventory, climate, customer profile, regional raw material costs, competitive environment and home sales rates.

Within each homebuilding community, we ~~utilize~~offer a product mix depending on market conditions, studies and opportunities. In determining our product mix in each community, we consider demographic trends, demand for a particular type of product, margins, timing and economic strength of the market. While remaining responsive to market opportunities, we have focused, and intend to continue to focus, our core homebuilding business primarily on ~~first~~entry-~~time~~level and move-up/luxury buyers, offering single-family detached and/or attached homes. For the year ended December 31, ~~2013~~2014, our product mix ~~was:~~ ~~37%~~based ~~first~~upon ~~time~~deliveries ~~buyers~~was: 43% entry-level, 4039% move -up / luxury and 2318% active lifestyle. While 43% of our 2014 deliveries were designed for entry-level buyers, the average selling price of our entry-level homes was $437,000 for the year ended December 31, 2014. Many of our entry-level homes contain a high number of amenities, particularly in California, and are located close to employment centers, which results in the relatively higher price compared to traditional entry-level homes.

We operate under ~~three~~four brands that reflect our value proposition: homes designed to meet the needs of our customers, with standard energy-efficient features, built in an environmentally-responsible manner.

• Shea Homes, our flagship brand, ~~targets~~generally ~~first~~attracts entry-~~time~~level and move-up/luxury buyers. Each of our segments, except the East, builds and markets homes under the Shea Homes brand;.

• Trilogy, communities are master-planned communities designed and built to meet the needs and active lifestyles of homebuyers 55 and older. These communities combine quality homes with diverse resort-like amenities in our Southern California, Northern California, Mountain West, South West and East segments~~; and~~.

• SPACES, ~~our~~generally ~~newest~~attracts ~~brand, targets~~ 25-40 year-old buyers with contemporary, practical homes that have flexible floor plans and stylish, energy-efficient features at an affordable price point. We have opened SPACES communities in our Southern California, Northern California, Mountain West and South West segments.

2• Shea 3D, introduced in 2014, allows buyers to choose the placement of their kitchen, dining, entertainment, outdoor and other living areas to design a home that matches how the buyer lives. We have opened Shea 3D communities in our Northern California, San Diego, Mountain West, South West and East segments.

We manage each homebuilding community as an operating segment and have aggregated these communities into reportable segments based generally on geography as follows:

•

Southern California, comprised of communities in Los Angeles, Ventura and Orange Counties, and the Inland Empire;

•

San Diego, comprised of communities in San Diego County, California;

•

Northern California, comprised of communities in northern and central California, and the central coast of California;

•

Mountain West, comprised of communities in Colorado and Washington;

•

South West, comprised of communities in Arizona, Nevada and Texas; and

• East, comprised of communities in Florida, North Carolina and Virginia.

~~The~~In ~~Company announced in July~~ 2013 ~~that~~, itwe entered the Houston, Texas housing market. Asand aacquired ~~start-up~~our ~~operation,~~first weparcel ~~expect~~of toland ~~close~~in ~~our~~Winchester, ~~first~~Virginia ~~homes~~for ina ~~2014~~SHALC project. In ~~addition~~2014, ~~during 2013~~ we acquired our first parcel of land in ~~Winchester,~~North ~~Virginia~~Carolina for a ~~new~~ SHALC project that is operated in an unconsolidated joint venture.

~~The~~We ~~following~~conduct ~~table~~our ~~presents~~homebuilding ~~certain~~business ~~operating~~through ~~information~~projects ~~for~~that we wholly-own, operate in joint ventures with third parties and generally have a 50% or less economic interest, and manage projects where we have no ownership interest. Most of our ~~reportable~~joint ~~segments~~ventures ~~for~~and managed projects are Trilogy master-planned communities. For the ~~years~~Trilogy ~~ended~~communities ~~December 31,~~we ~~2013~~manage, ~~2012~~part ~~and~~of our ~~2011:~~compensation reflects the use and licensing of our Trilogy brand.

	December 31,
	2013			2012			2011
Southern California:
Homes closed		271			249			313
Percentage of total homes closed		14	%		16	%		23	%
Average selling price	$	757,376		$	523,498		$	534,329
Total homebuilding revenues (in millions) (a)	$	207.6		$	134.0		$	167.4
San Diego:
Homes closed		256			194			172
Percentage of total homes closed		14	%		12	%		13	%
Average selling price	$	490,172		$	440,897		$	504,523
Total homebuilding revenues (in millions) (a)	$	125.5		$	86.0		$	86.9
Northern California:
Homes closed		456			323			215
Percentage of total homes closed		24	%		21	%		16	%
Average selling price	$	510,300		$	487,003		$	501,330
Total homebuilding revenues (in millions) (a)	$	242.4		$	166.1		$	108.8
Mountain West:
Homes closed		372			284			215
Percentage of total homes closed		20	%		18	%		16	%
Average selling price	$	444,156		$	446,352		$	419,343
Total homebuilding revenues (in millions) (a)	$	186.9		$	147.8		$	102.9
South West:
Homes closed		510			492			406
Percentage of total homes closed		27	%		31	%		30	%
Average selling price	$	311,951		$	280,283		$	276,487
Total homebuilding revenues (in millions) (a)	$	160.7		$	138.2		$	114.4
East:
Homes closed		25			31			27
Percentage of total homes closed		1	%		2	%		2	%
Average selling price	$	262,160		$	230,645		$	223,889
Total homebuilding revenues (in millions) (a)	$	6.6		$	7.1		$	6.0
Total:
Homes closed		1,890			1,573			1,348
Average selling price	$	473,177		$	410,045		$	423,046
Total homebuilding revenues (in millions) (a)	$	929.7		$	679.2		$	586.4

(a) Total homebuilding revenues are primarily comprise of revenues from home closings and land sales

For additional segment information, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 18 in our accompanying financial statements.

The following table presents certain operating information for our reportable segments for the years ended December 31, 2014, 2013 and 2012:


	December 31,
	2014			2013			2012
Southern California:
Homes delivered		481			271			249
Percentage of total homes delivered		24	%		14	%		16	%
Average selling price	$	812,121		$	757,376		$	523,498
Total homebuilding revenues (in millions) ^(a)	$	393.5		$	207.6		$	134.0
San Diego:
Homes delivered		252			256			194
Percentage of total homes delivered		13	%		14	%		12	%
Average selling price	$	568,095		$	490,172		$	440,897
Total homebuilding revenues (in millions) ^(a)	$	143.2		$	125.5		$	86.0
Northern California:
Homes delivered		385			456			323
Percentage of total homes delivered		19	%		24	%		21	%
Average selling price	$	668,179		$	510,300		$	487,003
Total homebuilding revenues (in millions) ^(a)	$	259.3		$	242.4		$	166.1
Mountain West:
Homes delivered		356			372			284
Percentage of total homes delivered		18	%		20	%		18	%
Average selling price	$	458,379		$	444,156		$	446,352
Total homebuilding revenues (in millions) ^(a)	$	175.7		$	186.9		$	147.8
South West:
Homes delivered		511			510			492
Percentage of total homes delivered		26	%		27	%		31	%
Average selling price	$	324,456		$	311,951		$	280,283
Total homebuilding revenues (in millions) ^(a)	$	168.3		$	160.7		$	138.2
East:
Homes delivered		0			25			31
Percentage of total homes delivered		0	%		1	%		2	%
Average selling price	$	0		$	262,160		$	230,645
Total homebuilding revenues (in millions) ^(a)	$	0		$	6.6		$	7.1
Total:
Homes delivered		1,985			1,890			1,573
Average selling price	$	564,241		$	473,177		$	410,045
Total homebuilding revenues (in millions) ^(a)	$	1,140.0		$	929.7		$	679.2

(a)	Total homebuilding revenues are primarily comprised of revenues from home deliveries and land sales.

For additional segment information, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 18 to our consolidated financial statements.

Strategy

~~After~~Provide aCustomers ~~prolonged~~with ~~downturn~~Value invia ~~the housing market from 2006 through early 2012~~Design, weQuality ~~saw signs of stabilization~~ and ~~improvement~~Service in 2012, which continued through 2013. The severe housing downturn was caused by weak economic conditions, including lower consumer confidence and higher unemployment, reduced housing affordability, excessive inventory and foreclosures, which led to an over-supply of existing homes on the market, and tight lending standards, which further contributed to a significantly reduced availability of mortgage credit. During 2012 and 2013, we saw the broader economy stabilize, affordability remain fairly attractive, and lower supplies of existing and new home inventories. Despite the increase in mortgage interest rates in the second half of 2013, which we believe impacted new sales orders, our cancellation rates remained low and new home prices increased year over year, which contributed to higher unit closings and revenues, and improved housing gross margins.

~~During~~An ~~the~~integral ~~downturn,~~component weof ~~reduced headcount~~our business strategy is to design and ~~operating~~deliver ~~costs~~quality ~~through~~homes afocused ~~restructuring~~on ofspecific ~~operations~~product types in “core” housing markets, ~~redesigned~~combined ~~product~~with ~~offerings~~a ~~and~~customer ~~exited~~experience orthat ~~reduced~~is ~~investments~~consistently among the leaders in ~~certain~~the ~~geographic~~homebuilding ~~markets~~industry. We ~~believe~~have historically been at or near the top of individual customer service rankings for each of our homebuilding markets. In 2011 and 2012, we ~~have~~were also honored as one of ~~the~~50 ~~lowest~~top ~~overhead~~consumer ~~structures~~brands in the ~~homebuilding~~country ~~industry~~to be named a “Customer Service Champion” by J.D. Power Associates. We are one of only two homebuilders to ever receive this award and the only homebuilder to have received this award in multiple years. We view a positive customer service experience and adherence to stringent quality control standards as fundamental to our ~~leaner,~~business ~~more~~model ~~efficient~~and ~~operating~~continued ~~structure~~success. ~~will~~We ~~enhance~~believe ~~near-term~~our quality assurance programs help improve production efficiency, reduce warranty costs and ~~long-term~~increase ~~profitability~~customer satisfaction and ~~serve~~referrals. usOur ~~well~~commitment asto weproduct ~~compete~~quality ~~for~~includes ~~new~~a ~~land~~comprehensive checkpoint evaluation at key points in the construction process, continuous improvement based on direct feedback and ~~project~~sharing ~~opportunities~~of best practices with our TradePartners®.

In 2012 and 2013, as a result of the improving housing market condition, we increased our land acquisitions. Our strategy focuses on acquiring land in the core locations of our market segments, as well as entering new markets, such as Houston, Texas and Winchester, Virginia. In Southern and Northern California, this includes a focus on the coastal markets which are generally more desirable and closer to major employment centers. In our Mountain West and South West segments, our focus will also be on the more desirable, closer markets. As we review new land acquisition opportunities, we will employ a disciplined and rigid underwriting process that considers the following: (1) ability to meet our return and profit targets (which in some cases are risk adjusted) using reasonable home price, risk and cost assumptions, (2) ability to take advantage of our broad product capabilities, (3) in each of our markets, an appropriate allocation between finished lot acquisitions which turn faster and undeveloped land which can be more profitable but turn slower, (4) ability to make land acquisitions with little or no entitlement risk, and (5) allocation of capital across all of our geographic segments based on our diversification objectives. Our goal is to be a top tier builder. By doing so in each of our markets, we believe we can benefit from economies of scale, gain access to more attractive land opportunities and attract and retain qualified employees and subcontractors.

Our growth strategy focuses primarily on investing in our existing geographic markets. We believe our current geographic markets represent regions of the country that present above average growth potential based on long-term employment, demographic and economic trends. We have operated in most of these markets for many years and our teams have extensive local knowledge and critical business relationships that are essential in competing for land, subcontractors and customers. We will, however, consider new geographic markets that meet the same criteria as our existing markets and which we can reasonably support through our capital base.

We enter into homebuilding and land development joint ventures from time to time to access larger or highly desirable lot positions, expand our market opportunities, establish strategic alliances, leverage our capital base and manage financial and market risks associated with land holdings. We typically enter into these arrangements with land owners and developers, other homebuilders and financial partners. These joint ventures usually obtain secured acquisition, development and/or construction loans designed to reduce the use of corporate financing sources.

An integral component of our business strategy is to build and deliver homes of exceptional quality combined with a customer service experience that is consistently among the leaders in the homebuilding industry. Historically, we have been at or near the top of individual customer service rankings for each of our homebuilding markets and in 2012 and 2011, the last two years this award was made, we were the only home builder to be recognized as a “Customer Service Champion” by J.D. Power Associates. Our commitment to quality and customer experience is an integral part of our business strategy and company culture.

Marketing and Sales

We believe we have an established and valuable brand, with a reputation for high quality construction, innovative design and strong customer service. We believe our reputation helps generate interest in each new project we undertake. We positioned ourselves as the “homebuilder who cares” and believe our approach enhances customer satisfaction, increases referrals and improves brand recognition.

We use a variety of marketing platforms, including website, internet and mobile applications, customer information centers, advertisements, newspapers, magazines and brochures, direct mail, billboards and fully decorated model units. We focus on being at the forefront of technological based marketing, including how we communicate information to the marketplace. We have had success working through Facebook, Twitter and blogs, and in November 2009, we became the first national builder to launch an application for Apple Inc.’s iPhone and iPod Touch devices. We also maintain a state-of-the-art website that allows potential customers to insert their existing furniture into our floor plans, and benefit from an exclusive arrangement with our website design firm.

~~Model~~Maintain ~~homes~~Disciplined ~~are~~Operating anStrategy important part of our marketing efforts where we focus on creating an attractive atmosphere at each community. We use local third party design specialists for interior decorations and furniture, which vary within models based upon characteristics of targeted homebuyers. At December 31, 2013, we owned 221 model homes in our communities. We also have home design service centers offering a wide range of customization options to satisfy individual customer tastes.

We currently employ a lean “hybrid” organizational structure to reduce costs, maintain consistency and increase operational flexibility:

•

local-level, decentralized decision making to provide flexibility with regard to: personnel hiring, land identification and sourcing, land development and homebuilding processes;

•

regionalized purchasing for home construction and building materials to promote increased buying power, take advantage of regional market differences and facilitate nationwide cost sharing; and

•

centralized functions to provide cost-efficient operation of customer call center, customer service, architecture (construction documents) and other back office operations including accounting, information technology and payroll.

We focus on lowering costs and construction cycle times through benchmarking and the sharing of best practices among divisions. By concentrating on these objectives, we believe we can manage our business through changing economic climates.

We seek to allocate the capital necessary for new projects in a manner consistent with our overall operating strategy and based on market conditions. We utilize return on assets, peak cash investment, gross margin and net income margin as the primary criteria prior to deploying our capital resources. Capital commitments are determined via a formal land committee among selected executive and operational personnel who play an important role in ensuring that new projects reflect our strategy.

Continue Balanced Land Policies

We plan to capitalize on our existing land supply, which we believe is largely sufficient to support our homebuilding operations for the next two years in most of our divisions and limits our need to acquire land to execute our business plan. We also maintain a supply of lots that we strategically and opportunistically sell to other builders, capitalizing on demand for lot inventory. We generally only purchase entitled land but will provide the expertise to entitle land held by a seller and contracted to us under an option agreement. This provides a potentially lower cost way of controlling land inventory for the future. To reduce the risks associated with our investments in land, we utilize deal structures including long-term purchase options, rolling lot takedowns and purchase contracts that sometimes provide for payment to land sellers upon delivery of homes built on land purchased. We plan to continue land acquisitions, with a continued focus on core “A” markets closest to major employment centers and an emphasis on acquiring smaller land parcels with quicker turns. We focus on minimizing unsold, under-construction housing inventory.

Preserve and Build on Positions in Existing Markets

We will pursue growth to the extent that we believe it is consistent with our disciplined operating strategy, balanced land policies and overall commitment to quality. Our growth strategy focuses primarily on investing and acquiring land in core locations in our existing geographic markets. We believe our current geographic markets represent regions of the country that present above average growth potential based on long-term employment, demographic and economic trends. We have operated in most of these markets for many years and our teams have extensive local knowledge and critical business relationships that are essential in competing for land, subcontractors and customers. While we are focused primarily on growth in our existing markets, we will also opportunistically consider entry into new geographic markets that meet the same criteria as our existing markets and which we can reasonably support through our capital base.

Marketing and Sales

We believe we have an established and valuable brand, with a reputation for high quality construction, innovative design and strong customer service. We believe our reputation helps generate interest in each new project we undertake. Customers often comment on the quality of our homes and their positive buying experience. These attributes enhance our brand position and increase referrals.

We use a variety of marketing platforms, including website, internet and mobile applications, customer information centers, advertisements, newspapers, magazines and brochures, direct mail, billboards and fully decorated model units. We focus on being at the forefront of technological based marketing, including how we communicate information to the marketplace. We have had success working through Facebook, Twitter, blogs and an application for Apple Inc.’s iPhone and iPod Touch devices. We also maintain a state-of-the-art website that allows potential customers to insert their existing furniture into our floor plans, and benefit from an exclusive arrangement with our website design firm.

Model homes are an important part of our marketing efforts where we focus on creating an attractive atmosphere at each community. We use local third party design specialists for interior decorations and furniture, which vary within models based upon characteristics of homebuyers. At December 31, 2014, we owned 206 model homes. We also have home design service centers offering a range of customization options to satisfy individual customer tastes.

To sell homes, we employ commissioned sales agents who are licensed real estate agents where required by law. We also use independent brokers who are typically paid a market-based commission based on the price of the home.

Customer purchase deposit requirements vary among markets based on state laws as well as customs and practices and are sometimes dictated by the financing program used by the consumer, as well as market conditions. Total base purchase price deposits range from $500 to $40,000 (excluding options). ~~Additional~~Subject to applicable law and depending on a particular market, additional purchase deposits are required for options and upgrades and range from 1510% to 100% of the option price (as opposed to the overall purchase price), with a higher deposit sometimes required for custom options or certain options above an amount designated for the community. Generally, higher deposit percentages are required for large option orders. Our sales contracts may include, among other contingencies, a financing contingency which permits customers to cancel and receive a refund of their deposits if they cannot obtain mortgage financing at prevailing or specified interest rates within a specified period. Our contracts may include other contingencies, such as the sale of an existing home. Our cancellation rate as a percentage of home sales orders averaged approximately 21% from 1997-2006 before the downturn in the homebuilding industry. Though this rate increased to a high of 31% in 2008, it returned to 20% in 2009. For the year ended December 31, ~~2013~~2014, our cancellation rate was 15 16%.

To reduce the risk of unsold inventory, we formalized our approval process of home construction starts. Generally, customers must have approved financing, no contingencies tied to the sale of an existing home, and an appropriate deposit before construction of a home begins. Depending on market conditions in each community, we may begin construction on a limited number of homes when no signed sales contracts exist to provide inventory to buyers who want a finished home for a quicker move in. In addition, we may use various sales incentives, such as payment of certain homebuyer costs as part of our sales process. Use of incentives and inventory construction is dependent on local economic and competitive market conditions.

Land Acquisition and Development

We have a disciplined and structured land acquisition process. Each acquisition must be approved by our land committee, which is ~~composed~~comprised of members of senior management and directors of J.F. Shea Construction Management, Inc., our ultimate general partner. The committee reviews potential new projects, and option and deposit funds are placed at risk only if approved by the committee. As part of this process, the committee reviews underwriting and due diligence information provided by our division management and land acquisition ~~teams,~~personnel ~~which~~and typically includes market, environmental and site-planning studies, project and market risk assessments, and financial analysis. We expect to acquire more land inventory in ~~all~~each ~~our~~market ~~markets~~ to meet expected demand.

For ~~the~~ our homebuilding operations, we typically purchase land only after substantially all of the necessary governmental development approvals or entitlements have been obtained so that development or construction may begin as and when market conditions dictate. The term “entitlements”, as used herein, refers to the right, for the duration of the term of the entitlements, to develop a specific number of residential lots without the need for further public hearings or discretionary local government approvals. Entitlements generally give developers the right to obtain building permits upon compliance with certain conditions that are ordinarily within the developer’s control. Although entitlements are usually obtained before we acquire land, we are still required to secure other governmental approvals and obtain permits prior to and during development and construction. The process of obtaining such approvals and permits can be costly, time consuming and difficult to obtain, and substantially delay the originally planned development cycle.

We acquire land through purchase and option contracts. Deposits are generally refundable until the necessary entitlements and zoning, including plan approval and in some cases engineering plan approval, are obtained, at which time deposits become non-refundable. Actual land acquisitions are generally financed from cash on our balance sheet, ~~or through our~~ cash flow from operations. Inor, ~~the~~if ~~future~~necessary, weour ~~have a new~~ $125.0 million secured revolving credit facility ~~which can also be used to finance land acquisitions~~. Option contracts allow us to control lots and land without incurring risks of land ownership or financial commitments other than, in some circumstances, a non-refundable deposit. We also enter into option contracts with land owners and developers and, in certain circumstances, other third parties, including affiliates, to purchase finished lots over time and before home construction begins. These option contracts may require a certain number of purchases per quarter. We typically have the right to decline to exercise future purchases and to cancel our future rights to lots, typically forfeiting only the deposits held by the sellers at that time.

When we acquire undeveloped land, we generally begin development through contractual agreements with consultants and our TradePartners^® (see below). These activities include site planning and engineering and constructing roads, sewer, water, utility and drainage systems and, in certain instances, recreational amenities. For additional information regarding our land position, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Selected Homebuilding Operational Data—Land and Homes in Inventory.”

Backlog

Sales order backlog represents homes under contract to be built, but not ~~closed~~delivered with the transfer of title. Revenue is recognized on homes under sales contracts when the ~~sale~~home ~~closes~~delivers. ~~Home~~Homes ~~sales~~deliver ~~close~~ when all conditions of escrow are met, including delivery of the home or other real estate asset to the customer, title passage, appropriate consideration is received or collection of ~~associated~~ associated receivables, if any, is reasonably assured and when we have no other continuing involvement in the assets. At December 31, ~~2013~~2014, we had a backlog of ~~849~~918 units with a sales value of $~~466~~551.67 million that is anticipated to be realized as ~~closings~~ deliveries, which are subject to cancellation, primarily throughout ~~2014~~2015.

Seasonality

Historically, the homebuilding industry experiences seasonal fluctuations. We typically experience the highest home sales 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 three to ~~eight~~seven months to construct a new home, we ~~close~~deliver more homes in the second half of the year as spring and summer home sales orders convert to home ~~closings~~deliveries. Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest from April to October, and the majority of cash receipts from home ~~closings~~deliveries occur during the second half of the year.

Consumer Financial Services

We make available certain financial services to our homebuyers through:

•

Shea Insurance Services, Inc., a wholly-owned subsidiary that provides insurance brokerage services; and

• Shea Mortgage, Inc. (“Shea Mortgage”), aan ~~related company~~affiliate, that provides mortgage services.

Construction

As the general contractor for most communities, we employ subcontractors that meet our requirements for becoming TradePartners^®. These requirements include quality and workplace safety standards and participation in various training programs. We typically hire TradePartners^® on a community-by-community basis at a fixed price. Occasionally, we enter into longer term contracts or national account agreements (exclusive or non-exclusive) with suppliers or manufacturers if we can obtain more favorable terms or receive rebates based upon product usage and volumes. Our construction managers and field superintendents coordinate and schedule the activities of TradePartners^® and suppliers and subject their work to quality and cost controls.

We do not maintain significant inventories of construction materials, except for work-in-process materials for homes under construction. When possible, we negotiate price and volume discounts with manufacturers and suppliers to take advantage of production volume and regional purchasing capabilities, including parties such as Delta, for plumbing fixtures, and ~~Whirlpool~~GE, for appliances. ~~Prices~~ Prices for these goods and services may fluctuate due to various factors, including supply shortages that may be beyond the control of our suppliers.

Quality Control and Warranty Programs

We view a positive customer service experience and adherence to stringent quality control standards as fundamental to our business model and continued success. We believe our quality assurance programs help improve production efficiency, reduce warranty costs and increase customer satisfaction and referrals. Our commitment to product quality includes a comprehensive checkpoint evaluation at key points in the construction process, continuous improvement based on direct feedback from our TradePartners^®, and our participation in TradePartners^® councils to discuss industry practices, solve problems and distribute information in an effort to build better homes.

We offer our customers a comprehensive one or two-year fit and finish warranty for our homes and typically provide more limited ongoing customer service support for up to ~~twelve~~ten years in some markets as required by state law ~~requirements~~. Specific length, terms and conditions of these warranties vary depending on the market in which a home is sold. Additionally, post-~~closing~~delivery, we proactively provide one, five and eleven-month customer care home visits. On-site customer care personnel coordinate with TradePartners® to service the homes.

We record a reserve of approximately 1.0% to 2.0% of the home sales price to cover warranty and customer service expenses, although this allowance is subject to adjustment in special circumstances. Our historical experience has been ~~that~~ warranty and customer service expenses generally fall within this allowance. We believe our reserves are adequate to cover the ultimate resolution of of potential liabilities associated with known and anticipated warranty and customer service related claims ~~and litigation~~.

Insurance Coverage

We obtain workers compensation insurance, commercial general liability insurance, and insurance for completed operations losses and damages with respect to our homebuilding operations from affiliate and unrelated third party insurance providers. Policies covering these items are written at various coverage levels but include a self-insured retention or deductible ranging from $0.5 million to $2515.0 million, depending on the layer. We typically procure general liability, workers compensation and completed operations insurance from affiliated entities to insure these retentions or deductibles, plus excess layers above the third party limits. See “Item 13: Certain Relationships and ~~Related~~Affiliate Transactions, and Director Independence —Transactions with Unconsolidated Joint Ventures and Other Shea Family Owned Companies — Supplemental Insurance Coverage and PIC Transaction.”

We require TradePartners^® to be insured for work on our communities for workers compensation, commercial general liability and completed operations losses and damages, and many of our TradePartners^® carry this insurance through our “rolling wrap-up” insurance program, where our risks and the risks of participating TradePartners^® on our projects are insured through a set of master policies.

Competition and Market Factors

Development and sale of residential properties is highly competitive and fragmented. We compete for sales with many large and small homebuilders, including homebuilders with national operations, based on various interrelated factors, including location, reputation, amenities, design, quality and price. We also compete for sales with existing home ~~resales~~sales and rental housing.

Demand for new housing is affected by, among other factors, consumer confidence and prevailing economic conditions, including employment levels and job growth or contraction, interest rates, and state and federal home ownership legislative policies. Other factors affect the housing industry and demand for new homes, including availability of labor and materials and increases in the costs thereof, changes in costs of home ownership, such as property taxes and energy costs, changes in consumer preferences, demographic trends and availability of and changes in mortgage financing programs.

Government Regulation and Environmental Matters

The homebuilding industry is subject to extensive and complex regulations. We and our TradePartners® ~~subcontractors~~ must comply with various federal, state and local laws and regulations, including zoning, density and development requirements, and building, environmental, advertising and real estate sales rules and regulations. These requirements affect the development process, ~~building~~ materials and ~~building~~ designs of our properties. Moreover, we are dependent on state and local authorities to issue ~~building~~ permits and other approvals to complete our projects. The time to obtain these permits and other approvals impacts ~~the~~our carrying costs~~, and~~. ~~continued~~The effectiveness of granted permits is subject to changes in policies, rules and regulations and their interpretation and application.

Some state and local governments in our markets have approved, and others may approve, slow-growth or no-growth initiatives that have and could continue to adversely impact land availability and building opportunities. Additionally, approval of these initiatives could adversely affect our ability to build and sell homes in the affected markets or could require satisfaction of additional administrative and regulatory requirements, which could delay or extend construction and increase costs.

Our homebuilding operations are also subject to various local, state and federal statutes, ordinances, rules and regulations concerning land use and protection of health, safety and the environment. The particular impact and requirements of environmental laws for each project vary greatly according to location, environmental condition and present and former uses of the site and adjoining properties. Complying with such laws may result in delays, cause us to incur substantial compliance and other costs or prohibit or severely restrict development in certain environmentally sensitive regions or areas. To date, such compliance has not had a material adverse effect on our operations, although in the future it may have such an effect.

We typically conduct environmental due diligence reviews prior to acquisition of ~~undeveloped properties~~land. Prior to development, we ~~undertake~~perform an appropriate level ~~extensive~~of site planning ~~as appropriate~~ for each community, which may include design and implementation of storm water management plans, wetlands delineation and mitigation plans, perennial stream flow determinations, erosion and sediment control plans and archeological, cultural and endangered species surveys. We may be required to obtain permits or other approvals for our operations, particularly in environmentally sensitive areas, such as wetlands. Infrastructure projects impacting public health and the environment, such as construction of drain fields or connection to public sewer lines, and drilling of wells or connection to municipal water supplies, may be subject to inspection and approval by local authorities. We also could incur cleanup costs and obligations with respect to environmental conditions at our ~~properties~~communities, including, under some environmental laws, conditions resulting from ~~the~~ operations of prior owners or operators, or at properties where we, or others, have disposed of wastes. Although no assurances can be given, we are not aware of obligations or liabilities arising from environmental conditions in any of our existing ~~properties~~communities that are likely to be material or adversely impact us.

Employees

At December 31, ~~2013~~2014, we employed ~~619~~668 people, including ~~315~~330 management, office and administrative staff, ~~120~~125 sales personnel and ~~184~~213 construction personnel. No employees are covered by collective bargaining agreements. Employees of certain TradePartners® are represented by labor unions or are subject to collective bargaining arrangements. We believe relations with our employees and TradePartners® are satisfactory.

Business Segment Financial Data

For business segment financial data, please see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as Note 18 to our consolidated financial statements.

Availability of Reports

This annual report on Form 10-K and each of our subsequent quarterly reports on Form 10-Q and current reports on Form 8-K, including any amendments, are available free of charge on our website, www.sheahomes.com, as soon as reasonably practicable after ~~such~~ such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). The information contained on our website is not incorporated by ~~references~~reference into this report and should not be considered part of ~~this~~ this report. In addition, the SEC website contains reports and other information about us at www.sec.gov.

ITEM 1A. RISK FACTORS

The discussion of our business and operations included in this annual report on Form 10-K should be read together with the risk factors set forth below. They describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. As used below, the term “notes” and “Secured Notes” refers to the outstanding 8.625% Senior Secured Notes, due 2019, issued by Shea Homes Limited Partnership and Shea Homes Funding Corp. and guaranteed by certain of our subsidiaries.

Market and Economic Risks

The homebuilding industry, which is very cyclical and affected by a variety of factors, was in a significant and prolonged economic downturn, and, while the industry has attained a moderate level of stabilization and recovery, any return to a sustained and more normal economic and housing market environment is uncertain. A return to weak housing and general economic conditions or deterioration in industry conditions or in broader economic conditions could have additional material adverse effects on our business, financial condition and results of operations.

The homebuilding industry is cyclical and is significantly affected by ~~changes in~~ industry ~~conditions~~and local, asregional ~~well as in general~~ and ~~local~~national economic conditions, ~~such as~~ including changes in:

•

employment and wage levels;

•

availability of financing for homebuyers;

•

interest rates;

•

consumer confidence;

•

levels of new and existing homes for sale;

•

demographic trends;

•

housing demand; and

•

government policies.

These changes may occur on a national scale or may acutely affect some of the local regions or markets inwhere ~~which~~ we operate more than others. When adverse conditions affect any of our larger markets, they could have a proportionately greater impact on us than on other homebuilding companies that have a smaller presence in such markets. Our operations in previously strong markets, particularly California and Arizona, have adversely affected our results of operations disproportionately compared to our other markets in the latest downturn.

An oversupply of alternatives to new homes, including foreclosed homes, homes held for sale by investors and speculators, other existing homes and rental properties, can also adversely impact our ability to sell new homes, depress new home prices and reduce our margins on the sales of new homes. High levels of foreclosures not only contribute to additional inventory available for sale, but also reduce appraised values for new homes, potentially resulting in lower sales prices.

As a result of the foregoing matters, potential customers may be less willing or able to buy our homes.

The recent downturn in the homebuilding industry was one of the most severe housing downturns in U.S. history. This downturn was marked by the significant decline in demand for new homes, significant oversupply of homes on the market and significant reductions in the availability of financing for homebuyers. As a result, we experienced material reductions in our home sales and homebuilding revenues, and incurred material inventory impairments and losses from our joint venture interests and other write-offs. It is not clear at this time if these trends have permanently reversed or when we may return to meaningful, sustained profitability. ~~A housing or economic relapse or recession would have a material adverse effect on our business, financial condition and results of operations.~~

~~Our~~In ~~ability~~2014, tothe ~~respond~~housing market continued to ~~any~~improve ~~downturn~~from isthe ~~limited~~most recent housing downturn. ~~Numerous~~ ~~home~~This ~~mortgage~~recovery, ~~foreclosures~~which ~~during~~began ~~the~~in 2012, ~~recent~~was ~~downturn~~primarily ~~increased~~attributable ~~supply and~~to ~~drove~~improved ~~down~~demand ~~prices~~for homes, ~~making~~low ~~the~~inventories ~~purchase~~ of ahomes ~~foreclosed~~available ~~home~~for ansale ~~attractive~~and ~~alternative~~generally tohealthy ~~purchasing~~and aimproving ~~new~~economic ~~home~~and demographic factors. ~~Homebuilders~~Recent ~~responded~~housing todemand ~~declining~~has ~~sales~~been supported by population and ~~increased~~household formation ~~cancellation~~growth, ~~rates~~as ~~with~~well ~~significant~~as ~~concessions,~~affordability ~~further~~largely ~~adding~~attributable to ~~the price~~low ~~declines.~~mortgage ~~With~~loan ~~the~~interest ~~decline~~rates inand ~~the~~increased ~~value~~consumer ofconfidence. ~~homes~~However, ~~and~~ the ~~inability~~performance of ~~many~~individual ~~homeowners~~housing tomarkets ~~make~~varied ~~their~~during ~~mortgage~~the ~~payments~~year, ~~the~~with ~~credit~~home sales volume and selling price appreciation differing across markets ~~were~~due ~~significantly~~to, ~~disrupted~~among other things, ~~putting~~different ~~strains~~levels onof ~~many~~employment ~~households~~growth, ~~and~~unemployment ~~businesses. These~~rates ~~conditions could~~and ~~return~~consumer ifconfidence, ~~there~~and isvarying alevels ~~weakening~~of ~~economy~~new and ~~housing~~existing ~~market~~home inventories available for sale.

We expect such unevenness in housing market conditions will continue in 2015 and beyond, whether or not this housing recovery progresses and prevailing conditions in various housing markets and submarkets will fluctuate. These fluctuations may be significant and unfavorable in 2015 and future periods, and may include a softening or sustained deterioration of home sales activity and/or selling prices, which could be more pronounced in the markets where we operate. Additionally, while some of the negative factors contributing to the housing downturn appear to have subsided, several remain and others could return and, collectively, could intensify to inhibit future improvement in housing market conditions in 2015 and beyond. A housing or economic relapse or recession would have a material adverse effect on our business, financial condition and results of operations.

Our ability to respond to any downturn is limited. Numerous home mortgage foreclosures during the recent downturn increased supply and drove down prices, making the purchase of a foreclosed home an attractive alternative to purchasing a new home. Homebuilders responded to declining sales and increased cancellation rates with significant concessions, including incentives, further adding to the price declines. With the decline in the value of homes and the inability of many homeowners to make their mortgage payments, the credit markets were significantly disrupted, putting strains on many households and businesses. These conditions could return if there is a weakening economy and housing market.

We cannot predict the duration or ultimate magnitude of any economic downturn or the extent of a recovery. Nor can we provide assurance that our response to a homebuilding downturn or the government’s attempts to address the troubles in the overall economy would be successful.

The reduction in availability of mortgage financing over the recent downturn has adversely affected our business, and it is likely that access to mortgage financing going forward will be more restrictive than in previous housing cycles.

~~The~~Although there has been some improvement and a general increase in housing prices over the past three years, the mortgage lending ~~industry~~ and mortgage finance industries experienced significant instability during the recent housing downturn, beginning with increased defaults on subprime loans and other nonconforming loans followed by a surge in defaults in the broader mortgage loan market. 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 many 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 has caused most lenders to stop offering subprime mortgages and other loan products that are not eligible for sale to Fannie Mae or Freddie Mac or loans that do not meet Federal Housing Administration (“FHA”) and Veterans Administration (“VA”) requirements. Fewer loan products, changes in conforming loan limits, tighter loan qualifications, higher down payments and a reduced willingness of lenders to provide loans make it more difficult for buyers to finance the purchase of homes. These factors have served to reduce the pool of qualified homebuyers and made it more difficult to sell to ~~first~~entry-~~time~~level and move-up buyers who historically made up a substantial part of our customers. These reductions in demand have adversely affected our business, financial condition and results of operations over the past several years, and the duration and severity of their effects are uncertain.

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. At times, the federal government has discussed changing the nature of its relationship with Fannie Mae and Freddie Mac, and possibly eliminating these entities. If Fannie Mae and Freddie Mac were dissolved or if the federal government stopped providing liquidity support to the mortgage market, there would be a reduction in available financing from these institutions. Any such reduction would likely have an adverse effect on interest rates, mortgage availability and new home sales.

The FHA insures mortgage loans that generally have lower down payments and, as a result, it continues to provide important support for financing home purchases. Recently, more restrictive guidelines were placed on FHA insured loans, such as increased minimum down payments and increased insurance premiums. Further restrictions on FHA insured loans could be adopted, including, but not limited to, limitations on seller-paid closing costs and concessions. These or any other restrictions may further negatively affect availability or affordability of FHA financing, which could adversely affect our ability to sell homes.

Some customers still utilize 100% financing through programs offered by the VA and United States Department of Agriculture. There can be no assurance these or other programs will continue to be available or will be as attractive to customers as programs currently offered, which could adversely affect our home sales.

Elimination or reduction of the tax benefits associated with owning a home could prevent potential customers from buying our homes and adversely affect our business or financial results.

Significant expenses of owning a home, including mortgage interest and real estate taxes, generally are deductible expenses for an individual’s federal and, in some cases, state income taxes, subject to certain limitations. If the federal government or a state government changes its income tax laws to eliminate or substantially modify these income tax deductions, the after-tax cost of owning a new home would increase for many potential customers. The resulting loss or reduction of homeowners’ tax deductions, if such tax law changes were enacted without offsetting provisions, would adversely affect demand for new homes.

Because most customers require mortgage financing, increases in interest rates could lower demand for our products, limit our marketing effectiveness and limit our ability to realize our backlog.

Most customers finance their home purchases through lenders providing mortgage financing. Increases in interest rates could lower demand for new homes because the mortgage costs to potential homebuyers would increase. Even if potential new homebuyers do not need financing, changes in interest rates could make it difficult to sell their existing homes to potential buyers who need financing. This could prevent or limit our ability to attract new customers and fully realize our backlog in ~~closing~~delivering homes because our sales contracts generally include a financing contingency which permits buyers to cancel their sales contracts if mortgage financing is unobtainable within a specified time. This contingency period is typically 30 to 60 days following the date of execution of the sales contract. Exposure to such financing contingencies renders us vulnerable to changes in prevailing interest rates.

Cancellations of home sales orders in backlog may increase as homebuyers choose to not honor their contracts.

~~Notwithstanding~~For the years ended December 31, 2014, 2013 and 2012, our cancellation rate as a percentage of home sales ~~strategies~~orders was 16%, we15% and 15%, respectively. We experienced elevated rates of sales order cancellations from 2006 through 2008. We believe the elevated cancellation rates during this period were largely a result of reduced homebuyer confidence, due principally to continued price declines, growth in foreclosures, continued high unemployment and the fact that homebuyer deposits are generally a small percentage of the purchase price. A more restrictive mortgage lending environment since 2008 and the inability of some buyers to sell their existing homes has also impacted cancellations. Many of these factors are beyond our control, and it is uncertain whether they will cause cancellation rates to rise in the future.

Home prices and demand in California, Arizona, Colorado, Washington, Nevada, ~~and~~Texas, Florida, North Carolina and Virginia have a large impact on our results of operations because we conduct our homebuilding business in these states.

Our operations are concentrated in regions that were among some of the most severely affected by the recent economic downturn. We conduct our homebuilding business in California, Arizona, Colorado, Washington, Nevada, ~~and~~Texas, Florida, North Carolina and Virginia. Home prices and sales in these states have declined significantly since 2006 and, while improving, these states, particularly California, have experienced some economic challenges in recent years, including elevated levels of unemployment and precarious budget situations in state and local governments. These conditions may materially adversely affect the market for our homes in those areas. Declines in home prices and sales in these states also adversely affect our financial condition and results of operations.

Inflation could adversely affect our business, financial condition and results of operations.

Inflation can adversely affect us by increasing costs of land, materials and labor. ~~The~~We ~~Company~~are is currently experiencing a significant increase in the cost of labor and materials to construct our homes. In addition, with rising home prices, land prices have ~~begun to increase significantly~~increased. We may be unable to offset these increases with higher sales prices. In addition, inflation is often accompanied by higher interest rates, which have a negative impact on housing demand. In such an environment, we may be unable to raise home prices sufficiently to keep up with the rate of cost inflation and, accordingly, our margins could decrease. Moreover, with inflation, the purchasing power of our cash resources can decline. Efforts by the government to stimulate the economy may not be successful, but have increased the risk of significant inflation and its resulting adverse effect on our business, financial condition and results of operations.

Homebuilding is very competitive, and competitive conditions could adversely affect our business, financial condition and results of operations.

The homebuilding industry is highly competitive. Homebuilders compete not only for homebuyers, but also for desirable land, financing, raw materials and skilled labor. We compete with other local, regional and national homebuilders, often within larger subdivisions designed, planned and developed by such homebuilders and developers. We also compete with existing home sales, foreclosures and rental properties. In addition, some competitors may have greater financial, marketing and sales resources with the ability to compete more effectively. New competitors may also enter our markets. These competitive conditions in the homebuilding industry can result in:

•

fewer sales;

•

lower selling prices;

•

increased selling incentives;

•

lower profit margins;

•

impairments in the value of inventory and other assets;

• difficulty in acquiring suitable land, raw materials, and skilled labor at acceptable prices or terms; or

•

delays in home construction.

These competitive conditions affect our business, financial condition and results of operations.

Operational Risks

Supply shortages and risks of demand for building materials and skilled labor could increase costs and delay deliveries.

The homebuilding industry has periodically experienced significant difficulties that can affect the cost or timing of construction, and adversely impact our revenues and operating margins, including:

•

difficulty in acquiring land suitable for residential building at affordable prices in locations where our potential customers want to live;

•

shortages of qualified labor;

•

reliance on local subcontractors, manufacturers and distributors who may be inadequately capitalized;

•

shortages of materials; and

•

increases in the cost of materials, particularly lumber, drywall, cement, steel, plumbing and electrical components, which are significant components of home construction costs.

Competitive bidding helps control labor and building material costs. ~~The~~With ~~downward~~the ~~trend~~improvement of ~~these~~the ~~costs~~real ~~has~~estate ~~stopped~~market, ~~and~~ a trend of ~~significantly~~ increasing costs for material and labor has emerged in our markets. An increase in costs without an increase in selling prices of our homes could adversely affect our financial condition and results of operations.

In most of our markets, we need to replenish our lot inventory for construction. If the housing market recovers, the price of improved or finished lots for construction in these markets could increase and adversely affect our financial condition and results of operations.

~~Homebuilding~~12 is subject to home warranty and construction defect claims and other litigation risks in the ordinary course of business that can be significant. Our operating expenses could increase if we are required to pay higher insurance premiums or incur substantial warranty and litigation costs with respect to such claims and risks.

As a homebuilder, we are subject to home warranty and construction defect claims and other claims arising in the ordinary course of business. As a consequence, we maintain liability insurance in the form of a “rolling wrap-up” insurance program which insures both us and our TradePartners®. We also record customer service and warranty reserves for the homes we sell based on our historical experience in our markets and our judgment of the qualitative risks associated with the types of homes built. Because of the uncertainties inherent in these matters, we cannot provide assurance that, in the future, our insurance coverage and reserves will be adequate to address all warranty and construction defect claims.

Costs of insuring against construction defect liability claims are high, and the amount and scope of coverage offered by insurance companies at acceptable rates is limited. The scope of coverage may continue to be limited, become further restricted, more costly or a combination of the above.

In recent years, an increasing number of individual and class action lawsuits have been filed against homebuilders asserting claims of personal injury and property damage caused by various sources, including faulty materials and the presence of mold in residential dwellings. Furthermore, decreases in home values as a result of general economic conditions resulted in an increase in construction defect liability claims, as well as claims based on marketing and sales practices. Our insurance may not cover all of the claims arising from such issues, or such coverage may become prohibitively expensive. Notwithstanding, our annual policy limits presently are $50.0 million per occurrence and $50.0 million in the aggregate, a portion of which are insured through related party insurance companies, who may reinsure our policy limits from time to time. If we are unable to obtain adequate insurance against these claims, we may experience litigation costs and losses that could adversely affect our financial condition and results of operations. Even if we are successful in defending such claims, we may incur significant costs.

Homebuilding is subject to home warranty and construction defect claims and other litigation risks in the ordinary course of business that can be significant. Our operating expenses could increase if we are required to pay higher insurance premiums or incur substantial warranty and litigation costs with respect to such claims and risks.

As a homebuilder, we are subject to home warranty and construction defect claims and other claims arising in the ordinary course of business. As a consequence, we maintain liability insurance in the form of a “rolling wrap-up” insurance program which insures both us and, in some markets, our TradePartners^®. We also record customer service and warranty reserves for the homes we sell based on our historical experience in our markets and our judgment of the qualitative risks associated with the types of homes built. Because of the uncertainties inherent in these matters, we cannot provide assurance that, in the future, our insurance coverage and reserves will be adequate to address all warranty and construction defect claims.

Aggressive marketing/solicitation efforts from plaintiff construction defect lawyers, anti-builder legislation and case law, and decreases in home values as a result of general economic conditions can result in an increase in construction defect claims. Our insurance may not cover all of the claims arising from such issues, or such coverage may become prohibitively expensive. Notwithstanding, our annual policy limits presently are $50.0 million per occurrence and $50.0 million in the aggregate, a portion of which is insured through affiliate insurance companies, who may reinsure our policy limits from time to time. If we are unable to obtain adequate insurance against these claims, we may experience litigation costs and losses that could adversely affect our financial condition and results of operations. Even if we are successful in defending such claims, we may incur significant costs.

Historically, builders have recovered a significant portion of the construction defect liabilities and defense costs from their subcontractors and insurance carriers. We try to minimize our liability exposure by providing a master insurance policy and requiring TradePartners^® to enroll in a “rolling wrap-up” insurance policy. If we cannot effectively recover from our carriers, we may suffer greater losses because we may not have rights to pursue TradePartners^® included in the “rolling wrap-up” insurance policy, which could adversely affect our financial condition and results of operations.

Furthermore, a builder’s ability to recover against an insurance policy depends upon the continued solvency and financial strength of the insurance carrier issuing the policy, as well as the insurance carrier’s willingness to honor the policy. The states where we build homes typically limit property damage claims resulting from construction defects to those arising within ~~an eight~~a ten- ~~to twelve-~~year period from close of escrow. To the extent any carrier providing insurance coverage to us or our TradePartners® becomes insolvent or experiences financial difficulty, or disputes coverage, we may be unable to recover on those policies, which could adversely affect our financial condition and results of operations.

Our success depends on the availability of suitable undeveloped land and improved lots at acceptable prices, and having sufficient liquidity to acquire such properties.

Our success in developing land and building and selling homes depends in part upon the continued availability of suitable undeveloped land and improved lots at acceptable prices. Availability of undeveloped land and improved lots for purchase at favorable prices depends on many factors beyond our control, including risk of competitive over-bidding and restrictive governmental regulation. Should suitable land become less available, the number of homes we may be able to build and sell would be reduced, which would reduce revenue and profits. In addition, our ability to purchase land depends upon us having sufficient liquidity. We may be disadvantaged in competing for land due to our debt obligations, limited cash resources, inability to incur further debt and, as a result, more limited access to capital compared to publicly traded competitors.

Poor relations with the residents of our communities could adversely impact sales, which could cause revenues 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 development or operation of their communities. Efforts to resolve these issues or disputes could be deemed unsatisfactory to the affected residents and subsequent actions by these residents could adversely affect our reputation or sales. In addition, we could be required to incur costs to settle these issues or disputes or to modify our community development plans, which could adversely affect our financial condition and results of operations.

If we are unable to develop our communities successfully or within expected timeframes, results of operations could be adversely affected.

Before a community generates revenues, time and capital are required to acquire land, obtain development approvals and construct project infrastructure, amenities, model homes and sales facilities. Our inability to successfully develop and market our communities and to generate cash flow from these operations in a timely manner could have a material adverse effect on our business, financial condition and results of operations. In addition, certain project-related costs such as sales and marketing expenses, model maintenance, utilities, taxes and overhead expenses, are time-based costs and could be significantly higher if the project duration is extended.

Risks associated with our land and lot inventory could adversely affect our business, financial condition and results of operations.

The risks inherent in controlling or purchasing, holding and developing land for new home construction are substantial and increase as consumer demand for housing decreases. The value of undeveloped land, building lots and housing inventories can fluctuate significantly from changing market conditions. If the fair market value of the land, lots and inventories we hold decreases, we may be required to reduce their carrying value and take significant impairment charges. 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 land controlled under option or similar contracts may be put at risk. In certain circumstances, a grant of entitlements or development agreement with respect to particular land may include restrictions on the transfer of such entitlements to a buyer, which may increase our exposure to decreases in 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 result in reduced margins or losses in a poorly performing community or market. In a weak market, we have recorded significant inventory impairment charges and sold homes and land for lower margins or at a loss, and such conditions may return and persist for extended periods of time.

12Historically, our goals for the ownership and control of land were based on management’s expectations for future volume growth. In light of weak market conditions that persisted from 2006 through early 2012, we significantly reduced purchases of undeveloped land and land development spending, and made substantial land sales to reduce inventory to better align with the then reduced rate of production. We also terminated certain land option contracts and wrote off earnest money deposits and pre-acquisition costs related to these option contracts. While housing market conditions have improved, future market conditions are uncertain and we cannot provide assurance we will be successful in managing future inventory risks or avoiding future impairment charges. We could be limited in the amount of land we can dispose of and, therefore, our cash inflows attributable to land sales may decline.

Historically, our goals for the ownership and control of land were based on management’s expectations for future volume growth. In light of weak market conditions that have persisted from 2006 through early 2012, we significantly reduced purchases of undeveloped land and land development spending, and made substantial land sales to reduce inventory to better align with the then reduced rate of production. We also terminated certain land option contracts and wrote off earnest money deposits and pre-acquisition costs related to these option contracts. While housing market conditions have improved, future market conditions are uncertain and we cannot provide assurance we will be successful in managing future inventory risks or avoiding future impairment charges. We could be limited in the amount of land we can dispose of, therefore, our cash inflows attributable to land sales may decline.

Also, use of option contracts is dependent on the willingness of land sellers, availability of capital, housing market conditions and geographic preferences. Options may be more difficult to obtain from land sellers in stronger housing markets and are more prevalent in certain geographic regions.

At a consolidated homebuilding project in Colorado, we have a contractual obligation to purchase and receive water system connection rights which, at December 31, ~~2013~~2014, was $3027.54 million, ~~and~~ which is less than ~~the~~their estimated market value ~~of the water system connection rights~~. These water system connection rights are held, ~~and~~ then transferred to homebuyers upon ~~closing~~delivery of their home or, transferred upon the sale of land to the respective buyer., ~~These water system connection rights can also be~~ sold or leased, but generally only within the local jurisdiction. The risks inherent in purchasing, controlling or holding these water system connection rights are substantial and increase as consumer demand for housing decreases. The value of these water system connection rights and their marketability can also fluctuate from changing market conditions. If the fair market value of these water system connection rights decreases, we may be required to reduce their carrying value, which could adversely affect our financial condition and results of operations.

Certain of our homebuilding projects utilize community facility district, metro-district, and other local government bond financing programs to fund acquisition or construction of infrastructure improvements. Interest and principal on these bonds are typically paid from taxes and assessments levied on landowners, including land ~~owners~~we own, and/or homeowners following the ~~closing~~delivery of new homes in the ~~project~~community. Occasionally, we also enter into credit support arrangements requiring us to pay interest and principal on these bonds if taxes and assessments levied on landowners and/or homeowners are insufficient to cover such obligations. Furthermore, reimbursement of these payments to us is dependent on the district or local government’s ability to generate tax and assessment revenues from the new homes.

IfUntil ~~the~~bond ~~current~~proceeds ~~housing~~or ~~recovery~~tax ~~is not sustained~~ and we ~~experience~~assessment ~~another~~revenues ~~housing~~are ~~market~~sufficient ~~downturn~~to ~~which~~cover ~~results~~our inobligations ~~declines in new home sales~~ and/or ~~home~~reimburse ~~values~~us, ~~bond proceeds and taxes and assessments levied on homeowners may be insufficient to satisfy~~ our ~~obligations. Our~~ responsibility to make interest and principal payments on these bonds or pay fees and costs associated with the construction of infrastructure improvements could be prolonged and significant,. ~~possibly~~In ~~without reimbursement~~addition, ~~and/or~~if ~~accrue~~bond ~~liabilities~~proceeds inor ~~connection~~tax ~~with these credit support~~ and ~~funding~~assessment ~~arrangements.~~revenues ~~If we~~ are not ~~fully~~sufficient to orcover ~~adequately~~our ~~reimbursed,~~obligations weand/or ~~may~~reimburse beus, ~~required~~the toamounts ~~recognize~~might anot ~~charge~~be ~~for uncollectible amounts~~recoverable, which could adversely affect our financial condition and results of operations.

Our consolidated financial statements could be adversely affected if we are unable to obtain performance bonds.

In the course of developing our communities, we are often required to provide to various municipalities and other government agencies performance bonds and/or letters of credit to secure the completion of ~~our~~certain ~~projects~~improvements ~~and/or~~ in ~~support~~our ofcommunities ~~obligations to build community improvements~~ such as roads, sewers, water systems and other utilities, and to support similar development activities by certain of our unconsolidated joint ventures. Our ability to obtain such bonds or letters of credit and the cost to do so depend on our credit rating, overall market capitalization, available capital, past operational and financial performance, management expertise and other factors, including surety and housing market conditions and the underwriting practices and resources of performance bond issuers. If we are unable to obtain performance bonds and/or letters of credit when required or the cost of operational restrictions or conditions imposed by issuers to obtain them increases significantly, we may not be able to develop, or we may be significantly delayed in developing, a community or communities and/or we may incur significant additional expenses, and, as a result, our consolidated financial statements, cash flows and/or liquidity could be materially and adversely affected.

We continue to consider growth or expansion of our operations, which could have a material adverse effect on our financial condition and results of operations.

If the housing market continues to ~~improve~~remain healthy, we will consider opportunities for growth, primarily within our existing markets, but also in new markets. ~~Additional~~Historically, ~~growth~~our ofstrategy has been to enter new markets using our ~~business~~existing brands, ~~either~~rather ~~through~~than ~~increased~~the ~~land~~acquisition ~~purchases~~of orexisting ~~development~~homebuilding companies. Because we typically do not acquire existing homebuilders when entering a new market, we do not have the advantage of ~~larger~~the experience and goodwill of an established homebuilding company. As a result, we incur substantial start-up costs in establishing our operations in new markets, and we may not be successful in taking operations in ~~projects~~new markets from the start-up phase to profitability. If we are not successful in making operations in new markets profitable, we may not be able to recover our investment, which could adversely affect our financial condition and results of operations.

13In addition, growth of our business, either through increased land purchases or development of larger projects, may have a material adverse effect on our financial condition and results of operations. Any expansion of our business into new markets could divert the attention of senior management from our existing business and could fail due to our relative lack of experience in those markets. In addition, while we do not currently intend to acquire any homebuilding operations from third parties, opportunities may arise in the future, and any acquisition could be difficult to integrate with our operations and could require us to assume unanticipated liabilities or expenses.

have a material adverse effect on our financial condition and results of operations. Any expansion of our business into new markets could divert the attention of senior management from our existing business and could fail due to our relative lack of experience in those markets. In addition, while we do not currently intend to acquire any homebuilding operations from third parties, opportunities may arise in the future, and any acquisition could be difficult to integrate with our operations and could require us to assume unanticipated liabilities or expenses.

Our business is seasonal in nature and quarterly operating results can fluctuate.

Our quarterly operating results generally fluctuate by season. We typically experience the highest home sales orders in spring and summer, although this activity is also highly dependent on the number of active selling communities, timing of community openings and other market factors. Since it typically takes three to ~~eight~~seven months to construct a new home, we deliver ~~close~~ more homes in the second half of the year as spring and summer home sales orders convert to home ~~closings~~deliveries. Because of this seasonality, construction costs and related cash outflows are historically highest from April to October, and the majority of cash receipts from home ~~closings~~deliveries occur during the second half of the year. If, due to construction delays or other causes, we cannot ~~close~~ deliver our expected number of homes in the second half of the year, our financial condition and full year results of operations may be adversely affected.

We may be adversely affected by weather conditions and natural disasters.

Weather conditions and natural disasters, such as hurricanes, tornadoes, earthquakes, snow storms, landslides, wildfires, volcanic activity, droughts and floods can harm our homebuilding business and delay home ~~closings~~deliveries, increase the cost or availability of materials or labor, or damage homes under construction. In addition, the climates and geology of many of the states where we operate present increased risks of adverse weather or natural disasters. In particular, a large portion of our homebuilding operations are concentrated in California, which is subject to increased risk of earthquakes. Any such event or any business interruption caused therefrom could have a material adverse effect on our business, financial condition and results of operations.

Utility and resource shortages or rate fluctuations could have an adverse effect on operations.

Our communities at times have experienced utility and resource shortages, including significant changes to water availability and increases in utility and resource costs. Shortages of natural resources, particularly water, may make it more difficult to obtain regulatory approval of new developments. We may incur additional costs and be unable to complete construction as scheduled if these shortages and utility rate increases continue. Furthermore, these shortages and utility rate increases may adversely affect the regional economies where we operate, which may reduce demand for our homes.

In addition, costs of petroleum products, which are used to deliver materials and transport employees, fluctuate and may increase due to geopolitical events or accidents. This could also result in higher costs for products utilizing petrochemicals, which could adversely affect our financial condition and results of operations.

We are dependent on the services of our senior management team and certain of our key employees, and loss of their services could hurt our business.

We believe our senior management’s experience in the homebuilding industry and tenure with ~~our~~us ~~company~~ are competitive strengths, and our success depends upon our ability to retain these executives. In addition, we believe our ability to attract, train, assimilate and retain new skilled personnel is important to our success. If we are unable to retain senior management and certain key employees, particularly lead personnel in our markets, as well as our senior corporate officers, or attract, train, assimilate or retain other skilled personnel, it could hinder the execution of our business strategy. Competition for qualified personnel in our markets is intense, and it could be difficult to find experienced personnel to replace our employees, many of whom have significant homebuilding experience. Furthermore, a significant increase in our active communities would necessitate hiring a significant number of field construction and sales personnel, who may be in short supply in our markets.

Information technology failures and data security breaches could harm our business.

We use information technology and other computer resources to carry out important operational and marketing activities, as well as maintain our business records. Many of these resources are provided to us and/or maintained on our behalf by third party service providers pursuant to agreements that specify certain security and service level standards. Although we and our service providers employ what we believe are adequate security, disaster recovery and other preventative and corrective measures, our ability to conduct our business may be impaired if these resources are compromised, degraded, damaged or fail, whether due to a virus or other harmful circumstance, intentional penetration or disruption of our information technology resources by a third party, natural disaster, hardware or software corruption or failure or error (including a failure of security controls incorporated into or applied to such hardware or software), telecommunications system failure, service provider error or failure, intentional or unintentional personnel actions (including the failure to follow our security protocols), or lost connectivity to our networked resources. A significant and extended disruption in the functioning of these resources could impact our ability to conduct business and damage our reputation, which could cause us to lose customers, sales and revenue, result in the unintended public disclosure or the misappropriation of proprietary, personal and confidential information (including information about our homebuyers and business partners), and require us to incur significant expense to address and resolve these kinds of issues. The release of confidential information may also lead to litigation or other proceedings against us by affected individuals, business partners and/or by regulators, and the outcome of such proceedings, which could include penalties or fines, could have a material and adverse effect on our consolidated financial statements. In addition, the costs of maintaining adequate protection against such threats, depending on their evolution, pervasiveness, frequency and/or government-mandated standards or obligations regarding protective efforts, could be material to our consolidated financial statements.

protocols), or lost connectivity to our networked resources. A significant and extended disruption in the functioning of these resources could damage our reputation and cause us to lose customers, sales and revenue, result in the unintended public disclosure or the misappropriation of proprietary, personal and confidential information (including information about our homebuyers and business partners), and require us to incur significant expense to address and resolve these kinds of issues. The release of confidential information may also lead to litigation or other proceedings against us by affected individuals, business partners and/or by regulators, and the outcome of such proceedings, which could include penalties or fines, could have a material and adverse effect on our consolidated financial statements. In addition, the costs of maintaining adequate protection against such threats, depending on their evolution, pervasiveness, frequency and/or government-mandated standards or obligations regarding protective efforts, could be material to our consolidated financial statements.

Acts of war or terrorism may seriously harm our business

Acts of war or terrorism or any outbreak or escalation of hostilities throughout the world may cause disruption to the economy, our company, our employees and our customers, which could undermine consumer confidence and result in a decrease in new sales contracts and cancellations of existing contracts, which, in turn, could impact our revenue, costs and expenses and financial condition.

Failure to maintain effective internal control over financial reporting could materially adversely affect our business, results of operations and financial condition.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Sar Ox”), we are required to provide a report by management on internal control over financial reporting, including management’s assessment of the effectiveness of such control. Changes to our business will necessitate ongoing changes to our internal control systems and processes. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including possibility of human error, circumvention or overriding of controls or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain adequate internal controls, including any required new or improved controls, we may be unable to provide financial information in a timely and reliable manner and might be subject to sanctions or investigation by regulatory authorities such as the SEC or the Public Company Accounting Oversight Board. Any such action could adversely affect our financial results or investors’ confidence in us and could adversely impact the price of our notes. Furthermore, we are not an “accelerated filer” or “large accelerated filer” as defined in Rule 12b-2 of the Exchange Act, and as a result are not currently required to comply with the auditor attestation requirements of Section 404 of Sar Ox.

We16 are an “emerging growth company” and have presented reduced compensation disclosures applicable to “emerging growth companies,” and as a result our compensation practices may not be readily comparable to other companies that are not “emerging growth companies.”

Under the JOBS Act, “emerging growth companies” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other Exchange Act reporting companies that are not “emerging growth companies.”

Regulatory Risks

Government regulations could increase the cost and limit the availability of our development and homebuilding projects and adversely affect our business, financial condition and results of operations.

We are subject to extensive and complex regulations that affect land development and home construction, including zoning, density restrictions, building design and building standards. These regulations often provide broad discretion to the administering governmental authorities as to the conditions we must meet prior to being approved, if approved at all. We are subject to determinations by these authorities as to the adequacy of water and sewage facilities, roads and other local services. New housing developments may also be subject to various assessments for schools, parks, streets and other public improvements. In addition, in many markets, government authorities have implemented no growth or growth control initiatives and preservation of land, often as a result of local grass-roots lobbying efforts. Furthermore, restrictions on immigration can create a shortage of skilled labor. Any of these regulatory issues can limit or delay home construction and increase operating costs.

We are also subject to various local, state and federal laws and regulations concerning the protection of health, safety and the environment, including endangered species. These matters may result in delays, may cause us to incur substantial compliance, remediation, mitigation and other costs or subject us to fines, penalties and related litigation. These laws and regulations can also prohibit or severely restrict development and homebuilding activity in environmentally sensitive areas.

We may incur additional operating expenses or delays due to compliance requirements or fines, penalties and remediation costs pertaining to environmental regulations within our markets.

We are subject to local, state and federal statutes, ordinances, rules and regulations concerning land use and the protection of health and the environment, including those governing discharge of pollutants to water and air, handling of hazardous materials and cleanup of contaminated sites. 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 use of the site. We expect that increasingly stringent requirements will be imposed on homebuilders. 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. Environmental regulations can also have an adverse impact on the availability and price of certain raw materials, such as lumber. 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 under environmental laws and regulations to the permits and other approvals required for our projects and operations.

Changes in governmental regulation of our financial services operations could adversely affect our business, financial condition and results of operations.

We assist customers with finding homeowners’ insurance through Shea Insurance Services, Inc., a wholly owned subsidiary of Shea Homes, Inc. (“SHI”). Through Shea Mortgage, aan ~~related~~affiliate ~~entity~~ within the Shea Family Owned Companies but not a subsidiary of SHLP or consolidated in its financial statements, we are also able to ~~introduce~~offer mortgage origination options for our customers, helping us to ensure they secure financing for their home purchases. Our homebuilding operations sometimes offer financial incentives to our homebuyers to use Shea Mortgage in accordance with applicable laws. In addition to the financial benefits accruing to Shea Mortgage from these mortgage originations, the homebuilding operations are able to better manage the ~~closing~~inventory of homes under construction and the closing process, as well as prequalify our homebuyers as a result of this affiliate arrangement. The homebuyers are not required to use Shea Mortgage as the homebuyer’s lender. Each homebuyer may select any lending institution of his or her choice for the purpose of securing mortgage financing and is not in any way limited to obtaining financing from Shea Mortgage.

These financial services operations are subject to federal, state and local laws and regulations. There have been numerous proposed and adopted changes in these regulations as a result of the housing downturn. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R.4173) was signed into law, which has and will continue to have, a significant impact on the regulation of the financial services industry, including new standards related to regulatory oversight of ~~systematically~~systemically important financial companies, derivatives transactions, asset-backed securitization, mortgage underwriting and consumer financial protection. Among other things, this legislation provides for a number of new requirements relating to residential 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, the definitions and parameters of a Qualified Mortgage and a Qualified Residential Mortgage, future risk retention, limitations on certain fees, retention of credit risk, prohibition of certain tying arrangements and remedies for borrowers in foreclosure proceedings. The effect of such provisions on our financial services business will depend on the rules that are ultimately enacted. In addition, we cannot predict what similar changes to, or new enactments of, statutes and regulations pertinent to our financial services operations will occur. Any such changes or new enactments could have a material adverse effect on our financial condition and results of operations.

Financing Risks

Our ability to generate sufficient cash or access other limited sources of liquidity to operate our business and service our debt depends on many factors, some of which are beyond our control.

Our ability to make payments on our notes and to fund land acquisition, development and construction costs depends on our ability to generate sufficient cash flow, which is subject to general economic, financial, competitive, legislative and regulatory factors and other factors beyond our control. We cannot assure we will generate sufficient cash flow from operations to pay principal and interest on our notes or fund operations. As a result, we may need to refinance all or a portion of our debt, including our notes, on or before the maturity thereof, or incur additional debt. We cannot assure we will be able to do so on favorable terms, if at all. If we are unable to timely refinance our debt, we may need to dispose of certain assets, minimize capital expenditures or take other steps that could be detrimental to our business and could reduce the value of the collateral. There is no assurance these alternatives will be available, if at all, on satisfactory terms or on terms that will not require us to breach the terms and conditions of our existing or future debt agreements. Any inability to generate sufficient cash flow, refinance debt or incur additional debt on favorable terms could have a material adverse effect on our financial condition and results of operations, and could compromise our ability to service our debt, including our notes.

16In addition, we use letters of credit and surety bonds to secure our performance under various construction and land development agreements, escrow agreements, financial guarantees and other arrangements. Should our future performance or economic conditions make such letters of credit and surety bonds costly or difficult to obtain or lead to our being required to collateralize such instruments to a greater extent than previously, our business, financial condition and results of operations could be adversely affected.

available, if at all, on satisfactory terms or on terms that will not require us to breach the terms and conditions of our existing or future debt agreements. Any inability to generate sufficient cash flow, refinance debt or incur additional debt on favorable terms could have a material adverse effect on our financial condition and results of operations, and could compromise our ability to service our debt, including our notes.

In addition, we use letters of credit and surety bonds to secure our performance under various construction and land development agreements, escrow agreements, financial guarantees and other arrangements. Should our future performance or economic conditions make such letters of credit and surety bonds costly or difficult to obtain or lead to us being required to collateralize such instruments to a greater extent than previously, our business, financial condition and results of operations could be adversely affected.

We have a significant number of contingent liabilities, including obligations relating to local government bond financing programs, and if any are satisfied by us, it could have a material adverse effect on our financial condition and results of operations.

At a consolidated homebuilding project in Colorado, we have a contractual obligation to purchase and receive water system connection rights which, at December 31, ~~2013~~2014, was $3027.54 million, ~~and~~ which is less than ~~the~~their estimated market value ~~of the water system connection rights~~. These water system connection rights are held, ~~and~~ then transferred to homebuyers upon ~~closing~~delivery of their home, or transferred upon the sale of land to the respective buyer., ~~These water system connection rights can also be~~ sold or leased, but generally ~~only~~ within the local jurisdiction. The risks inherent in purchasing, ~~controlling~~ controlling or holding these water system connection rights are substantial and increase as consumer demand for housing decreases. The value of these water system connection rights and their marketability can also fluctuate from changing market conditions. If the fair market value of these water system connection rights decreases, we may be required to reduce their carrying value, which could adversely affect our financial condition and results of operations.

Certain of our homebuilding projects utilize community facility district, metro-district and other local government bond financing programs to ~~fund~~ fund acquisition or construction of infrastructure improvements. Interest and principal on these bonds are typically paid from taxes and assessments levied on landowners, including land we own, and/or homeowners following the ~~sale~~delivery of new homes in ~~within~~ the ~~project~~community. Occasionally, we also enter into credit support arrangements requiring us to pay interest and principal on these bonds if ~~the~~ taxes and assessments levied on landowners and/or homeowners are insufficient to cover such obligations. Furthermore, reimbursement of these payments to us is dependent on the district or local government’s ability to generate sufficient tax and assessment revenues from the ~~sale of~~ new homes. At December 31, ~~2013~~2014 and December 31, ~~2012~~2013, in connection with credit support arrangements, there was $810.69 million and $48.96 million, respectively, reimbursable to us from certain agencies in Colorado and, accordingly, wewere recorded ~~these~~ in inventory as a recoverable project cost.

We also pay certain fees and costs associated with the construction of infrastructure improvements in homebuilding projects that utilize these district bond financing programs. These fees and costs are typically reimbursable to us from, and therefore dependent on, bond proceeds or taxes and assessments levied on landowners and/or homeowners. At December 31, ~~2013~~2014 and December 31, ~~2012~~ 2013, in connection with certain funding arrangements, there was $1314.10 million and $1613.31 million, respectively, reimbursable to us from certain agencies, including $1112.98 million and $11.9 million, respectively, from a metro-~~district~~districts in Colorado and, accordingly, wewere recorded ~~these~~ in inventory as a recoverable project cost.

IfUntil ~~the current housing recovery isn’t sustained and we experience another weak housing market which results in declines in new home sales and home values,~~ bond proceeds ~~and~~or ~~taxes~~tax and ~~assessments~~assessment ~~levied~~revenues onare ~~homeowners may be insufficient~~ sufficient to cover our obligations. ~~Our~~and/or reimburse us, our responsibility to make interest and principal payments on these bonds or pay fees and costs associated with the construction of infrastructure improvements could be prolonged and significant. In addition, ~~possibly~~if ~~without~~bond ~~reimbursement,~~proceeds ~~and/~~or ~~accrue~~tax ~~liabilities in connection with these credit support~~ and ~~funding~~assessment ~~arrangements.~~revenues ~~If we~~ are not ~~fully~~sufficient orto ~~adequately~~cover ~~reimbursed,~~our weobligations ~~may~~and/or bereimburse ~~required~~us, tothese ~~recognize~~amounts amight ~~charge~~not ~~for~~be ~~uncollectible amounts~~recoverable, which could adversely affect our financial condition and results of operations.

In18 2009, we filed a petition with the United States Tax Court regarding our tax filing position on the completed contract method of accounting (“CCM”) for homebuilding operations. Although we received a favorable ruling on February 12, 2014, which permits us to continue use of CCM for tax purposes, the ruling can be appealed (see Note 13 to our consolidated financial statements).

We have other contingent liabilities typical to the homebuilding industry. For further discussion, see Note 16 to our consolidated financial statements.

~~The~~In ~~indenture~~2009, ~~governing~~we ~~our~~filed ~~notes~~a ~~and~~petition with the United States Tax Court (the “Tax Court”) regarding our ~~new~~tax ~~revolving~~filing ~~credit~~position ~~facility~~on dothe completed contract method of accounting (“CCM”) for homebuilding operations. Although we received a favorable ruling on February 12, ~~and~~2014, ~~agreements~~which ~~governing~~permits ~~our~~us to continue use of the CCM for tax ~~future~~purposes ~~indebtedness~~(the ~~may~~“Tax Court Decision”), ~~contain~~on ~~covenants~~July 15, ~~that~~2014, ~~could~~the ~~adversely~~Tax ~~affect~~Court ~~our~~Decision ~~ability~~was toappealed ~~operate~~by ~~our~~the ~~business~~U.S. Internal Revenue Service (the “IRS”) in the U.S. Court of Appeals for the Ninth Circuit (the “Court of Appeals”). If the Tax Court Decision is overturned in whole or in part, aswe ~~well~~could asbe ~~significantly~~obligated ~~affect~~to ~~our~~pay ~~financial~~the ~~condition~~IRS, applicable state taxing authorities and/or ~~therefore~~make distributions to the Partners for their respective amounts owed, which could adversely affect our financial condition and results of operations (see Note 13 to our consolidated financial statements).

~~The~~We ~~indenture~~have ~~governing~~other ~~our~~contingent liabilities ~~notes~~typical ~~and~~to ~~our~~the ~~new~~homebuilding ~~revolving credit facility contain covenants that prohibit or restrict certain activities~~industry. ~~These covenants~~For ~~restrict~~further discussion, ~~among~~see ~~other~~Note ~~things,~~16 to our ~~ability~~consolidated ~~to:~~financial statements.

The indenture governing our notes and our revolving credit facility do, and agreements governing our future indebtedness may, contain covenants that could adversely affect our ability to operate our business, as well as significantly affect our financial condition, and therefore could adversely affect our results of operations.

The indenture governing our notes and revolving credit facility contain covenants that prohibit or restrict certain activities, such as:

•

pay dividends or distributions, repurchase equity or prepay subordinated debt;

•

incur additional debt or issue certain equity interests;

•

incur liens on assets;

•

merge or consolidate with another company or sell all or substantially all of our assets;

•

enter into transactions with affiliates;

•

make certain investments;

•

create certain restrictions on the ability of restricted subsidiaries to transfer assets;

•

guarantee certain debt; and

•

enter into sale and lease-back transactions.

These covenants, among other things, limit our ability to grant certain liens to support indebtedness, to invest in joint venture transactions and merge or sell assets in connection with our business. This in turn could adversely affect our ability to finance our operations or capital needs or engage in, expand or pursue our business activities and prevent us from engaging in certain transactions that might otherwise be considered beneficial. In particular, restrictions on our ability to enter into joint venture transactions may limit our ability to undertake new large scale master-planned development opportunities, including developments of our homes under the Trilogy brand, and may thereby adversely affect our growth and results of operations. In addition, these covenants may restrict our ability to meet capital commitments under our joint venture agreements, including obligations to ~~re-margin~~remargin joint venture loans, which may result in our ownership interests in the corresponding joint ventures being reduced or eliminated.

The agreements we enter into governing our future indebtedness may impose similar or other restrictions. The restrictions contained in the indenture governing our notes and in any agreements governing future indebtedness may limit our financial flexibility, prohibit or limit any contemplated strategic initiatives, limit our ability to grow and increase our revenues or restrict our ability to respond to competitive changes.

We conduct certain ~~of our~~ operations through unconsolidated joint ventures with independent and ~~affiliated~~ ~~third~~ affiliated parties in which we do not have a controlling interest. These investments involve risks and are highly illiquid.

We ~~currently~~conduct certain ~~operate~~operations through a number of unconsolidated homebuilding and land development joint ventures with independent and affiliated parties in which we do not have a controlling interest. At December 31, ~~2013~~2014, we had a net capital investment and loan advances of $4742.45 million in these unconsolidated joint ventures and guaranteed, on a joint and several basis, $5255.57 million of outstanding liabilities for projects under development by these unconsolidated joint ventures. In addition, we may issue letters of credit under our ~~new~~ revolving credit facility as credit support for liabilities of our unconsolidated joint ventures.

~~Our~~19 investments in the unconsolidated joint ventures involve risks and are highly illiquid, and their success depends in part on our joint venture partners’ performance, which can be impacted by their financial strength and other factors. There are a limited number of sources willing to provide acquisition, development and construction financing to land development and homebuilding joint ventures and, as market conditions become more challenging, it may be difficult or impossible to obtain financing for our unconsolidated joint ventures on commercially reasonable terms. Due to tighter credit markets, financing for newly created unconsolidated joint ventures has been difficult to obtain. In addition, since we lack a controlling interest in our unconsolidated joint ventures, we are usually unable to require these unconsolidated joint ventures to sell assets or return invested capital, make additional capital contributions, or take other action without the vote of at least one other venture partner. Therefore, absent partner agreement, we may be unable to liquidate our unconsolidated joint ventures investments to generate cash.

Our substantial debt could adversely affect our financial condition and results of operations.

We have a significant amount of debt. At December 31, 2013, the total principal amount of our debt was $751.7 million. In addition, we have a substantial number of contingent liabilities which could affect our business.

Our substantial debt and contingent liabilities could have important consequences for the holders of our notes, including:

• making it more difficult for us to satisfy our obligations with respect to our notes;

•Our ~~increasing~~investments in the unconsolidated joint ventures involve risks and are highly illiquid, and their success depends in part on our ~~vulnerability~~joint venture partners’ performance, which can be impacted by their financial strength and other factors. There are a limited number of sources willing to ~~adverse~~provide ~~economic~~acquisition, ordevelopment ~~industry~~and construction financing to land development and homebuilding joint ventures and, as market conditions; become more challenging, it may be difficult or impossible to obtain financing for our unconsolidated joint ventures on commercially reasonable terms. Due to tighter credit markets, financing for newly created unconsolidated joint ventures has been difficult to obtain. In addition, since we lack a controlling interest in our unconsolidated joint ventures, we are usually unable to require these unconsolidated joint ventures to sell assets or return invested capital, make additional capital contributions, or take other actions without the vote of at least one other venture partner. Therefore, absent partner agreement, we may be unable to liquidate our unconsolidated joint ventures investments to generate cash.

Our substantial debt could adversely affect our financial condition and results of operations.

We have substantial debt. At December 31, 2014, the total principal amount of our debt was $761.4 million. In addition, we have contingent liabilities which could affect our business.

Our debt and contingent liabilities could have important consequences for the holders of our notes, including:

•

making it more difficult for us to satisfy obligations with respect to our notes;

•

increasing vulnerability to adverse economic or industry conditions;

•

limiting our ability to obtain additional financing to fund capital expenditures and acquisitions, particularly when the availability of financing in the capital markets is limited;

• requiring a substantial portion of ~~our~~ cash flows from operations for the payment of interest on our debt and reducing our ability to use ~~our~~ cash flows to fund working capital, capital expenditures, acquisitions and general corporate requirements;

• limiting ~~our~~ flexibility in planning for, or reacting to, changes in our business and the industry inwhere ~~which~~ we operate; and

•

placing us at a competitive disadvantage to less leveraged competitors.

We may incur additional indebtedness, which indebtedness might rank equal to our notes or the guarantees thereof.

Despite our indebtedness, we and our subsidiaries may be able to incur significant additional indebtedness, including secured indebtedness, in the future, including under our ~~new~~ revolving credit facility, which is secured on a pari-passu basis with our notes but will have the benefit of of payment priority upon enforcement against the collateral. Although the indenture governing our notes contains restrictions on our and our subsidiaries’ ability to incur additional indebtedness, these restrictions are subject to ~~qualifications~~ qualifications and exceptions, and, under certain circumstances, the indebtedness incurred in compliance with such restrictions could be substantial and certain of this indebtedness may be secured by the same collateral securing our notes, and the ~~respective~~ respective guarantees thereof. If new indebtedness is added to our and our subsidiaries’ debt levels, the related risks that we and the note guarantors face would be increased, and we may not be able to meet all our debt obligations, including ~~repayment~~ repayment of our notes, in whole or in part. If we incur any additional debt that is secured on an equal and ratable basis with our notes or the guarantees thereof, the holders of that debt will be entitled to share ratably with the holders of our notes in any proceeds distributed in connection with any enforcement against the collateral or an insolvency, liquidation, reorganization, dissolution or other winding-up of the applicable note issuer or guarantor. This may have the effect of reducing the amount of proceeds paid to holders of our notes.

We could be adversely affected by negative changes in our credit ratings.

Our ability to access capital on favorable terms is a key factor in our ability to service our debt and fund our operations. Downgrades to our credit ratings and negative changes to the outlook for such credit ratings have in the past required, and, may in the future require, significant management time and effort to address. Such changes in the past have made it difficult and costly for us to access debt capital and engage in other ordinary course financing transactions relating to our new developments. Any future adverse action by any of the principal credit agencies may exacerbate these difficulties.

Credit ratings assigned to our notes may not reflect all risks of an investment in our notes.

Credit ratings assigned to our notes reflect the rating agencies’ assessments of our ability to make payments on our notes when due. Consequently, real or anticipated changes in these credit ratings, or to the outlook for such credit ratings, will generally affect the market value of our notes. These credit ratings, however, may not reflect the potential impact of risks related to structure, market or other factors related to the value of our notes.

~~Other~~20 ~~Risks~~

We have a significant number of affiliated entities with whom we have entered into many transactions. Our relationship with these entities could adversely affect us.

We are part of the Shea Family Owned Companies, which are operated in three major groups: homebuilding, heavy construction and commercial property development and management. Though our business forms the core of the homebuilding group, we have historically entered into many transactions with other Shea Family Owned Companies which are not part of the homebuilding group. These transactions range from management and administrative-related matters to joint ventures, transfers of assets and financial guarantees and other credit support arrangements. We are currently party to many such affiliate transactions, not all of which are memorialized in formal written agreements. In the future, we will continue to be party to many of the affiliate transactions currently in existence, and it is likely we will enter into new affiliate transactions.

The homebuilding group of the Shea Family Owned Companies, which is operated largely through us, has only recently been operated as an independent business without credit support from the other Shea Family Owned Companies. If we are unable to continue to operate without such credit support, it could materially adversely affect our business, financial condition and results of operations. In addition, though we do not expect to receive new credit support from other Shea Family Owned Companies, we will still depend on our affiliates to provide us with certain management and administrative services. If these affiliates become unable to provide us with such services, we could incur significant additional costs to obtain them through other means due to lost efficiencies.

~~Until~~Other ~~August~~Risks 2011, one of our affiliates, JFSCI, provided us with centralized cash management services. As part of this function, we engaged in related party transactions and monetary transfers to settle amounts owed. The resultant accounts receivables and payables from these transfers were paid monthly. In August 2011, we ceased our participation in the centralized cash management service and performed the function independently. In addition, SHI has an unsecured term note receivable from JFSCI (the “Intercompany Debt Balance”), which bears interest at 4%, is payable in equal quarterly installments and due May 15, 2019, and has an outstanding balance, including accrued interest, at December 31, 2013 of $21.6 million. Subsequent to December 31, 2013, JFSCI made an $8.4 million payment, including accrued interest. Quarterly, we evaluate collectability of the Intercompany Debt Balance, which includes consideration of JFSCI’s payment history, operating performance and future payment requirements under the note. Based on this criteria, and as JFSCI applied prepayments under the note to defer future installments until November 2016, we do not presently anticipate collection risks on the Intercompany Debt Balance. However, JFSCI’s inability to honor its obligation with respect to the Intercompany Debt Balance could have a material adverse effect on our financial condition, results of operations and capital resources.

~~Although~~We ~~the~~have ~~indenture governing our notes contains~~ a ~~covenant~~significant ~~limiting transactions with affiliates, this covenant has a~~ number of ~~significant~~ ~~exceptions and, in any case, does not prohibit transactions with~~ affiliates ~~but only requires they be on arm’s length terms. In particular,~~ with ~~respect~~whom ~~to transactions involving the transfer of real property,~~ we ~~are~~have ~~required~~entered ~~to obtain~~into ~~third~~many ~~party independent estimates of the value of such real property when the transaction involves consideration exceeding $10~~transactions.0 ~~million.~~Our ~~With~~relationship ~~respect to all other affiliate transactions, we are required to obtain an independent third party fairness opinion in connection~~ with ~~transactions~~these ~~involving~~entities ~~consideration~~could ~~exceeding~~adversely $5affect us.0 ~~million.~~

~~Finally,~~We ~~though~~are ~~the~~part ~~current~~of ~~intention with respect to~~ the Shea Family Owned Companies, iswhich toare ~~create~~operated ~~three~~in ~~independent~~four ~~businesses~~major ~~that~~groups: dohomebuilding, ~~not~~heavy ~~provide~~construction, venture ~~credit support to each other~~capital, itand iscommercial ~~possible~~property ~~the~~development ~~homebuilding~~and ~~group~~management. ~~would~~Though beour ~~adversely~~business ~~affected~~forms bythe ~~future~~core ~~financial~~of ~~and other difficulties arising with respect to either~~ the ~~heavy~~homebuilding ~~construction~~group, orwe ~~commercial~~have ~~property~~historically ~~group.~~entered ~~For~~into ~~example,~~many iftransactions ~~any~~with ofother ~~the~~ Shea Family Owned Companies ~~not~~which aare not part of the homebuilding group. ~~requires~~These ~~financial~~transactions ~~support,~~range itfrom ismanagement ~~likely the attention~~ and ~~financial resources~~administrative-related ofmatters ~~the~~to ~~Shea~~joint ~~family~~ventures, ~~members~~transfers ~~could~~of beassets ~~diverted~~and ~~from~~financial usguarantees and ~~toward~~other ~~the~~credit ~~business~~support inarrangements. ~~need~~We ofare ~~additional~~currently ~~support.~~party ~~Moreover~~to ifmany ~~any~~such ofaffiliate transactions. In the ~~Shea~~future, ~~Family~~we ~~Owned~~will ~~Companies~~continue ~~becomes subject~~ to abe ~~bankruptcy,~~party ~~liquidation~~to ormany ~~similar~~of ~~proceeding,~~the ~~such proceeding~~affiliate ~~could~~transactions ~~have~~currently ain ~~substantial~~existence, ~~effect~~and onit ~~our~~is ~~business.~~likely Itwe iswill ~~possible~~enter ~~that,~~into ~~among~~new ~~other~~affiliate ~~consequences:~~transactions.

•The ~~our~~homebuilding ~~receivable~~group ~~from~~of ~~JFSCI~~the ~~and~~Shea ~~the~~Family ~~Intercompany~~Owned ~~Debt~~Companies, ~~Balance~~which ~~could~~is ~~become~~operated ~~uncollectible~~largely through us, ~~which~~has ~~could~~been ~~have~~operated aas ~~material~~an ~~adverse~~independent ~~effect~~business without oncredit support from the other Shea Family Owned Companies since 2011. If we are unable to continue to operate without such credit support, it could materially adversely affect our business, financial condition and results of operations;. In addition, though we do not expect to receive new credit support from other Shea Family Owned Companies, we will still depend on our affiliates to provide us with certain management and administrative services. If these affiliates become unable to provide us with such services, we could incur significant additional costs to obtain them through other means due to lost efficiencies.

Until August 2011, one of our affiliates, JFSCI, provided us with centralized cash management services. As part of this function, we engaged in affiliate transactions and monetary transfers to settle amounts owed. The resultant accounts receivables and payables from these transfers were paid monthly. In August 2011, we ceased our participation in the centralized cash management service and began to perform the function independently.

Although the indenture governing our notes contains a covenant limiting transactions with affiliates, this covenant has a number of significant exceptions and, in any case, does not prohibit transactions with affiliates but only requires they be on arm’s length terms. In particular, with respect to transactions involving the transfer of real property to an affiliate, we are required to obtain three third party independent estimates of the value of such real property when the transaction involves consideration exceeding $10.0 million. With respect to all other affiliate transactions, we are required to obtain an independent third party fairness opinion in connection with transactions involving consideration exceeding $5.0 million.

Finally, though the current intention with respect to the Shea Family Owned Companies is to create four independent businesses that do not provide credit support to each other, it is possible the homebuilding group would be adversely affected by future financial and other difficulties arising with respect to the heavy construction, venture capital or commercial property group. For example, if any of the Shea Family Owned Companies not a part of the homebuilding group requires financial support, it is likely the attention and financial resources of the Shea family members could be diverted from us and toward the business in need of additional support. Moreover, if any of the Shea Family Owned Companies becomes subject to a bankruptcy, liquidation or similar proceeding, such proceeding could have a substantial effect on our business. It is possible that, among other consequences:

•

any existing affiliate transaction could be terminated, resulting in our inability to access needed services;

•

prior affiliate transactions could be examined and set aside, resulting in our liability to the bankruptcy or liquidation estate; and

• such Shea Family Owned Company could be ~~closed or~~ sold to an unrelated buyer, resulting in a loss of any synergies from which we benefit as a member of the Shea Family Owned Companies.

The families and family trusts that own our equity interests may have interests different from yours.

Entities directly or indirectly owned by the Shea family beneficially own substantially all of the equity interests in SHLP. As a result, members of the Shea family have the ability to control SHLP and, except as otherwise provided by law or our organizational documents, to approve or disapprove matters that may be submitted to a vote of SHLP’s ~~limited partners~~Partners. Each director isof J.F. Shea Construction Management, Inc., our ultimate general partner, is a member of the Shea family or an employee of other Shea Family Owned Companies. We have been advised that Shea family members do not currently plan to appoint any nonaffiliated or independent directors.

~~Our~~21 ownership group and their affiliates operate businesses using the Shea Homes brand that derive revenue from homebuilding and land development, including Shea Homes North Carolina, which are not owned by SHLP. We do not receive any brand licensing or sales revenue from these businesses, although in certain circumstances we provide them with management and administrative services. Certain of these affiliated entities have also engaged, and will continue to engage, in transactions with us. Shea Mortgage derives revenue from loan fees paid by our customers. Shea Properties develops commercial properties that are sometimes built on land purchased from us, and we develop properties on land that is sometimes purchased from Shea Properties. In the future, we may enter into other agreements with affiliates of Shea Properties. Shea family members comprising our ownership group are not restricted from engaging in homebuilding or land development activities through independent entities.

The interests of our limited partners and owners of J.F. Shea Construction Management, Inc., our ultimate general partner, could conflict with interests of our note holders. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of our equity holders might conflict with the interests of our note holders. In addition, our owners may have interests in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their investments, even though such transactions might involve risks to our note holders. Furthermore, our owners currently own and may in the future own businesses,

~~which~~Our ~~may~~ownership group and their affiliates operate ~~under~~businesses using the Shea Homes brand, that derive ~~directly~~revenue ~~compete~~from ~~with~~homebuilding ~~our~~and ~~business.~~land Indevelopment, ~~addition~~including Shea Homes North Carolina, ~~although~~which ~~the~~are ~~indenture~~not ~~governing~~owned ~~our~~by ~~notes~~SHLP. ~~contains~~We ado ~~covenant~~not ~~limiting~~receive ~~transactions~~any ~~with affiliates~~brand licensing or sales revenue from these affiliated businesses, ~~this~~although ~~covenant~~in ~~has~~certain acircumstances ~~number~~we provide ofthem ~~significant~~with ~~exceptions~~management and, inadministrative ~~any~~services. ~~case~~Certain of these affiliated entities have also engaged, ~~does~~and ~~not~~will ~~prohibit~~continue to engage, in transactions with ~~affiliates~~us. ~~but~~Shea ~~only~~Mortgage ~~requires~~derives ~~they~~revenue befrom onloan ~~arm’s~~fees ~~length~~paid ~~terms~~by our customers. NoShea Properties ~~owner~~LLC ~~has~~(“SPLLC”) ~~any~~develops ~~obligation~~commercial toproperties ~~provide~~that are sometimes built on land purchased from us, ~~with~~and ~~any~~we ~~additional~~develop properties on land that is sometimes purchased from SPLLC. In the future, we may enter into other agreements with ~~debt~~affiliates of SPLLC. Shea family members comprising our ownership group are not restricted from engaging in homebuilding or ~~equity~~land ~~financing~~development activities through independent entities.

The interests of our limited partners and owners of J.F. Shea Construction Management, Inc. could conflict with interests of our note holders. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of our equity holders might conflict with the interests of our note holders. In addition, our owners may have interests in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their investments, even though such transactions might involve risks to our note holders. Furthermore, our owners currently own, and may in the future own, businesses which may operate under the Shea Homes brand and directly compete with our business. In addition, although the indenture governing our notes contains a covenant limiting transactions with affiliates, this covenant has a number of significant exceptions and, in any case, does not prohibit transactions with affiliates but only requires they be on arm’s length terms. No owner has any obligation to provide us with any additional debt or equity financing.

The IRS can challenge our income and expense recognition methodologies. If we are unsuccessful in supporting or defending our positions, we could become subject to a substantial tax liability from previous years.

In the normal course of business, we are audited by ~~various~~ federal, state and local authorities regarding income tax matters. Significant judgment is required to determine our provision for income taxes and our liabilities for federal, state, local and other taxes. Any changes as a result of IRS and state audits could have a material adverse effect on our income tax provision or benefit, or other tax reserves, in the reporting period in which such determination is made and, consequently, on our results of operations, financial position and/or cash flows for such period.

Since 2002, SHLP and SHI ~~have~~ used the CCM to determine when to recognize taxable income or loss with respect to the majority of their respective homebuilding operations. ~~The~~Federal ~~CCM~~law allows homebuilders like SHLP and SHI to defer taxable income/loss recognition from their homebuilding operations until ~~projects~~the tax year in which the contracts are substantially complete, rather than annually based on the ~~sale~~percentage of ~~individual~~ ~~homes~~completion tomethod. ~~buyers~~The ofIRS ~~those~~objected ~~homes.~~to ~~The~~SHLP’s ~~Internal~~and ~~Revenue~~SHI’s ~~Service~~use (of the ~~“IRS”)~~CCM ~~has~~and assessed a tax deficiency against ~~SHLP and SHI~~them, contending they did not accurately and appropriately apply the relevant U.S. Treasury Regulations in calculating their respective homebuilding projects’ income/loss pursuant to the CCM for years 2004 through 2008, and years 2003 through 2008, respectively. SHLP and SHI believe their use of the CCM complies with the relevant regulations and ~~have~~ filed a petition in 2009 with the ~~United States~~ Tax Court to ~~challenge~~contest the ~~IRS~~notice ~~position.~~of ~~The~~deficiency ~~Tax Court heard trial testimony in July 2012~~ and ~~ordered~~to ~~the~~challenge ~~Company and~~ the IRS ~~to exchange briefs, which were filed~~position. On February 12, 2014, the Tax Court ruled in our favor, ofissuing ~~SHLP and SHI (~~the “Tax Court Decision~~”).~~ on April 21, 2014. Pursuant to the ruling, ~~the~~we ~~Company~~are is permitted to continue to report income and loss from the ~~sale~~delivery of homes ~~in their planned developments~~ using the ~~completed contract method of accounting for homebuilding operations~~CCM. As a result, no additional tax, interest or penalties are currently due and owing by the ~~Company~~Partners or ~~the Partners~~us. The IRS has appealed the Tax Court Decision isto ~~subject~~the toCourt ~~appeal~~of byAppeals. We and the IRS tohave each filed briefs and the ~~U.S.~~IRS ~~Court~~is ofentitled ~~Appeals~~to ~~for~~file ~~the Ninth~~a ~~Circuit~~reply brief, which is due to be filed no later than March 2015. The ~~IRS~~Court ~~must~~of ~~elect~~Appeals ~~whether~~will toschedule ~~appeal~~oral ~~within~~argument 90after ~~days~~briefing is ~~after~~completed; ~~the~~we ~~Tax~~cannot ~~Court~~predict ~~enters~~when ait ~~decision~~will ~~document,~~schedule ~~which~~the ~~has~~argument ~~not~~or ~~yet~~issue ~~occurred~~its decision.

If the Tax Court Decision is ~~appealed~~overturned ~~and~~in whole ~~overturned~~or in part, SHLP and SHI would be required to recognize income for prior years that would otherwise be deferred until future years. With respect to SHI, this earlier recognition of income could result in a tax liability of up to $6574 million (federal and state income taxes inclusive of interest). With respect to SHLP, the earlier recognition of income could result in the ~~owners~~Partners ~~of SHLP~~ incurring an additional tax liability of up to $~~108~~134 million (federal and state income taxes inclusive of interest) for the years at issue, and SHLP would be required to make a distribution to ~~its~~the ~~owners~~Partners to pay a portion of such tax liability. The indenture governing the notes restricts SHLP’s ability to make distributions to ~~its~~the ~~partners~~ Partners pursuant to an agreement which requires SHLP to distribute cash payments to ~~its~~the ~~partners~~Partners for taxes incurred by such ~~partners~~Partners (or their direct or indirect holders) for their ownership interest in SHLP (the “Tax Distribution Agreement”) in excess of an amount specified by the indenture (such maximum amount of collective distributions referred to as the “Maximum CCM Payment”), unless SHLP receives a cash equity contribution from JFSCI for such excess or unless we use some of our capacity under the indenture governing the notes to make restricted payments. The initial Maximum CCM Payment is $70.0 million, which amount will be reduced by payments made by SHI in connection with any resolution of our dispute with the IRS regarding our use of the CCM and payments made by SHLP on certain guarantee obligations ~~described~~permitted in the indenture. Such potential additional taxes imposed on SHI and tax distributions by SHLP may have a material adverse effect on the financial condition and results of operations of SHI and SHLP, respectively, which could compromise our ability to service our debt, including our notes.

~~Under~~22 our Tax Distribution Agreement, we are required to make distributions to our equity holders from time to time based on their ownership in SHLP, which is a limited partnership and, under certain circumstances, those distributions may occur even if SHLP does not have taxable income.

Under our Tax Distribution Agreement, SHLP will be required to make cash distributions to the partners of SHLP (or their direct or indirect holders) for taxable income allocated to them in connection with their ownership interests in SHLP. In addition, SHLP will be required under the Tax Distribution Agreement to provide tax distributions to the partners of SHLP (or their direct or indirect holders) for any additional taxable income allocated to them as a result of any audit, tax proceeding or tax contest arising from or in connection with any tax position taken by SHLP (or any entity treated as a “pass-through” entity under U.S. federal income tax principles in which SHLP has an ownership interest). If any audit, proceeding or contest in connection with years prior to 2011 (including those related to the CCM) ultimately results in an increase in taxable income allocated to our partners, or any disallowance of losses or deductions previously allocated to our partners, then we would be required to make additional tax distributions to them, even if the audit, proceeding or contest resulted in a reduction of a tax loss previously allocated for such period and no taxable income had been previously allocated to them for such period or would be so allocated after such reduction. Any distribution under the Tax Distribution Agreement could have a material adverse effect on our business, financial condition and results of operations, which could compromise our ability to service our debt, including our notes.

Under our Tax Distribution Agreement, we are required to make distributions to our equity holders from time to time based on their ownership in SHLP, which is a limited partnership and, under certain circumstances, those distributions may occur even if SHLP does not have taxable income.

Under our Tax Distribution Agreement, SHLP is required to make cash distributions to the Partners (or their direct or indirect holders) for taxable income allocated to them in connection with their ownership interests in SHLP. In addition, SHLP will be required under the Tax Distribution Agreement to provide tax distributions to the Partners (or their direct or indirect holders) for any additional taxable income allocated to them as a result of any audit, tax proceeding or tax contest arising from or in connection with any tax position taken by SHLP (or any entity treated as a “pass-through” entity under U.S. federal income tax principles in which SHLP has an ownership interest). If any audit, proceeding or contest in connection with years prior to 2011 (including those related to the CCM) ultimately results in an increase in taxable income allocated to the Partners, or any disallowance of losses or deductions previously allocated to the Partners, then we would be required to make additional tax distributions to them, even if the audit, proceeding or contest resulted in a reduction of a tax loss previously allocated for such period and no taxable income had been previously allocated to them for such period or would be so allocated after such reduction. Any distribution under the Tax Distribution Agreement could have a material adverse effect on our business, financial condition and results of operations, which could compromise our ability to service our debt, including our notes.

Decreases in the market value of our investments in marketable securities could have an adverse impact on our results of operations.

We have investments in marketable securities, money market funds and other short-term investments, of which the market value ~~of which~~ is subject to changes ~~from period to period~~. Furthermore, during periods of financial stress, ~~the~~values ~~value~~ of money market and short-term securities funds have come under pressure. Decreases in the market value in these investments could ~~have~~adversely anaffect ~~adverse impact on~~ our ~~statements of~~ financial ~~position,~~condition ~~results~~and results of operations ~~and cash flow~~.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We lease ~~145~~144,~~668~~118 square feet of office space in various locations from ~~related~~affiliates and unrelated parties. All rents were at market rates at the time of lease execution. WeAt December 31, 2014, we have satellite offices in ~~Aliso Viejo, California;~~ Corona, California; Livermore, California; San Diego, California; Scottsdale, Arizona; Highlands Ranch, Colorado; and Houston, Texas. Subsequent to December 31, 2014, we entered into a new lease agreement and will move our operations from Corona, California to Irvine, California. The total square footage leased from ~~related~~ ~~parties~~affiliates is 7982,~~735~~188 and comprises offices in Livermore, San Diego and Highlands Ranch. Our corporate office is in Walnut, California, approximately 35 miles east of Los Angeles, California. JFSCI leases this office from aan ~~related~~affiliate ~~party~~ and SHLP bears 61.0% of its total cost. For information about land owned or controlled by us for use in our homebuilding activities, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Selected Homebuilding Operational Data—Land and Homes in Inventory.”

ITEM 3. LEGAL PROCEEDINGS

Lawsuits, claims and proceedings have been and will likely 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 and environmental protection. As a result, we are subject to periodic examinations or inquiry by agencies that administer these laws and regulations.

WeIn ~~record~~2009, awe ~~reserve~~filed ~~for~~a ~~potential~~petition ~~legal~~with ~~claims~~the ~~and~~Tax ~~regulatory~~Court ~~matters~~regarding ~~when~~our ~~they~~tax ~~are~~filing ~~probable~~position ofon ~~occurring~~the ~~and a~~CCM ~~potential~~for ~~loss~~homebuilding ~~is reasonably estimable~~operations. WeAlthough ~~accrue~~the ~~for~~Tax Court ~~these~~Decision ~~matters~~permits ~~based~~us onto ~~facts~~continue ~~and~~use ~~circumstances~~of ~~specific~~the toCCM ~~each~~for ~~matter~~tax ~~and~~purposes, ~~revise~~on ~~these~~July 15, ~~estimates~~2014, ~~when~~the ~~necessary.~~Tax InCourt ~~such~~Decision ~~cases,~~was ~~there~~appealed ~~may~~by ~~exist~~the anIRS ~~exposure~~ to ~~loss~~the inCourt ~~excess~~ of ~~amounts accrued~~Appeals. InIf ~~view of~~ the ~~inherent~~Tax ~~difficulty~~Court ofDecision ~~predicting~~is ~~the~~overturned ~~outcome~~in ofwhole ~~legal~~or ~~claims~~in ~~and related contingencies~~part, we ~~generally~~could ~~cannot predict their ultimate resolution, related timing or eventual loss. While their outcome cannot~~ be ~~predicted with~~obligated ~~certainty,~~to wepay ~~believe~~the weIRS, ~~have~~applicable ~~appropriately~~state ~~reserved~~taxing ~~for~~authorities ~~these claims~~ and/or ~~matters.~~make ~~Other~~distributions ~~than~~to the ~~CCM~~Partners ~~matter~~for ~~described~~their ~~below~~respective inamounts ~~“Item~~owed, 7:which ~~Management’s~~could ~~Discussion~~adversely ~~and~~affect ~~Analysis~~our offinancial ~~Financial~~condition ~~Condition~~ and ~~Results~~results of ~~Operations-Liquidity~~operations ~~and Capital~~(see ~~Resources” and in~~ Note 13 to our consolidated financial statements~~, we do not believe we are subject to any material legal claims and regulatory matters at this time~~). However, to the extent the liabilities arising from the ultimate resolution of legal claims or regulatory matters exceeds their recorded reserves, we could incur additional charges that could be significant.

On or around October 10, 2014, SHI was named as a defendant in an action entitled Aamodt v. Shea Homes, Inc., Case No. 14-cv-01566, filed in the U.S. District Court for the Western District of Washington. The plaintiffs in the matter purported to bring a claim seeking an undisclosed monetary recovery for alleged construction defects under Washington’s Consumer Protection Act originally involving approximately 589 homes, but subsequently amended their complaint to include approximately 964 homes and we have reached a tentative settlement of the case. While most of the settlement amount should be covered by insurance, one of our insurance carriers has denied coverage for the settlement and related matters. We are disputing this insurance carrier’s position (see Note 16 to our consolidated financial statements).

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

2224

PART II

We are a privately held company, with no public or private trading market for our common equity. Ownership interests in SHLP are held in three classes: Class B, Class C and Class D. At December 31, ~~2013~~2014, there is one holder of our Class B limited partnership interests, eight holders of our Class C limited partnership interests and six holders of our Class D limited partnership interests. See “Item 12: Security Ownership of Certain Beneficial Owners and Management” for information regarding the beneficial ownership of SHLP.

No dividends were paid to our equity holders in ~~2013~~2014 or ~~2012~~2013. Our ~~new~~ $125.0 million secured revolving credit facility (the “Revolver”) and the indenture governing our 8.625% ~~Senior~~senior ~~Secured~~secured ~~Notes~~notes (the “Secured Notes”) contain covenants that limit, among other things, our ability to pay dividends and distributions on our equity. See “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Notes Payable” for information about limitations on our ability to pay dividends.

ITEM 6. SELECTED FINANCIAL DATA

The following should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Form 10-K.

	Years Ended December 31,
	2013		2012		2011			2010			2009
	2014		2013		2012			2011			2010
	(In thousands)
Consolidated Statements of Operations:
Revenues	$	~~930~~1,~~610~~140,606	$	~~680~~930,~~147~~610	$	~~587~~680,~~770~~147		$	~~639~~587,~~566~~770		$	~~611~~639,~~463~~566
Net income (loss)	$	~~125~~133,~~939~~399	$	29125,~~184~~939	$	~~(107~~29,~~242~~184	)	$	(55107,~~215~~242	)	$	(~~423~~55,~~060~~215	)
Consolidated Balance Sheet Information (at end of year):
Cash and cash equivalents, restricted cash, and investments	$	216,833	$	304,865	$	314,512		$	190,391		$	287,989
Cash and cash equivalents, restricted cash and investments	$	247,143	$	216,833	$	304,865		$	314,512		$	190,391
Inventory	$	1,~~013~~173,~~272~~585	$	~~837~~1,~~653~~013,272	$	~~783~~837,~~810~~653		$	~~800~~783,~~029~~810		$	~~903~~800,~~504~~029
Total assets	$	1,~~505~~666,~~333~~710	$	1,~~373~~505,~~537~~333	$	1,~~328~~373,~~116~~537		$	1,~~414~~328,~~886~~116		$	1,~~618~~414,~~760~~886
Total debt	$	~~751~~761,~~708~~404	$	~~758~~751,~~209~~708	$	~~752~~758,~~056~~209		$	~~730~~752,~~005~~056		$	~~745~~730,~~017~~005
Total equity	$	~~445~~554,~~457~~858	$	~~319~~445,~~247~~457	$	~~328~~319,~~003~~247		$	~~432~~328,~~113~~003		$	~~481~~432,~~206~~113

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the section “Selected Financial Data” and our consolidated financial statements and ~~the~~ related notes included elsewhere in this Form 10-K.

RESULTS OF OPERATIONS

The tabular homebuilding operating data presented throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes data for SHLP and its wholly owned subsidiaries and consolidated joint ventures. Data for our unconsolidated joint ventures is presented separately where indicated. Our ownership interest in unconsolidated joint ventures varies, but is generally less than or equal to 50%.

Overview

In ~~2013~~2014, we experienced a continuation of improved housing conditions that emerged in 2012. Generally, demand for new homes remained healthy~~, however,~~ during the ~~second~~year ~~half~~in ofour ~~2013~~Southern California, ~~the~~San ~~housing~~Diego, ~~market~~Northern ~~experienced~~California aand ~~modest~~Mountain ~~slowdown~~West ~~from~~segments, ~~higher~~while ~~mortgage~~we ~~interest~~saw ~~rates.~~demand ~~We continue~~improve toin ~~believe,~~our ~~however,~~South West segment during the ~~fundamentals~~fourth ~~remain~~quarter, inspecifically, ~~place~~from ~~for~~our aPhoenix ~~continued~~communities, ~~recovery~~which inwere sluggish for the ~~new~~first ~~home~~three ~~market~~quarters of 2014.

For the year ended December 31, ~~2013~~2014, compared to the year ended December 31, ~~2012~~2013, net new home sales orders ~~decreased~~increased 1012%, ~~and~~which ~~new~~was ~~home~~primarily ~~sales~~attributable ~~orders~~to ~~per~~a ~~community increased 1~~2%. ~~The~~higher ~~decrease in new home~~ sales ~~orders~~rate ~~for~~per ~~the~~community ~~year~~and isan ~~primarily~~increase ain ~~result of~~ the ~~lower~~ average number of active selling communities from 58 in 2013 to 64 in 2014. For the year ended December 31, ~~2013~~ 2014, compared to the year ended December 31, ~~2012~~2013, ~~homes closed increased 20% and~~ homebuilding revenues increased 3723%, which was primarily attributable to a 985% ~~higher backlog~~increase atin ~~the~~homes ~~beginning~~delivered ofand ~~2013~~a ~~versus~~19% ~~2012.~~increase ~~Gross~~in ~~margin,~~the asaverage aselling ~~percentage~~price (“ASP”) of ~~revenues,~~homes ~~improved~~delivered. The ~~from~~higher ~~20.8%~~year toover ~~23.8%~~year ~~and~~deliveries wewere ~~ended~~primarily ~~2013~~attributable ~~with~~to a ~~backlog of 849 homes, down 7~~12% ~~from~~increase ~~December 31,~~in ~~2012.We~~new ~~have~~home ~~$216~~sales.8 ~~million~~Gross ~~in cash~~margin, ~~cash~~as ~~equivalents and~~a ~~restricted~~percentage ~~cash~~of ~~and~~revenues, ~~expect~~decreased tofrom ~~continue~~23.8% ~~investing~~ in ~~land~~2013 ~~opportunities in desirable locations~~ to ~~supplement~~22.4% ~~our~~in ~~existing~~2014, ~~land positions.~~ primarily

2325

	Years Ended December 31,
	2013			2012			2011			%Change2012-2013			%Change2011-2012
	(Dollars in thousands)
Revenues	$	930,610		$	680,147		$	587,770			37	%		16	%
Cost of sales		(709,412	)		(538,434	)		(515,578	)		32			4
Gross margin		221,198			141,713			72,192			56			96
Selling expenses		(54,338	)		(45,788	)		(45,251	)		19			1
General and administrative expenses		(50,080	)		(43,747	)		(37,374	)		14			17
Equity in income (loss) from unconsolidated joint ventures		(1,104	)		378			(5,134	)		—			—
Loss on debt extinguishment		0			0			(88,384	)		—			(100	)
Gain (loss) on reinsurance transaction		2,011			(12,013	)		3,072			—			—
Interest expense		(5,071	)		(19,862	)		(16,806	)		(74	)		18
Other income (expense), net		(778	)		9,119			7,374			—			24
Income (loss) before income taxes		111,838			29,800			(110,311	)		275			—
Income tax benefit (expense)		14,101			(616	)		3,069			—			—
Net income (loss)		125,939			29,184			(107,242	)		332			—
Less: Net loss (income) attributable to non-controlling interests		8			(146	)		(7,143	)		—			(98	)
Net income (loss) attributable to SHLP	$	125,947		$	29,038		$	(114,385	)		334	%		—	%

attributable to $9.0 million in impairment charges and a $16.9 million legal charge related to a legal matter in Washington (see “Business – Legal Proceedings”, “Gross Margin” and Note 16 to our consolidated financial statements). We ended 2014 with a backlog of 918 homes with a sales value of $551.7 million, up 8% and 18%, respectively, from December 31, 2013.We had $237.3 million in cash, cash equivalents and restricted cash at December 31, 2014 and expect to continue investing in new land opportunities in desirable locations to supplement our existing land positions.

In 2013, net income attributable to SHLP was $125.9 million compared to $29.0 million in 2012. This increase was primarily attributable to a $79.5 million improvement in gross margins (from higher revenues and gross margin percentages), a $14.8 million decrease in interest expense (due to higher qualified inventory), a $14.0 million improvement in our reinsurance transaction results, and a $15.6 million reversal of the deferred tax valuation allowance. These improvements were partially offset by a $9.9 million decrease in other income (expense) (from decreased income on the sale of marketable securities), a $8.6 million increase in selling expenses (from higher home closings and revenues) and a $6.3 million increase in general and administrative expenses (from higher volume and compensation expenses).


	Years Ended December 31,
	2014			2013			2012			% Change 2013-2014			% Change 2012-2013
	(Dollars in thousands)
Revenues	$	1,140,606		$	930,610		$	680,147			23	%		37	%
Cost of sales		(885,018	)		(709,412	)		(538,434	)		25			32

Gross margin		255,588			221,198			141,713			16			56
Selling expenses		(63,429	)		(54,338	)		(45,788	)		17			19
General and administrative expenses		(54,921	)		(50,080	)		(43,747	)		10			14
Equity in income (loss) from unconsolidated joint ventures		9,142			(1,104	)		378			—			—
Gain (loss) on reinsurance transaction		7,177			2,011			(12,013	)		257			—
Interest expense		(595	)		(5,071	)		(19,862	)		(88	)		(74	)
Other income (expense), net		(1,350	)		(778	)		9,119			74			—

Income before income taxes		151,612			111,838			29,800			36			275
Income tax benefit (expense)		(18,213	)		14,101			(616	)		—			—

Net income		133,399			125,939			29,184			6			332
Less: Net loss (income) attributable to non-controlling interests		37			8			(146	)		363			—

Net income attributable to SHLP	$	133,436		$	125,947		$	29,038			6	%		334	%

In ~~2012~~2014, net income ~~(loss)~~ attributable to SHLP was $29133.04 million compared to $~~(114~~125.4)9 million in ~~2011~~2013. This increase was primarily attributable to a ~~16%~~$34.4 ~~increase~~million improvement in ~~revenues,~~our ~~higher~~ gross ~~margins~~margin (~~reflecting~~from nohigher ~~inventory~~revenues, ~~impairment~~partially inoffset ~~2012~~by ~~compared to~~ a ~~$30.6~~lower ~~million~~gross ~~inventory~~margin ~~impairment in 2011~~percentage), ~~and~~a ~~the~~ $~~88.~~4.5 million ~~loss~~decrease ~~on debt extinguishment~~ in ~~connection~~interest ~~with~~expense ~~the~~(due ~~payoff of~~to ~~previously~~higher ~~outstanding~~capitalized ~~indebtedness~~interest infrom ~~May~~higher qualified ~~2011. In 2012~~inventory), wea ~~also recognized an~~ $85.82 million ~~gain~~improvement onin ~~sale~~our ofreinsurance ~~investments~~transaction results, and a $710.02 million ~~decrease~~increase in equity income ~~attributable~~from tounconsolidated ~~non-controlling~~joint ~~interests,~~ventures. These improvements were partially offset by a $1232.03 million ~~charge~~increase ~~primarily~~in income ~~for~~tax ~~actuarial~~expense ~~adjustments~~(due to ~~our~~a ~~loss~~$15.6 ~~reserves~~million ontax ~~completed~~benefit ~~operations~~in ~~policies~~2013 ~~that~~related ~~were~~to ~~reinsured~~the inreversal ~~2009,~~of ~~compared~~our todeferred atax ~~$3.1~~asset ~~million~~valuation ~~gain in 2011~~allowance), a $39.1 million increase in ~~interest~~selling ~~expense,~~expenses (from higher home deliveries and revenues) and a $64.98 million increase in ~~selling,~~ general and administrative expenses, ~~and~~(from ahigher ~~$3.7~~compensation ~~million~~and ~~increase~~other involume ~~income~~related ~~tax expense~~expenses).

In 2013, net income attributable to SHLP was $125.9 million compared to $29.0 million in 2012. This increase was primarily attributable to a $79.5 million improvement in gross margins (from higher revenues), a $14.8 million decrease in interest expense (due to higher capitalized interest from higher qualified inventory), a $14.0 million improvement in our reinsurance transaction results, and a $15.6 million reversal of the deferred tax valuation allowance. These improvements were partially offset by a $9.9 million decrease in other income (expense) (from decreased income on the sale of marketable securities), a $8.6 million increase in selling expenses (from higher home deliveries and revenues) and a $6.3 million increase in general and administrative expenses (from higher volume related and compensation expenses).

Revenues

Revenues are derived primarily from home ~~closings~~ and land ~~sales~~deliveries. House and land revenues are recorded at ~~closing~~delivery. Management fees from homebuilding joint ventures and managed projects are in other homebuilding revenues. Revenues from corporate, insurance brokerage services and our captive insurance company, Partners Insurance Company (“PIC”), are in other revenues.

	Years Ended December 31,
	2013		2012		2011		%Change2012-2013			%Change2011-2012
	(Dollars in thousands)
Revenues:
House revenues	$	894,305	$	645,000	$	570,267		39	%		13	%
Land revenues		31,462		32,583		11,261		(3	)		189
Other homebuilding revenues		3,930		1,579		4,857		149			(67	)
Total homebuilding revenues		929,697		679,162		586,385		37			16
Other revenues		913		985		1,385		(7	)		(29	)
Total revenues	$	930,610	$	680,147	$	587,770		37	%		16	%

In 2013, total revenues were $930.6 million compared to $680.1 million in 2012. This increase was primarily attributable to a 20% increase in homes closed and a 15% increase in the average selling price (“ASP”) of homes closed.

In 2012, total revenues were $680.1 million compared to $587.8 million in 2011. This increase was primarily attributable to a 17% increase in homes closed and an increase in land revenues, partially offset by a 3% decrease in ASP of homes closed.


	Years Ended December 31,
	2014		2013		2012		% Change 2013-2014			% Change 2012-2013
	(Dollars in thousands)
Revenues:
House revenues	$	1,120,019	$	894,305	$	645,000		25	%		39	%
Land revenues		14,028		31,462		32,583		(55	)		(3	)
Other homebuilding revenues		5,978		3,930		1,579		52			149

Total homebuilding revenues		1,140,025		929,697		679,162		23			37
Other revenues		581		913		985		(36	)		(7	)

Total revenues	$	1,140,606	$	930,610	$	680,147		23	%		37	%

~~For~~In ~~the~~2014, ~~years~~total ~~ended~~revenues ~~December 31~~were $1,140.6 million compared to $930.6 million in 2013,. ~~2012~~This 23% increase was primarily attributable to a 5% increase in homes delivered and ~~2011,~~a ~~homebuilding~~19% ~~revenues~~increase byin ~~segment~~the ~~were~~ASP asof ~~follows:~~homes delivered.

	Years Ended December 31,
	2013		2012			2011		%Change2012-2013			%Change2011-2012
	(Dollars in thousands)
Southern California:
House revenues	$	205,249	$	130,351		$	167,245		57	%		(22	)%
Land revenues		2,175		3,617			151		(40	)		2,295
Other homebuilding revenues		226		22			21		927			5
Total homebuilding revenues	$	207,650	$	133,990		$	167,417		55	%		(20	)%
San Diego:
House revenues	$	125,484	$	85,534		$	86,778		47	%		(1	)%
Land revenues		—		13			66		(100	)		(80	)
Other homebuilding revenues		10		424			12		(98	)		3,433
Total homebuilding revenues	$	125,494	$	85,971		$	86,856		46	%		(1	)%
Northern California:
House revenues	$	232,697	$	157,302		$	107,786		48	%		46	%
Land revenues		8,300		7,923			210		5			3,673
Other homebuilding revenues		1,359		881			792		54			11
Total homebuilding revenues	$	242,356	$	166,106		$	108,788		46	%		53	%
Mountain West:
House revenues	$	165,226	$	126,764		$	90,159		30	%		41	%
Land revenues		20,862		21,030			10,564		(1	)		99
Other homebuilding revenues		811		(10	)		2,147		—			—
Total homebuilding revenues	$	186,899	$	147,784		$	102,870		26	%		44	%
South West:
House revenues	$	159,095	$	137,899		$	112,254		15	%		23	%
Land revenues		125		—			270		100			(100	)
Other homebuilding revenues		1,524		262			1,885		482			(86	)
Total homebuilding revenues	$	160,744	$	138,161		$	114,409		16	%		21	%
East:
House revenues	$	6,554	$	7,150		$	6,045		(8	)%		18	%
Land revenues		0		0			0		—			—
Other homebuilding revenues		0		0			0		—			—
Total homebuilding revenues	$	6,554	$	7,150		$	6,045		(8	)%		18	%

In 2013, total revenues were $930.6 million compared to $680.1 million in 2012. This 37% increase was primarily attributable to a 20% increase in homes delivered and a 15% increase in the ASP of homes delivered.

InFor ~~2013, total homebuilding revenues were $929.7 million compared to $679.2 million in 2012. This increase was primarily attributable to a 20% increase in homes closed and a 15% increase in~~ the ~~ASP~~years ofended ~~homes~~December 31, ~~closed.~~2014, ~~The increase in home closings was primarily attributable to a 98% higher backlog at the beginning of~~ 2013 ~~versus~~and 2012 ~~due to the beginning of the housing recovery~~, ~~which~~homebuilding ~~began~~revenues toby ~~emerge~~segment inwere ~~the~~as ~~second~~follows: ~~half of 2012.~~

In 2012, total homebuilding revenues were $679.2 million compared to $586.4 million in 2011. This increase was primarily attributable to a 17% increase in homes closed, partially offset by a 3% decrease in the ASP of homes closed.


	Years Ended December 31,
	2014		2013		2012			% Change 2013-2014			% Change 2012-2013
	(Dollars in thousands)
Southern California:
House revenues	$	390,630	$	205,249	$	130,351			90	%		57	%
Land revenues		2,330		2,175		3,617			7			(40	)
Other homebuilding revenues		520		226		22			130			927

Total homebuilding revenues	$	393,480	$	207,650	$	133,990			89	%		55	%

San Diego:
House revenues	$	143,160	$	125,484	$	85,534			14	%		47	%
Land revenues		68		0		13			100			(100	)
Other homebuilding revenues		6		10		424			(40	)		(98	)

Total homebuilding revenues	$	143,234	$	125,494	$	85,971			14	%		46	%

Northern California:
House revenues	$	257,249	$	232,697	$	157,302			11	%		48	%
Land revenues		0		8,300		7,923			(100	)		5
Other homebuilding revenues		2,115		1,359		881			56			54

Total homebuilding revenues	$	259,364	$	242,356	$	166,106			7	%		46	%

Mountain West:
House revenues	$	163,183	$	165,226	$	126,764			(1	)%		30	%
Land revenues		11,630		20,862		21,030			(44	)		(1	)
Other homebuilding revenues		852		811		(10	)		5			—

Total homebuilding revenues	$	175,665	$	186,899	$	147,784			(6	)%		26	%

South West:
House revenues	$	165,797	$	159,095	$	137,899			4	%		15	%
Land revenues		0		125		0			(100	)		100
Other homebuilding revenues		2,485		1,524		262			63			482

Total homebuilding revenues	$	168,282	$	160,744	$	138,161			5	%		16	%

East:
House revenues	$	0	$	6,554	$	7,150			(100	)%		(8	)%
Land revenues		0		0		0			—			—
Other homebuilding revenues		0		0		0			—			—

Total homebuilding revenues	$	0	$	6,554	$	7,150			(100	)%		(8	)%

2527

~~For~~In ~~the~~2014, ~~years~~total ~~ended~~homebuilding ~~December 31~~revenues were $1,140.0 million compared to $929.7 million in 2013,. This ~~2012~~23% ~~and~~increase ~~2011,~~was primarily attributable to a 5% increase in homes ~~closed~~delivered and a 19% increase in the ASP of homes delivered. The increase in home deliveries was primarily attributable to the 77% increase in deliveries from our Southern ~~closed~~California bysegment. The higher deliveries from our Southern California segment were asdriven ~~follows:~~by a 67% increase in new home sales orders and a 30% higher beginning backlog in 2014 versus 2013. The increase in the ASP was attributable to all three of our California segments, including a higher percentage of deliveries from our Southern California segment in 2014 versus 2013, which had an ASP of $812,121 in 2014 and is 44% higher than our Company average of $564,241.

	Years Ended December 31,
	2013		2012		2011		%Change2012-2013			%Change2011-2012
Homes closed:
Southern California		271		249		313		9	%		(20	)%
San Diego		256		194		172		32			13
Northern California		456		323		215		41			50
Mountain West		372		284		215		31			32
South West		510		492		406		4			21
East		25		31		27		(19	)		15
Total consolidated		1,890		1,573		1,348		20			17
Unconsolidated joint ventures		202		149		107		36			39
Total homes closed		2,092		1,722		1,455		21	%		18	%
	Years Ended December 31,
	2013		2012		2011		%Change2012-2013			%Change2011-2012
ASP of homes closed:
Southern California	$	757,376	$	523,498	$	534,329		45	%		(2	)%
San Diego		490,172		440,897		504,523		11			(13	)
Northern California		510,300		487,003		501,330		5			(3	)
Mountain West		444,156		446,352		419,343		0			6
South West		311,951		280,283		276,487		11			1
East		262,160		230,645		223,889		14			3
Total consolidated		473,177		410,045		423,046		15			(3	)
Unconsolidated joint ventures		334,921		304,980		306,626		10			(1	)
Total ASP of homes closed	$	459,827	$	400,954	$	414,485		15	%		(3	)%

In 2013, total homebuilding revenues were $929.7 million compared to $679.2 million in 2012. This 37% increase was primarily attributable to a 20% increase in homes delivered and a 15% increase in the ASP of homes delivered. The increase in home deliveries was primarily attributable to a 98% increase in backlog at the beginning of 2013 versus 2012.

InFor ~~all~~the ofyears ~~our~~ended ~~segments~~December 31, ~~new house sales orders were lower in 2013 compared to 2012 primarily attributable to a lower number of active selling communities. Home closings in all of our segments~~2014, ~~except East, were higher in~~ 2013 ~~compared~~and to 2012~~. ASP in all of our segments~~, ~~except~~homes ~~Mountain~~delivered ~~West,~~and ~~was higher in 2013 compared to 2012. The increase in closings was primarily attributable to a 98% higher backlog at~~ the ~~beginning of 2013 compared to 2012. The increase in~~ ASP of homes ~~closed~~delivered ~~was~~by ~~primarily~~segment ~~attributable~~were toas ~~general~~follows: ~~price increases in all of our segments resulting from the improvements in demand for new homes which emerged in the second half of 2012.~~

In all of our segments, except Southern California, new house sales orders and home closings were higher in 2012 compared to 2011 due to improved housing market conditions. In the Southern California segment, homes closed and the ASP of homes closed decreased 20% and 2%, respectively. The decrease in homes closed was primarily attributable to closeouts of several communities and a lower year-over-year community count, and the decrease in ASP of homes closed was primarily attributable to a shift towards lower-priced homes, partially offset by general price increases. In the San Diego and Northern California segments, homes closed increased and the ASP of homes closed decreased. The decreases in the ASP of homes closed were primarily attributable to the shift towards lower-priced homes, partially offset by general price increases, especially in Northern California. In the Mountain West, South West and East segments, the increases in the ASP of homes closed were primarily attributable to general price increases.


	Years Ended December 31,
	2014		2013		2012		% Change 2013-2014			% Change 2012-2013
Homes delivered:
Southern California		481		271		249		77	%		9	%
San Diego		252		256		194		(2	)		32
Northern California		385		456		323		(16	)		41
Mountain West		356		372		284		(4	)		31
South West		511		510		492		0			4
East		0		25		31		(100	)		(19	)

Total consolidated		1,985		1,890		1,573		5	%		20	%

Southern California		107		47		48		128	%		(2	)%
Northern California		60		31		18		94			72
Mountain West		73		55		43		33			28
East		96		69		40		39			73

Total unconsolidated joint ventures		336		202		149		66	%		36	%

Total homes delivered		2,321		2,092		1,722		11	%		21	%


	Years Ended December 31,
	2014		2013		2012		% Change 2013-2014			% Change 2012-2013
ASP of homes delivered:
Southern California	$	812,121	$	757,376	$	523,498		7	%		45	%
San Diego		568,095		490,172		440,897		16			11
Northern California		668,179		510,300		487,003		31			5
Mountain West		458,379		444,156		446,352		3			0
South West		324,456		311,951		280,283		4			11
East		0		262,160		230,645		(100	)		14

Total consolidated	$	564,241	$	473,177	$	410,045		19	%		15

Southern California	$	417,090	$	293,304	$	268,147		42	%		9	%
Northern California		523,959		510,099		533,757		3			(4	)
Mountain West		390,211		367,715		351,584		6			5
East		289,960		258,426		196,140		12			32

Total unconsolidated joint ventures	$	394,012	$	334,921	$	304,980		18	%		10	%

Total ASP of homes delivered	$	539,598	$	459,827	$	400,954		17	%		15	%

Homebuilding deliveries during the year were a function of beginning backlog and new home sales orders. Deliveries in our Southern California segment increased 77% in 2014 versus 2013 as a result of a 30% higher beginning backlog and a 67% increase in new home sales orders. Deliveries in our San Diego segment decreased 2% as a result of a 7% lower beginning backlog, partially offset by a 2% increase in new home sales orders. Deliveries in our Northern California segment decreased 16% as a result of a 40%

lower beginning backlog, partially offset by a 5% increase in new home sales orders. Deliveries in our Mountain West segment decreased 4% as a result of a 2% lower beginning backlog and longer construction cycle times, partially offset by a 16% increase in new home sales orders. Deliveries in our South West segment were similar as a result of a 12% higher beginning backlog, partially offset by a 17% decrease in new home sales orders.

The ASP of homes delivered is a function of product, geographic mix and general changes in new home prices. In 2014, each segment experienced some level of price increases, except for our Southwest segment. In addition to the impact of price increases, our San Diego and Northern California segments delivered a larger mix of higher priced homes in 2014 versus 2013.

Deliveries in our Southern California segment increased 9% in 2013 versus 2012 as a result of a 108% higher beginning backlog, partially offset by a 2% decrease in new home sales orders. Deliveries in our San Diego segment increased 32% as a result of a 174% higher beginning backlog, partially offset by a 5% decrease in new home sales orders. Deliveries in our Northern California segment increased 41% as a result of a 130% higher beginning backlog, partially offset by a 22% decrease in new home sales orders. Deliveries were up 31% in our Mountain West segment as a result of a 123% higher beginning backlog, partially offset by an 8% decrease in new home sales orders. Deliveries in our South West segment increased 4% as a result of a 39% higher beginning backlog, partially offset by a 3% decrease in new home sales orders.

Gross Margin

Gross margin is revenues less cost of sales and is comprised of gross margins from our homebuilding and corporate segments.

Gross margins for the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012 were as follows:

	Years Ended December 31,
	2013		GrossMargin %			2012		GrossMargin %			2011		GrossMargin %
	2014		GrossMargin %			2013		GrossMargin %			2012		GrossMargin %
	(Dollars in thousands)
Gross margin	$	~~221~~255,~~198~~588		2322.84	%	$	~~141~~221,~~713~~198		2023.8	%	$	72141,~~192~~713		1220.38	%

26In 2014, gross margin was $255.6 million compared to $221.2 million in 2013. This 16% increase was primarily attributable to a 23% increase in revenues, resulting from a 5% increase in new home deliveries and a 19% increase in the ASP, partially offset by increased construction and labor costs, $9.0 million of impairment charges and $16.9 million of charges incurred by SHI in connection with Aamodt v. Shea Homes, Inc., Case No. 14-cv-01566 and related matters, of which $13.3 million was accrued at December 31, 2014 (see Note 16 to our consolidated financial statements).

In 2013, gross margin was $221.2 million compared to $141.7 million in 2012. This 56% increase was primarily attributable to a 37% increase in revenues, resulting from a 20% increase in new home deliveries and a 15% increase in the ASP, partially offset by increased construction and labor costs.

Housing impairments, which are in cost of sales and reduce gross margins, are generally attributable to lower home prices in response to lower housing demand, which can result from weak economic and housing conditions, including elevated levels of foreclosures, higher unemployment, lower consumer confidence and tighter lending standards. Since the fourth quarter of 2009, the housing market experienced some stabilization and, as a result, impairments significantly diminished. However, in the fourth quarter 2014, we experienced lower housing demand in two communities in our South West segment, resulting in impairment charges.

InImpairment ~~2013,~~by ~~our~~segment ~~gross~~and ~~margin~~type ~~was~~for ~~$221.2~~the ~~million~~years ~~compared~~ended toDecember 31, ~~$141.7~~2014, ~~million~~2013 inand 2012. ~~This~~were ~~increase~~as ~~was~~follows: ~~primarily attributable to higher revenues, primarily from increased new home closings and a higher gross margin percentage from general price increases in all our segments.~~

In 2012, our gross margin was $141.7 million compared to $72.2 million in 2011. This increase was primarily attributable to higher revenues, primarily from increased home closings, a higher gross margin percentage from price increases in most of our segments, and no inventory impairment in 2012 compared to $30.6 million in 2011.


	Years Ended December 31,
	2014		2013		2012		% Change 2013-2014			% Change 2012-2013
	(Dollars in thousands)
Impairment by segment:
Southern California	$	284	$	0	$	0		100	%		—
San Diego		0		0		0		—			—
Northern California		0		0		0		—			—
Mountain West		0		0		0		—			—
South West		8,751		0		0		100			—
East		0		0		0		—			—

Total impairment	$	9,035	$	0	$	0		100	%		—

Impairment by type:
Inventory	$	9,035	$	0	$	0		100	%		—
Joint venture		0		0		0		—			—

Total impairment	$	9,035	$	0	$	0		100	%		—

Housing impairments are generally attributable to lower home prices driven by increased incentives and price reductions in response to weak housing demand and economic conditions, including elevated levels of foreclosures, higher unemployment, lower consumer confidence and tighter lending standards. Since the fourth quarter 2009, the housing market experienced some stabilization and, as a result, impairments significantly diminished. Impairment by segment and type for the years ended December 31, 2013, 2012 and 2011 were as follows:

	Years Ended December 31,
	2013		2012		2011		%Change2012-2013		%Change2011-2012
	(Dollars in thousands)
Impairment by segment:
Southern California	$	0	$	0	$	7,189		—		(100	)%
San Diego		0		0		9,684		—		(100	)
Northern California		0		0		13,875		—		(100	)
Mountain West		0		0		0		—		—
South West		0		0		2,227		—		(100	)
East		0		0		0		—		—
Total impairment	$	0	$	0	$	32,975		—		(100	)%
Impairment by type:
Inventory	$	0	$	0	$	30,600		—		(100	)%
Joint venture		0		0		2,375		—		(100	)
Total impairment	$	0	$	0	$	32,975		—		(100	)%

Selling, General and Administrative Expense

Selling, general and administrative expenses for the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012 were as follows:

	Years Ended December 31,
	2013			2012			2011			%Change2012-2013			%Change2011-2012
	2014			2013			2012			%Change2013-2014			%Change2012-2013
	(Dollars in thousands)
Total homebuilding revenues	$	~~929~~1,~~697~~140,025		$	~~679~~929,~~162~~697		$	~~586~~679,~~385~~162			3723	%		1637	%
Selling expense	$	5463,~~338~~429		$	4554,~~788~~338		$	45,~~251~~788			1917	%		119	%
% of total homebuilding revenues		5.86	%		65.78	%		76.7	%
General and administrative expense	$	5054,~~080~~921		$	4350,~~747~~080		$	3743,~~374~~747			1410	%		1714	%
% of total homebuilding revenues		5.4.8	%		65.4	%		6.4	%
Total selling, general and administrative expense	$	~~104~~118,~~418~~350		$	89104,~~535~~418		$	8289,~~625~~535			1713	%		817	%
% of total homebuilding revenues		1110.24	%		1311.2	%		1413.12	%

Selling Expense

In ~~2013~~2014, selling expense was $5463.34 million compared to $4554.83 million in ~~2012,~~2013. ~~but~~This ~~decreased~~increase aswas aprimarily ~~percentage~~attributable ~~of revenues due~~ to ~~the~~higher ~~increase~~volume inrelated ~~homebuilding~~costs, ~~revenues.~~such ~~While~~as ~~many~~sales ~~selling~~commission, ~~expenses~~closing ~~fluctuate~~costs ~~directly~~and ~~with~~model ~~changes~~costs, inas ~~revenues,~~well as ~~homebuilding~~advertising. ~~revenues~~Selling ~~increase~~expense, weas ~~achieved~~a ~~economies~~percentage of ~~scale~~revenues, ~~and~~decreased ~~efficiencies~~as on certain fixed selling expenses ~~that~~were ~~are~~spread ~~more~~over ~~fixed~~a inhigher ~~nature~~revenue base.

In ~~2012~~2013, selling expense was $4554.83 million compared to $45.38 million in ~~2011~~2012, but decreased as a percentage of revenues as a result of a higher revenue base. The $8.5 million increase was primarily due to ~~the~~higher ~~increase~~volume ~~in homebuilding~~related ~~revenues~~costs, such as sales commissions, closing costs and model costs, as well as advertising.

General and Administrative Expense

In ~~2013~~2014, general and administrative expenses ~~increased~~were $654.39 million compared to $50.1 million, ~~primarily~~in ~~attributable to increased compensation expense due to incentive compensation plans tied to the Company’s overall level of profitability, partially offset by decreased legal expenses~~2013. InThis ~~2012,~~increase wewas ~~incurred~~primarily ~~$3.3~~attributable ~~million in legal expenses related~~ to higher ~~the~~compensation ~~CCM Tax Court case~~expense.

In ~~2012~~2013, general and administrative ~~expense~~expenses ~~increased~~were $650.41 million compared to $43.7 million, ~~partially~~in ~~attributable to $3~~2012.7 ~~million in increased legal~~This ~~expenses~~increase was primarily attributable to ~~the~~higher ~~CCM~~compensation ~~Tax~~expense, ~~Court~~partially ~~case~~offset ~~for~~by ~~which~~decreased ~~trial~~legal ~~testimony was heard in July 2012~~expenses. In ~~addition, on August 8,~~ 2012, ~~the~~we ~~Company~~incurred approved two incentive compensation plans, one designed as a financial incentive to recognize individual and Company performance for 2012, and the other a multi-year plan to promote the Company’s long-term success. The addition of these plans resulted in a $43.76 million ~~increase~~ in ~~incentive~~legal ~~compensation~~expenses ~~costs~~related ~~for~~to the ~~year ended~~Tax ~~December 31,~~Court ~~2012.~~CCM ~~Partially offsetting these increases was a decrease of $2~~case.5 ~~million in tax consulting expenses.~~

Equity in Income (Loss) from Unconsolidated Joint Ventures

Equity in income (loss) from unconsolidated joint ventures represents our share of income (loss) from unconsolidated joint ventures accounted for under the equity method. These joint ventures are generally ~~involved~~engaged in homebuilding and ~~real~~land ~~property~~ development.

In30 ~~2013, equity in income (loss) from unconsolidated joint ventures was $(1.1) million compared to $.4 million in 2012. There were no significant earnings or losses from any unconsolidated joint venture.~~

~~Loss~~In on2014, ~~Debt~~equity ~~Extinguishment~~in income (loss) from unconsolidated joint ventures was $9.1 million compared to $(1.1) million in 2013. This increase in income was primarily attributable to income from two joint ventures in our Southern California segment that completed their operations in 2014.

~~Concurrent with~~In ~~the~~2013, ~~payoff~~equity ofin ~~the~~income ~~outstanding obligations of the Company’s previous secured revolving lines of credit and notes payable~~ (~~the “Secured Facilities”~~loss) onfrom ~~May 10,~~unconsolidated ~~2011,~~joint anventures ~~$88.4 million loss on debt extinguishment~~ was ~~recognized. This included a~~ $65(1.01) million ~~write-off~~compared ~~of the Secured Facilities discount, which increased the Secured Facilities principal~~ to ~~its face value of~~ $~~779~~.64 million, ~~and~~in ~~a $23~~2012.4 ~~million~~There ~~write-off~~were ofno significant ~~prepaid~~earnings ~~professional~~or ~~and~~losses ~~loan~~from ~~fees~~our ~~incurred~~unconsolidated ~~in connection~~joint ~~with the Secured Facilities~~ventures.

Gain (Loss) on Reinsurance Transaction

Completed operations claims for policy years August 1, 2001 to July 31, 2007, and workers’ compensation and general liability risks for policy years August 1, 2001 to July 31, 2005, were previously insured through PIC. In December 2009, PIC entered into a series of transactions (the “PIC Transaction”) in which these policies were either novated to JFSCI or reinsured with third-party insurance carriers. As a result of the PIC Transaction, a $34.8 million gain was ~~generated but~~ deferred and to be ~~recognized~~recorded as income when related claims are paid. In addition, the deferred gain can be adjusted up or down based on on changes in actuarial estimates. Any ~~change~~changes to the deferred gain ~~will~~are berecorded ~~recognized~~as income or expense in the current period.

In ~~2013~~2014, we recognized $27.0 2 million of income, asprimarily aattributable ~~result~~to ofthe claims paid on these policies. In ~~2012~~2013, awe recognized $122.0 million ~~charge~~of ~~was~~income ~~recognized~~ as a result of anclaims ~~increase in the actuary’s estimate of ultimate losses to be~~ paid on these policies., ~~This~~partially ~~increase~~offset ~~was~~by ~~based~~adverse ~~on trends~~actuarial ~~in completed operations claims related to our markets and products built~~estimates, ~~claim~~which increased ~~settlement~~the ~~patterns~~deferred ~~and insurance industry practices~~gain.

Interest Expense

Interest expense is interest incurred and not capitalized. For ~~2013~~all of 2014 and ~~2012~~the latter half of 2013, ~~most~~substantially all interest incurred was capitalized to inventory ~~with~~as qualified inventory exceeded debt. During the ~~remainder~~first ~~expensed~~part asof a2013 ~~result~~and all of 2012, some interest incurred was expensed since debt ~~exceeding~~exceeded the qualified ~~asset~~inventory ~~amounts~~amount. Assets qualify for interest capitalization during their development and other qualifying activities, such as construction; however, if qualified assets are less than the total debt, a portion of interest is expensed.

In ~~2013~~2014, interest expense was $50.16 million compared to $195.91 million in ~~2012~~ 2013. This decrease was primarily attributable to higher qualified assets in 2014 versus 2013, relative to our debt balance. In 2014, interest expense represents fees for the unused portion of our $125.0 million secured revolving credit facility (the “Revolver”) and is not capitalized.

In ~~2012~~2013, interest expense was $195.91 million compared to $1619.8 9 million in ~~2011~~2012. This ~~increase~~decrease was primarily attributable to ~~lower~~higher qualified assets relative to our debt balance.

Other Income (Expense), Net

Other income (expense), net is comprised of interest income, gains (losses) on sales of investments, pre-acquisition cost and deposit write-offs, property tax expense and other income (expense). Interest income is primarily from ~~related~~affiliate ~~party~~ notes ~~receivables~~receivable, investments and interest bearing cash accounts.

For the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, other income (expense), net was as follows:

	Years Ended December 31,
	2013			2012			2011			%Change2012-2013			%Change2011-2012
	2014			2013			2012			%Change2013-2014			%Change2012-2013
	(Dollars in thousands)
Other income (expense), net:
Interest income	$	21,~~204~~547		$	42,~~315~~204		$	34,~~550~~315			(4930	)%		22(49	)%
Gain on sale of investments		150			~~8,806~~15			~~566~~8,806			(100	)		~~1,456~~(100	)
Gain on sale of joint venture		0			0			5,939			(100	)		(100	)
Pre-acquisition cost and deposit write-offs		(1,303	)		(1,436	)		(2,039	)		(9	)		(30	)
Pre-acquisition cost and deposit write-offs		(1,436	)		(2,039	)		(236	)		(30	)		764
Property tax expense		(2,377	)		(2,766	)		(3,192	)		(14	)		(13	)
Property tax expense		(2,766	)		(3,192	)		(2,881	)		(13	)		11
Other income		783			1,205			1,229			(35	)		(2	)
Other income (expense)		1,205			1,229			436			(2	)		(182	)
Total other income (expense), net	$	(1,350	)	$	(778	)	$	9,119			74	%		(109	)%
Total other income (expense), net	$	(778	)	$	9,119		$	7,374			(109	)%		24	%

In ~~2013~~2014, other income (expense), net was $(01.84) million compared to $9(0.18) million in ~~2012~~2013. ~~The~~This ~~decrease~~increase in ~~income~~expense was primarily attributable to andecreased ~~$8.8 million gain on sale of marketable securities in 2012, plus a $2.1 million decrease in~~ interest income~~, partially offset by a $0~~.6 ~~million decrease in pre-acquisition cost and deposit write-offs and a $0.4 million decrease in property taxes.~~

In ~~2012~~2013, other income (expense), net was $9(0.18) million compared to $79.4 1 million in ~~2011~~2012. This ~~increase~~ decrease in income was primarily attributable to an $8.8 million gain on the sale of marketable securities ~~(mostly impaired by $5.0 million~~ in ~~2009).~~2012 ~~This~~and ~~gain was partially offset by~~ a $12.81 million ~~increase~~decrease in ~~pre-acquisition~~interest ~~cost and deposit write-offs~~income.

Income Tax Benefit (Expense)

SHLP is treated as a partnership for income tax purposes. Asand ~~a limited partnership, SHLP~~ is subject to certain minimal state taxes and fees; however, taxes on income ~~realized by SHLP~~ are generally the obligation of SHLP’s general and limited partners and their owners. As SHI is a C corporation, and its federal and state income taxes are included in ~~these~~the consolidated financial statements.

At December 31, ~~2013~~2014 and ~~2012~~2013, net deferred tax assets of SHI before reserves were $1620.84 million and $3216.78 million, respectively, ~~which~~ primarily ~~related~~from to available loss carryforwards, inventory and investment impairments, and housing and land inventory basis differences. At December 31, ~~2013~~2014, SHI had net operating loss (“NOL”) carryforwards of approximately $1814.8 2 million, net, ~~that~~which expire by 2018 and are subject to annual limitations of $4.6 million.

When assessing the realizability of deferred tax assets, we consider whether it is more-likely-than-not that our deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon generating sufficient taxable income in the future. We record a valuation allowance when we determine it is more-likely-than-not a portion of the deferred tax assets will not be realized.

Because of the continued annual pretax losses of SHI through the year ended December 31, 2009, we determined it was more-likely-than-not, at December 31, 2009, the net deferred tax asset of $51.9 million would not be realized. Accordingly, for the year ended December 31, 2009, the deferred tax asset valuation allowance increased $32.7 million to fully reserve the net deferred tax asset. At December 2011 and 2010, our assessment of deferred tax assets was consistent with 2009 and the net deferred tax asset of $38.2 million and $48.8 million, respectively, remained fully reserved. For the year ended December 31, 2012, SHI generated ~~pretax~~income before income taxes for the first time since 2007, a result of the ~~housing~~beginning ~~industry~~of the housing recovery. However, since we only returned to profitability in 2012 and the housing recovery being in its early stages, the $32.7 million net deferred tax assets at December 31, 2012 remained fully reserved.

At December 31, 2013, after ~~considering~~experiencing ~~the continuation~~continued ofprofit ~~improving~~improvement ~~profits~~ from operations, we determined it was more-likely-than-not that most of the net deferred tax assets would be realized, which, during the fourth quarter of 2013, resulted in a $15.6 million reversal of the valuation allowance on our deferred tax assets. We based this conclusion on positive evidence related to the actual pre-tax profits achieved during the year and higher levels of forecasted profitability in the future. We expected these increased profits to result in a greater realization of our NOL carryforwards before they expire than previously estimated, and the realization of deferred tax assets associated with impairments and basis differences of our inventory. At December 31, 2014 and 2013, the remaining valuation allowance of $0.53 million ~~valuation~~and ~~allowance~~$0.5 ~~relates~~million, respectively, relates to capital losses that expire in 2016 and 2017, and impairment of debt securities that mature in 2021 and 2022, as it is unknown if these deferred tax assets will be realized.

29Accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcome of these future results could result in changes in our estimates of our deferred tax assets and related valuation allowances, and could also materially impact our consolidated financial condition and results of operations. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation of our deferred tax assets.

~~Table~~In 2014, income tax benefit (expense) was $(18.2) million compared to $14.1 million in 2013. The income tax benefit in 2013 was primarily attributable to the $15.6 million reversal of ~~Contents~~the valuation allowance.

The accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcome of these future results could result in changes in our estimates of the valuation of our deferred tax assets and related valuation allowances, and could also have a material impact on our consolidated results of operations or financial position. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation of our deferred tax assets.

In 2014, we anticipate filing Form 3115 with the IRS to change our tax accounting method of how we record certain expenses on our tax returns. As we believe it is more-likely-than-not the change will be approved by the IRS, we will reflect this tax accounting method in preparing the 2014 tax provision and, accordingly, this change may increase our effective tax rate.

In 2013, income tax benefit (expense) was $14.1 million compared to $(0.6) million in 2012. The income tax benefit in 2013 was primarily attributable to the $15.6 million reversal of the valuation allowance, partially offset by increased taxable income compared to 2012.

In ~~2012~~2014, we filed Form 3115 with the IRS to change our income tax ~~benefit~~accounting ~~(expense)~~method ~~was~~of ~~$(0.6)~~how ~~million~~we ~~compared~~record tocertain ~~$3.1~~expenses ~~million~~on our income tax returns beginning in ~~2011~~2014. ~~This~~As ~~decrease~~we believe it is more likely-than-not the change will be approved by the IRS, we reflected this income tax accounting method in our 2014 income tax ~~benefit~~expense. ~~was~~If ~~primarily~~we ~~attributable~~are unsuccessful in our application to change our income oftax ~~SHI~~accounting ~~compared~~method, towe ~~losses~~could inincur ~~2011~~an income tax liability for prior years ranging up to $13.5 million, and the Partners could have a reduction ofin ~~certain~~their ~~deferred~~income tax ~~assets~~liability inranging ~~2011 that~~up ~~were~~to ~~previously~~$13.5 ~~reserved~~million.

Net (Income) Loss Attributable to Non-Controlling Interests

Joint ventures are consolidated when we have a controlling interest or, absent a controlling interest, when we can substantially influence its business. Net (income) loss attributable to non-controlling interests represents the share of (income) loss attributable to the parties having a non-controlling interest. The net (income) loss attributable to non-controlling interests in 2014, 2013 and 2012 was not material. In 2011, net (income) attributable to non-controlling interests was $(7.1) million and included income allocated to our non-controlling partner in the sale of Vistancia LLC’s interest in an unconsolidated joint venture.

SELECTED HOMEBUILDING OPERATIONAL DATA

Homes Sales Orders and Active Selling Communities

Home sales orders are contracts executed with homebuyers to purchase homes and are stated net of cancellations. Except where market conditions or other factors justify increasing available unsold home inventory, construction of a home typically begins when a sales contract for that home is executed and other conditions are satisfied, such as financing approval. Therefore, recognition of a home sales order usually represents the beginning of the home’s construction cycle. Homebuilding construction expenditures and, ultimately, homebuilding revenues and cash flow, are therefore dependent on the timing and magnitude of home sales orders.

An active selling community represents a new home community that advertises, markets and typically sells homes through a sales office located at a model complex in the community. Sales offices in communities near the end of their sales cycle are not designated as an active selling community. An active selling community is a designation similar to a store or sales outlet and is used to measure home sales order results on a per active selling community basis. Presentation of home sales orders per active selling community is a means of assessing sales growth or reductions across communities through a common analytical measurement. The average number of active selling communities for a particular period represents the aggregate number of active selling communities in operation at the end of each month in such period divided by the number of months in such period.

For the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012 home sales orders, net of cancellations, were as follows:

	Years Ended December 31,
	2013		2012		2011		%Change2012-2013			%Change2011-2012
	2014		2013		2012		%Change2013-2014			%Change2012-2013
Home sales orders, net:
Southern California		~~308~~514		~~313~~308		~~281~~313		(267	)%		11(2	)%
San Diego		~~249~~254		~~262~~249		~~169~~262		(52	)		55(5	)
Northern California		~~359~~376		~~459~~359		~~221~~459		~~(22~~5	)		~~108~~(22	)
Mountain West		~~367~~424		~~401~~367		~~251~~401		(816	)		60(8	)
South West		~~536~~447		~~552~~536		~~411~~552		(317	)		34(3	)
East		939		369		3236		~~(75~~333	)		13(75	)
Total consolidated		12,~~828~~054		21,~~023~~828		12,~~365~~023		~~(10~~12	)%		48(10	)%
Unconsolidated joint ventures		240		199		119		21			67
Southern California		111		46		66		141	%		(30	)%
Total home sales orders, net		2,068		2,222		1,484		(7	)%		50	%
Northern California		52		44		21		18			110
Mountain West		91		67		40		36			68
South West		14		0		0		100			0
East		120		83		72		45			15
Total unconsolidated joint ventures		388		240		199		62	%		21	%
Total home sales orders, net		2,442		2,068		2,222		18	%		(7	)%

30For the years ended December 31, 2014, 2013 and 2012, cancellation rates were as follows:


	Years Ended December 31,
	2014			2013			2012
Cancellation rates:
Southern California		12	%		11	%		12	%
San Diego		22			22			26
Northern California		14			14			10
Mountain West		16			16			14
South West		18			15			15
East		13			18			20

Total consolidated		16	%		15	%		15	%

Southern California		18	%		10	%		11	%
Northern California		17			30			5
Mountain West		17			20			20
South West		0			0			0
East		30			32			18

Total unconsolidated joint ventures		21	%		25	%		15	%

Total cancellation rates		17	%		17	%		15	%

For the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, ~~cancellation~~average ~~rates~~active selling communities were as follows:

	Years Ended December 31,
	2013			2012			2011
	2014			2013			2012			%Change2013-2014			%Change2012-2013
Cancellation rates:
Average number of active selling communities:
Southern California		11	%		126	%		218	%		83	%		(25	)%
San Diego		229			267			329			29			(22	)
Northern California		1413			1013			1814			0			(7	)
Mountain West		1612			1415			1814			(20	)		7
South West		1518			1516			1817			13			(6	)
East		181			201			183			0			(67	)
Total consolidated		1564			1558			2165			10	%		(11	)%
Unconsolidated joint ventures		25			15			23
Southern California		4			4			3			0	%		33	%
Total cancellation rates		17	%		15	%		21	%
Northern California		4			2			1			100			100
Mountain West		5			5			5			0			0
East		3			2			2			50			(0	)
Total unconsolidated joint ventures		16			13			11			23	%		18	%
Total average number of active selling communities		80			71			76			13	%		(7	)%

~~For~~In ~~the~~2014, ~~years~~consolidated ~~ended~~home ~~December~~sales orders per active selling community were 32.1, or 2.7 per month, compared to 31.5, or 2.6 per month in 2013, ~~2012~~a 2% increase. Overall, our Southern California, San Diego, Northern California and ~~2011~~Mountain West segments continued to experience healthy demand for new homes, ~~average~~while ~~active~~for ~~selling~~most ~~communities~~of ~~were~~the asyear ~~follows:~~our South West segment experienced sluggish demand for new homes, resulting in a 26% decrease in its sales rate per community.

	Years Ended December 31,
	2013		2012		2011		%Change2012-2013			%Change2011-2012
Average number of active selling communities:
Southern California		6		8		12		(25	)%		(33	)%
San Diego		7		9		10		(22	)		(10	)
Northern California		13		14		15		(7	)		(7	)
Mountain West		15		14		13		7			8
South West		16		17		23		(6	)		(26	)
East		1		3		3		(67	)		—
Total consolidated		58		65		76		(11	)		(14	)
Unconsolidated joint ventures		13		11		13		18			(15	)
Total average number of active selling communities		71		76		89		(7	)%		(15	)%

In 2013, consolidated home sales orders per consolidated active selling community were 31.5, or 2.6 per month, compared to 31.1, or 2.6 per month, in 2012. Demand was stronger in the first half of 2013 compared to the second half of 2013 when mortgage rates peaked.

In 2013, consolidated home sales order per consolidated active selling community were 31.5 compared to 31.1 in 2012. The increase was primarily attributable to the housing recovery which began in the second half of 2012 and continued in 2013. Demand was stronger in the first half of 2013 compared to the second half of 2013 as demand for new homes slowed in the second half of 2013 when mortgage rates spiked in the middle of 2013. In 2012, consolidated home sales order per consolidated active selling community were 31.1 compared to 18.0 in 2011.

Sales Order Backlog

Sales order backlog represents homes sold and under contract to be built, but not ~~closed~~delivered. Backlog sales value is the revenue estimated to be realized at ~~closing~~delivery. A home is sold when a sales contract is signed by the seller and buyer, and upon receipt of a prerequisite deposit. A home is ~~closed~~delivered when all conditions of escrow are met, including delivery of the home, to the customer, title passage, ~~and~~ appropriate consideration is received or collection of associated receivables, if any, is reasonably assured, and when we have no other continuing involvement in the home. A sold home is classified “in backlog” during the time between its sale and ~~close~~delivery. During that time, construction costs are generally incurred to complete the home except where market conditions or other factors justify increasing available unsold home inventory. Backlog is therefore an important performance measurement in analysis of cash outflows and inflows. However, because sales order contracts are cancelled by the buyer at times, not all homes in backlog will result in ~~closings~~deliveries.

3134

At December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, sales order backlog was as follows:

	Homes						Sales Value						ASP
	December 31,						December 31,						December 31,
	2013		2012		2011		2013		2012		2011		2013		2012		2011
	2014		2013		2012		2014		2013		2012		2014		2013		2012
							(In thousands)						(In thousands)
Backlog:
Southern California		~~160~~193		~~123~~160		59123	$	~~139~~166,~~059~~087	$	87139,~~675~~059	$	2687,~~714~~675	$	~~869~~861	$	~~713~~869	$	~~453~~713
San Diego		~~100~~102		~~107~~100		39107		5071,~~223~~164		4750,~~580~~223		1847,~~837~~580		~~502~~698		~~445~~502		~~483~~445
Northern California		~~144~~135		~~241~~144		~~105~~241		94100,~~605~~946		~~107~~94,~~497~~605		51107,~~270~~497		~~657~~748		~~446~~657		~~488~~446
Mountain West		~~207~~275		~~212~~207		95212		~~100~~140,~~186~~995		98100,~~733~~186		4498,~~489~~733		~~484~~513		~~466~~484		~~468~~466
South West		~~238~~174		~~212~~238		~~152~~212		8256,~~565~~293		6782,~~519~~565		4167,~~309~~519		~~347~~324		~~318~~347		~~272~~318
East		039		160		1116		016,242		~~4,192~~0		24,~~111~~192		0416		~~262~~0		~~192~~262
Total consolidated		~~849~~918		~~911~~849		~~461~~911	$	~~466~~551,~~638~~727	$	~~413~~466,~~196~~638	$	~~184~~413,~~730~~196	$	~~550~~601	$	~~454~~550	$	~~401~~454
Unconsolidated joint ventures		122		84		34		45,805		25,724		11,933		375		306		351
Southern California		30		26		27	$	14,257	$	9,383	$	7,427	$	475	$	361	$	275
Total backlog		971		995		495	$	512,443	$	438,920	$	196,663	$	528	$	441	$	397
Northern California		15		23		10		8,865		12,562		5,535		591		546		554
Mountain West		41		23		11		17,935		9,413		4,267		437		409		388
South West		14		0		0		6,983		0		0		499		0		0
East		74		50		36		22,221		14,447		8,495		300		289		236
Total unconsolidated joint ventures		174		122		84	$	70,261	$	45,805	$	25,724	$	404	$	375	$	306
Total backlog		1,092		971		995	$	621,988	$	512,443	$	438,920	$	570	$	528	$	441

Land and Homes in Inventory

Inventory is comprised of housing projects under development, land under development, land held for future development, land held for sale, deposits and pre-acquisition costs. As land is acquired and developed, and homes are constructed, the underlying costs are capitalized to inventory. As homes and land transactions ~~close~~deliver, these costs are relieved from inventory and charged to cost of of sales.

As land is acquired and developed, each parcel is assigned a lot count. For parcels of land, an estimated number of lots are added to inventory once entitlement occurs. Occasionally, when the intended use of a parcel changes, lot counts are adjusted. As homes and land are sold, lot counts are reduced. Lots are categorized as (i) owned, (ii) controlled (which includes a contractual right to purchase) or (iii) owned or controlled through unconsolidated joint ventures. The status of each lot is identified by land held for development, land under development, land held for sale, lots available for construction, homes under construction, completed homes and models. Homes under construction and completed homes are also classified as sold or unsold.

At35 ~~December 31, 2013, 2012 and 2011, total lots owned or controlled were as follows:~~

	December 31,
	2013		2012		2011		%Change2012-2013			%Change2011-2012
Lots owned or controlled by segment:
Southern California		1,890		1,989		1,241		(5	)%		60	%
San Diego		640		764		774		(16	)		(1	)
Northern California		3,731		3,182		3,927		17			(19	)
Mountain West		9,841		10,074		9,910		(2	)		2
South West		2,063		1,876		1,854		10			1
East		765		25		56		2,960			(55	)
Total consolidated		18,930		17,910		17,762		6			1
Unconsolidated joint ventures		4,455		3,874		1,976		15			96
Total lots owned or controlled		23,385		21,784		19,738		7	%		10	%
Lots owned or controlled by ownership type:
Lots owned for homebuilding		6,277		6,448		6,564		(3	)%		(2	)%
Lots owned and held for sale		3,313		3,382		3,158		(2	)		7
Lots optioned or subject to contract for homebuilding		6,306		5,046		5,006		25			1
Lots optioned or subject to contract that will be held for sale		3,034		3,034		3,034		—			—
Unconsolidated joint venture lots		4,455		3,874		1,976		15			96
Total lots owned or controlled		23,385		21,784		19,738		7	%		10	%

At December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, total ~~homes~~lots ~~under~~owned ~~construction~~or ~~and~~controlled ~~completed homes~~ were as follows:

	December 31,
	2013		2012		2011		%Change2012-2013			%Change2011-2012
	2014		2013		2012		%Change2013-2014			%Change2012-2013
Homes under construction:
Lots owned or controlled by segment:
Sold		611		630		225		(3	)%		180	%
Southern California		1,628		1,890		1,989		(14	)%		(5	)%
Unsold		149		133		112		12			19
San Diego		838		640		764		31			(16	)
Total consolidated		760		763		337		0			126
Northern California		4,033		3,731		3,182		8			17
Unconsolidated joint ventures		119		64		28		86			129
Mountain West		9,519		9,841		10,074		(3	)		(2	)
Total homes under construction		879		827		365		6	%		127	%
South West		2,261		2,063		1,876		10			10
Completed homes:(a)
East		1,273		765		25		66			2,960
Sold(b)		49		41		51		20	%		(20	)%
Total consolidated		19,552		18,930		17,910		3			6
Unsold		34		22		68		55			(68	)
Unconsolidated joint ventures		4,935		4,455		3,874		11			15
Total consolidated		83		63		119		32			(47	)
Total lots owned or controlled		24,487		23,385		21,784		5	%		7	%
Unconsolidated joint ventures		8		9		18		(11	)		(50	)
Lots owned or controlled by ownership type:
Total completed homes		91		72		137		26	%		(47	)%
Lots owned for homebuilding		7,033		6,277		6,448		12	%		(3	)%
Lots owned and held for sale		3,176		3,313		3,382		(4	)		(2	)
Lots optioned or subject to contract for homebuilding		6,309		6,306		5,046		0			25
Lots optioned or subject to contract that will be held for sale		3,034		3,034		3,034		0			0
Unconsolidated joint venture lots		4,935		4,455		3,874		11			15
Total lots owned or controlled		24,487		23,385		21,784		5	%		7	%

At December 31, 2014, 2013 and 2012, total homes under construction and completed homes were as follows:


	December 31,
	2014		2013		2012		% Change 2013-2014			% Change 2012-2013
Homes under construction:
Sold		623		611		630		2	%		(3	)%
Unsold		187		149		133		26			12

Total consolidated		810		760		763		7			0
Unconsolidated joint ventures		126		119		64		6			86

Total homes under construction		936		879		827		6	%		6	%

Completed homes:^(a)
Sold^(b)		56		49		41		14	%		20	%
Unsold		41		34		22		21			55

Total consolidated		97		83		63		17			32
Unconsolidated joint ventures		15		8		9		88			(11	)

Total completed homes		112		91		72		23	%		26	%

(a)	Excludes model homes.

(b) Sold but not ~~closed~~delivered.

LIQUIDITY AND CAPITAL RESOURCES

Operating and other short-term cash liquidity needs have been primarily funded from cash on our balance sheet and our homebuilding operations primarily through home ~~closings~~deliveries and land sales, net of the underlying expenditures to fund these operations. In addition, ~~the~~we ~~Company has~~have, and will continue to utilize, land option contracts, public and private note offerings, land seller notes, ~~joint~~ joint venture structures (which typically obtain project level financing to reduce the amount of partner capital invested), assessment district bond financing, letters of credit and surety bonds, tax refunds and proceeds from ~~related~~affiliate ~~party~~notes ~~note receivables~~receivable as sources of liquidity. AtIn ~~December 31~~addition, ~~2013,~~as wean ~~did~~additional ~~not~~source ~~have~~of aliquidity, ~~revolving~~we ~~credit~~obtained ~~facility~~the toRevolver ~~fund short-term cash liquidity needs, however,~~ in February 2014~~, we entered into a $125~~.0 ~~million secured revolving credit facility (see below).~~ At December 31, ~~2013~~2014, cash and cash equivalents were $~~206~~236.29 million, restricted cash was $10.24 million and total debt was $~~751~~761.7 4 million, compared to cash and cash equivalents of $~~279~~206.82 million, restricted cash of $131.02 million and total debt of $~~758~~751.27 million at December 31, ~~2012~~2013. Restricted cash includes customer deposits temporarily restricted in accordance with regulatory requirements and cash used in lieu of bonds.

In February 2014, we replaced our $75.0 million letter of credit facility with the Revolver, which bears interest, at our option, either at (i) a ~~$125.0~~daily ~~million~~Eurocurrency ~~secured~~base ~~revolving~~rate as defined in the credit ~~facility~~agreement governing the Revolver (the “~~Revolver~~Credit Agreement”), ~~which~~plus ~~bears~~a ~~interest~~margin atof ~~LIBOR~~2.75%, or (ii) a Eurocurrency rate as defined in the Credit Agreement, plus a margin of 2.75%, and matures March 1, 2016. Borrowing availability is determined by a borrowing base formula and we are subject to financial covenants, including minimum net worth, and leverage ~~and~~ and interest coverage ratios. If we do not maintain compliance with these financial covenants, the Revolver converts to an 18-month amortizing term loan. At ~~February~~December 2831, 2014, nowe ~~amounts~~ were ~~outstanding~~in ~~under~~compliance ~~the~~with ~~Revolver~~these covenants and no amounts were outstanding.

We believe the Revolver, combined with the other ~~sources~~ available ~~to us~~sources, such as ~~our~~ existing cash, cash equivalents and cash from operations, ~~will~~are be sufficient to provide for ~~our~~ cash requirements in the next twelve months. In evaluating this sufficiency, we considered the expected cash flow to be generated by homebuilding operations, our current cash position and other sources of liquidity available to us, compared to anticipated cash requirements for interest payments on our $750.0 million senior secured notes (the “Secured Notes”) and Revolver, land purchase commitments and land development expenditures, joint venture funding requirements and other cash operating expenses. We also continually monitor current and expected operational requirements to evaluate and determine the use and amount of our cash needs which includes, but is not limited to, the following disciplines:

•

Strategic land acquisitions that meet our investment and marketing standards, including, in most cases, the quick turn of assets;

•

Strict control and limitation of unsold home inventory and avoidance of excessive and untimely uses of cash;

•

Pre-qualification of homebuyers, timely commencement of home construction thereon and mitigation of cancellations and creation of unsold inventory;

• Reduced construction cycle times, prompt ~~closings~~deliveries of homes and improved cash flow thereon; and

•

Maintenance of sufficient cash or other sources of liquidity that, depending on market conditions, will be available to acquire land and increase our active selling communities.

33Availability of additional capital, whether from private capital sources (including banks) or the public capital markets, fluctuates as market conditions change. There may be times when the private capital markets and the public debt markets lack sufficient liquidity or when our securities cannot be sold at attractive prices, in which case we would be unable to access capital from these sources. Weakening of our financial condition, including a material increase in our leverage or decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds, result in a credit rating downgrade or change in outlook, or otherwise increase our cost of borrowing.

Since 2002, SHLP and SHI used the CCM to determine when to recognize taxable income or loss with respect to the majority of their respective homebuilding operations. Federal law allows homebuilders like SHLP and SHI to defer taxable income/loss recognition from their homebuilding operations until the tax year in which the contracts are substantially complete, rather than annually based on the percentage of completion method. The IRS objected to SHLP’s and SHI’s use of the CCM and assessed a tax deficiency against them, contending they did not accurately and appropriately apply the relevant U.S. Treasury Regulations in calculating their respective homebuilding projects’ income/loss pursuant to the CCM for years 2004 through 2008, and years 2003 through 2008, respectively. SHLP and SHI believe their use of the CCM complies with the relevant regulations and filed a petition in 2009 with the Tax Court to contest the notice of deficiency and to challenge the IRS position. On February 12, 2014, the Tax Court ruled in our favor, issuing the Tax Court Decision on April 21, 2014. Pursuant to the ruling, we are permitted to continue to report income and loss from the delivery of homes using the CCM. As a result, no additional tax, interest or penalties are currently due and owing by the Partners or us. The IRS has appealed the Tax Court Decision to the Court of Appeals. We and the IRS have each filed briefs and the IRS is entitled to file a reply brief, which is due to be filed no later than March 2015. The Court of Appeals will schedule oral argument after briefing is completed; we cannot predict when it will schedule the argument or issue its decision.

~~The~~If ~~availability~~the ofTax ~~additional~~Court ~~capital,~~Decision ~~whether~~is ~~from~~overturned ~~private~~in ~~capital~~whole ~~sources (including banks)~~ or ~~the~~ ~~public~~in ~~capital markets~~part, ~~fluctuates~~SHI ascould ~~market conditions change. There may~~ be ~~times~~obligated ~~when~~to pay the IRS ~~private capital markets~~ and ~~the~~applicable ~~public~~state ~~debt~~taxing ~~markets~~authorities ~~lack~~up ~~sufficient~~to ~~liquidity~~$74 ormillion ~~when~~and, ~~our~~under ~~securities~~the ~~cannot~~Tax beDistribution ~~sold at attractive prices~~Agreement, inSHLP ~~which~~could ~~case we would~~ be ~~unable~~obligated to ~~access~~make ~~capital from these sources. A weakening of our financial condition, including~~ a ~~material~~distribution ~~increase~~to inthe ~~our~~Partners ~~leverage~~up orto ~~decrease~~$134 inmillion ~~our~~to ~~profitability~~fund ortheir ~~cash~~related ~~flows,~~payments ~~could~~to ~~adversely~~the ~~affect~~IRS ~~our~~and ~~ability~~applicable ~~to obtain necessary~~state ~~funds,~~taxing ~~result in a credit rating downgrade or change in outlook, or otherwise increase our cost of borrowing~~authorities.

~~In 2009~~Notwithstanding, wethe ~~filed~~indenture ~~a petition~~governing ~~with~~ the ~~United~~Secured ~~States~~Notes ~~Tax Court~~ (the “~~Tax Court~~Indenture”) ~~regarding~~restricts ~~our~~SHLP’s ~~position~~ability to onmake distributions to the ~~completed~~Partners ~~contract~~pursuant ~~method~~to ~~(“CCM”)~~the ofTax ~~accounting~~Distribution ~~for~~Agreement ~~our~~in ~~homebuilding~~excess ~~operations.~~of ~~During~~the ~~2010~~Maximum ~~and~~CCM ~~2011~~Payment, weunless ~~engaged~~SHLP inreceives ~~formal~~a ~~and~~cash ~~informal discovery~~equity ~~with~~contribution ~~the~~from ~~IRS~~JFSCI ~~and~~for ~~the~~such ~~Tax~~excess ~~Court~~or ~~heard~~unless ~~trial~~we ~~testimony~~use insome ~~July~~of ~~2012~~our ~~and~~capacity ~~ordered~~under the Indenture ~~Company and IRS~~ to ~~exchange~~make ~~briefs,~~restricted ~~which were filed~~payments. OnThe ~~February 12,~~initial ~~2014,~~Maximum ~~the~~CCM ~~Tax~~Payment ~~Court~~is ~~ruled~~$70.0 inmillion, ~~favor~~which ofamount ~~the~~will ~~Company~~be ~~(the~~reduced ~~“Tax~~by ~~Court Decision”).~~payments ~~Pursuant~~made toby ~~the~~SHI ~~ruling,~~in ~~the~~connection ~~Company~~with isany ~~permitted~~resolution toof ~~continue~~our todispute ~~report~~with ~~income~~the ~~and~~IRS ~~loss~~regarding ~~from~~our ~~the~~use ~~sale~~ of ~~homes~~the inCCM ~~their~~and ~~planned~~payments made ~~developments~~by ~~using~~SHLP ~~CCM.~~on Ascertain aguarantee ~~result,~~obligations nopermitted ~~additional~~in ~~tax,~~the ~~interest~~Indenture. orPayments ~~penalties~~of ~~are~~CCM-related ~~currently~~tax ~~due~~liabilities ~~and owing~~ by ~~the~~SHLP ~~Company~~pursuant orto the ~~Partners. The~~ Tax ~~Court~~Distribution ~~Decision~~Agreement isor ~~subject to appeal~~ by ~~the~~SHI ~~IRS~~will tonot ~~the~~impact ~~U.S.~~our ~~Court~~Consolidated ofFixed ~~Appeals~~Charge ~~for~~Coverage ~~the~~Ratio ~~Ninth~~(as ~~Circuit.~~defined below) ~~The~~or ~~IRS~~our ~~must~~ability ~~elect whether~~ to ~~appeal~~incur ~~within~~additional 90indebtedness ~~days~~under ~~after~~ the ~~Tax~~terms ~~Court~~of ~~enters~~the ~~a decision document, which has not occurred~~Indenture.

If necessary, SHLP and SHI expect to pay any CCM-related tax liability from existing cash, cash from operations, our Revolver and, to the extent SHLP is required by the Tax ~~Court~~Distribution ~~Decision~~Agreement isto ~~appealed~~pay ~~and~~amounts ~~overturned~~in excess of the Maximum CCM Payment, ~~SHI~~from ~~could~~cash equity contributions by JFSCI. However, cash from homebuilding operations may be ~~obligated~~insufficient to ~~pay~~cover ~~the~~such payments. See “Item 1A: Risk Factors—The IRS can challenge our income and ~~applicable~~expense ~~state~~recognition ~~taxing~~methodologies. If we are unsuccessful in defending our positions, we ~~authorities~~could upbecome subject to ~~$65~~a ~~million~~substantial tax liability from previous years” and, ~~under~~“Item ~~the~~1A: Risk Factors—Under our Tax Distribution Agreement, ~~SHLP~~we ~~could~~are berequired ~~obligated~~ to make adistributions ~~distribution~~ to ~~the~~our ~~Partners~~equity upholders tofrom ~~$108~~time ~~million~~ to ~~fund~~time based on their ownership ~~related~~in ~~payments~~SHLP, towhich ~~the~~is ~~IRS~~a limited partnership and, ~~applicable~~under ~~state~~certain ~~taxing~~circumstances, ~~authorities~~those distributions may occur even if SHLP does not have taxable income.”

~~Notwithstanding,~~We ~~the~~are ~~Indenture~~unable ~~governing~~to ~~the~~extend ~~Secured~~our ~~Notes~~evaluation (of the ~~“Indenture”)~~sufficiency ~~restricts~~of ~~SHLP’s~~our ~~ability~~liquidity tobeyond ~~make~~twelve ~~distributions~~months, ~~to its~~and ~~partners~~we ~~pursuant~~cannot tooffer ~~the~~assurance ~~Tax~~that ~~Distribution~~our ~~Agreement~~future homebuilding inoperations ~~excess~~will ofgenerate ansufficient ~~amount~~cash ~~specified~~flow byto ~~the~~enable ~~Indenture~~us ~~(such~~to ~~maximum~~grow ~~amount~~our ofbusiness, ~~collective~~service ~~distributions~~our ~~referred~~indebtedness, tomake aspayments ~~the~~toward ~~“Maximum~~land ~~CCM~~purchase ~~Payment”)~~commitments, ~~unless~~or ~~SHLP~~fund ~~receives~~our ajoint ~~cash~~ventures. ~~equity contribution~~For ~~from~~more ~~JFSCI~~information, ~~for~~see ~~such~~“Item ~~excess.~~1A: ~~The~~Risk Factors—Our ~~initial~~ability ~~Maximum~~to ~~CCM~~generate ~~Payment~~sufficient iscash ~~$70.0~~or ~~million,~~access ~~which~~other ~~amount~~limited ~~will~~sources beof ~~reduced~~liquidity byto ~~payments~~operate ~~made~~our bybusiness ~~SHI~~and inservice ~~connection~~our ~~with~~debt ~~any~~depends ~~resolution~~on ofmany ~~our~~factors, ~~dispute~~some ~~with~~of ~~the~~which ~~IRS~~are ~~regarding~~beyond our ~~use~~control” ~~of CCM~~ and ~~payments~~“Item ~~made~~1A: Risk byFactors—We ~~SHLP~~have ona ~~certain~~significant ~~guarantee~~number ~~obligations described in the Indenture. Payments~~ of ~~CCM-related~~contingent ~~tax~~ liabilities, byand ~~SHLP~~if ~~pursuant~~any toare ~~the~~satisfied ~~Tax Distribution Agreement or~~ by ~~SHI~~us, ~~will~~could ~~not~~have ~~impact~~a ~~our~~material ~~Consolidated~~adverse ~~Fixed~~effect ~~Charge~~on ~~Coverage Ratio (as defined below) or~~ our ~~ability~~liquidity toand ~~incur~~results ~~additional indebtedness under the terms~~ of ~~the Indenture~~operations.”

If necessary, SHLP and SHI expect to pay any CCM-related tax liability from existing cash, cash from operations and, to the extent SHLP is required by the Tax Distribution Agreement to pay amounts in excess of the Maximum CCM Payment, from cash equity contributions by JFSCI. However, cash from homebuilding operations may be insufficient to cover such payments. See “Item 1A: Risk Factors—The IRS has disallowed certain income recognition methodologies. If we are unsuccessful in appealing this decision, we could become subject to a substantial tax liability from previous years” and “Item 1A: Risk Factors—Under our Tax Distribution Agreement, we are required to make distributions to our equity holders from time to time based on their ownership in SHLP, which is a limited partnership and, under certain circumstances, those distributions may occur even if SHLP does not have taxable income.”

We are unable to extend our evaluation of the sufficiency of our liquidity beyond twelve months, and we cannot assure in the future our homebuilding operations will generate sufficient cash flow to enable us to grow our business, service our indebtedness, make payments toward land purchase commitments, or fund our joint ventures. For more information, see “Item 1A: Risk Factors—Our ability to generate sufficient cash or access other limited sources of liquidity to operate our business and service our debt depends on many factors, some of which are beyond our control” and “Item 1A: Risk Factors—We have a significant number of contingent liabilities, and if any are satisfied by us, could have a material adverse effect on our liquidity and results of operations.”

The Indenture governing the Secured Notes provides that we and our restricted subsidiaries may not incur or guarantee the payment of any indebtedness (other than certain specified types of permitted indebtedness) unless, immediately after giving effect to such incurrence or guarantee and the application of the proceeds therefrom, the Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) would be at least 2.0 to 1.0. “Consolidated Fixed Charge Coverage Ratio” is defined in the Indenture as the ratio of (i) our Consolidated Cash Flow Available for Fixed Charges (as defined in the Indenture) for the prior four full fiscal quarters, to (ii) our aggregate Consolidated Interest Expense (as defined in the Indenture) for such prior four full fiscal quarters, in each case giving pro forma effect to certain transactions as specified in the Indenture. At December 31, 2013, our Consolidated Fixed Charge Coverage Ratio, determined as specified in the Indenture, was 2.44. The increase in the Consolidated Fixed Charge Coverage Ratio from 1.80 at December 31, 2012 was due to the increasing income of the Company.

The following tables present cash provided by (used in) operating, investing and financing activities:

	Years Ended December 31,
	2013			2012			2011
	2014			2013			2012
	(In thousands)
Cash provided by (used in):
Operating activities	$	~~(45~~2,~~898~~454	)	$	(647,~~191~~867	)	$	38(6,~~878~~655	)
Investing activities		~~(16~~34,~~773~~976	)		16(14,~~424~~804	)		~~104~~16,~~977~~888
Financing activities		(106,~~880~~733	)		1(10,~~157~~880	)		~~(42~~1,~~363~~157	)
Net increase (decrease) in cash	$	~~(73~~30,~~551~~697	)	$	11(73,~~390~~551	)	$	~~101~~11,~~492~~390

Cash from Operating Activities

In ~~2013~~2014, cash provided by (used in) operating activities was $~~(45~~2.9)5 million compared to $(647.29) million in ~~2012~~2013. This ~~decrease~~improvement was primarily ~~due~~attributable to increased ~~land~~cash ~~acquisitions,~~receipts ~~land~~from ~~development~~deliveries ~~costs,~~of ~~construction costs and selling~~homes, ~~general administration costs,~~ partially offset by increased ~~cash~~land ~~receipts~~acquisitions, ~~from~~land ~~deliveries~~development ofcosts, ~~homes~~construction costs and ~~sales~~selling, ofgeneral ~~land~~administrative costs. Total land ~~acquisitions~~acquisition and ~~development~~ development costs for ~~2013~~2014 were $(~~341~~453.3) million compared to $(~~215~~329.95) million in ~~2012~~2013. ~~The~~This ~~year-over-year~~ increase ~~in land acquisition and development costs~~ was attributable to the ~~improved~~continued favorable housing market conditions ~~that continued in 2013~~ and our desire to add to our land positions in anticipation of continued demand for new homes.

In ~~2012~~2013, cash provided by (used in) operating activities was $(647.29) million compared to $38(6.97) million in ~~2011~~2012. This decrease was primarily ~~due~~attributable to increased land acquisitions, land development ~~and~~costs, construction costs and selling, general administrative costs, partially offset by increased cash receipts from deliveries of homes and ~~sales~~ of land. Total land acquisition ~~acquisitions~~ and development costs for ~~2012~~2013 were $(~~215~~329.95) million compared to $(~~107~~215.49) million in ~~2011~~2012. ~~The~~This ~~year-over-year~~ increase ~~in land acquisition and development costs~~ was attributable to the improved housing market conditions that ~~emerged~~continued in ~~2012~~2013 and our desire to add to our land positions in anticipation of continued demand for new homes.

Cash from Investing Activities

In ~~2013~~2014, cash provided by (used in) investing activities was $~~(16~~35.8)0 million compared to $16(14.4 8) million in ~~2012~~ 2013.This ~~decrease~~improvement was primarily attributable to $~~(21~~25.3)2 million of collections on promissory notes with affiliates, principally the payoff of the note receivable from JFSCI, and $9.6 million of net ~~contributions~~distributions tofrom unconsolidated joint ventures in 2014. In 2013, there were $(22.1) million of net contributions to unconsolidated joint ventures, of which $(1112.53) million related to two unconsolidated joint ventures formed in 2013, ~~compared~~which towas partially offset by $~~(11~~4.6)1 million ~~contributed~~ inof ~~2012.~~collections Inon ~~addition,~~promissory wenotes ~~received~~with affiliates and $3.2 million of proceeds from the maturity and sales of available-for-sale investments ~~in 2013 compared to $26~~.5 ~~million in 2012.~~

In ~~2012~~2013, cash provided by (used in) investing activities was $16(14.48) million compared to $~~105~~16.09 million in ~~2011. In~~ 2012~~, we received $26~~.~~5 million~~This ofdecrease ~~proceeds~~was ~~from~~primarily ~~the~~attributable ~~sale~~to ~~of marketable securities and collected~~ $~~2.0 million on promissory notes receivables from related parties, offset by $~~(1122.61) million of net contributions to unconsolidated joint ventures. Inin ~~2011~~2013, weof ~~collected~~which $~~107.7 million on promissory notes from related parties~~ (~~see below~~12.3), ~~primarily from JFSCI as a condition of the issuance of the Secured Notes; $1.7~~ million ~~from~~related ~~the~~to ~~sale~~two ~~of investments; $14.0 million, through our consolidated~~ unconsolidated joint ~~venture,~~ventures ~~Vistancia,~~formed ~~LLC, from the sale of our 10% interest~~ in an2013, ~~unconsolidated~~compared ~~joint~~to ~~venture; and~~ $14(11.45) million ~~from the sale~~ of ~~property~~net ~~and~~contributions ~~equipment~~in to2012. aIn ~~related party~~addition, ofwe ~~which~~received $13.52 million ~~was~~of ~~recorded~~proceeds ~~as an equity contribution~~ from the ~~owners~~maturity ofand ~~SHLP.~~sales ~~These cash proceeds in 2011 were partially offset by the purchase~~ of ~~$(20.2)~~available-for-sale ~~million~~investments ofin ~~marketable~~2013 ~~securities~~compared ~~and~~to $(926.3)5 million ofin ~~net contributions to unconsolidated joint ventures~~2012.

Cash from Financing Activities

In 2014, cash used in financing activities was $(6.7) million compared to $(10.9) million in 2013. This reduction in cash used was primarily attributable to a $7.6 million decrease in principal payments on notes payable, partially offset by a $4.4 million cash payment for the acquisition of land from an affiliate under common control.

In 2013, cash provided by (used in) financing activities was $(10.9) million compared to $1.2 million in 2012. This decrease was primarily attributable to higher principal payments to financial institutions and others.

In 2012, cash provided by (used in) financing activities was $1.2 million compared to $(42.4) million in 2011. In October 2012, we sold land in Colorado to a related party for $4.6 million. As the related party is under common control, the $2.4 million of net sales proceeds received in excess of the net book value of the land sold was recorded as an equity contribution. We also received $1.4 million in net contributions from non-controlling interests, which were offset by $(2.4) million in payments on notes payable. In 2011, cash used in financing activities was primarily related to a $(20.0) million principal payment and the $(779.6) million payoff of the Secured Facilities in May 2011, which was primarily funded by the issuance of the $750.0 million of Secured Notes. In addition, there was a $2.0 million equity contribution from the owners of SHLP, which represented (1) the consideration received in excess of net book value from the sale of fixed assets and land to a related party under common control and (2) $0.5 million for the sale of land to a related party under common control.

Notes Payable

At December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, notes payable were as follows:

	December 31,
	2013		2012		2011
	2014		2013		2012
	(In thousands)
Notes payable:
$750.0 million 8.625% senior secured notes due May 2019	$	750,000	$	750,000	$	750,000
Secured Notes	$	750,000	$	750,000	$	750,000
Other secured promissory notes		1,708		8,209		2,056
Revolver		0		0		0
Total notes payable	$	751,708	$	758,209	$	752,056
Other secured promissory notes		11,404		1,708		8,209
Total notes payable	$	761,404	$	751,708	$	758,209

~~On May 10, 2011, our~~ Secured Notes were issued in the aggregate principal amount of $750.0 million and the outstanding obligations of the Company’s secured revolving lines of credit and notes payable (the “Secured Facilities”) were paid off and terminated. Principal and interest paid in 2011 under the Secured Facilities was $779.6 million and $2.5 million, respectively. Concurrent with the payoff of the Secured Facilities, an $88.4 million loss on debt extinguishment was recognized, which included a $65.0 million write-off of the discount related to the Secured Facilities, which increased the principal to its face value of $779.6 million, and a $23.4 million write-off of prepaid professional and loan fees incurred in connection with the Secured Facilities. All payable-in-kind interest, $5.0 million of principal and certain fees were waived, all of which were netted against the $88.4 million charge. In addition, of the $19.1 million of then outstanding letters of credit, $4.0 million were returned and $15.1 million were paid by the Company, of which $14.5 million was reimbursed by JFSCI for its share of the letters of credit paid by the Company.

~~The~~Our Secured Notes were issued on May 10, 2011 at $750.0 million, bear interest at 8.625%, paid semi-annually on May 15 and November 15, and do not require principal payments until maturity on May 15, 2019. The Secured Notes are redeemable, in whole or in part, at ~~the~~our ~~Company’s~~ option beginning on May 15, 2015 at a price of 104.313 per bond, reducing to 102.156 on May 15, 2016 and are redeemable at par beginning on May 15, 2017. The Secured Notes may be redeemed prior to May 15, 2015 subject to a make-whole premium. At December 31, ~~2013~~2014 and ~~2012~~2013, accrued interest was $8.1 million and $8.1 million, respectively.

The Indenture ~~governing the Secured Notes~~ contains covenants that limit, among other things, our ability to incur additional indebtedness (including the issuance of certain preferred stock), pay dividends and distributions on our equity interests, repurchase our equity interests, retire unsecured or subordinated notes more than one year prior to their maturity, make investments in subsidiaries and joint ventures that are not restricted subsidiaries that guarantee the Secured Notes, sell certain assets, incur liens, merge with or into other companies, expand into unrelated businesses, and enter into certain transactions with our affiliates. At December 31, ~~2013~~2014 and ~~2012~~2013, we were in compliance with these covenants.

The Indenture ~~governing the Secured Notes~~ provides ~~that~~ we and our restricted subsidiaries may not incur or guarantee ~~the~~ payment of any indebtedness (other than certain specified types of permitted indebtedness) unless, immediately after giving effect to such incurrence or guarantee and ~~the~~ application of the proceeds therefrom, the Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) would be at least 2.0 to 1.0. “Consolidated Fixed Charge Coverage Ratio” is defined in the Indenture as the ratio of (i) our Consolidated Cash Flow Available for Fixed Charges (as defined in the Indenture) for ~~the~~such prior four full fiscal quarters, to (ii) our aggregate Consolidated Interest Expense (as defined in the ~~indenture governing the Secured Notes~~Indenture) for such prior four full fiscal quarters, in each case giving pro forma effect to certain transactions as specified in the Indenture. At December 31, ~~2013~~2014, our Consolidated Fixed Charge Coverage Ratio, determined as specified in the Indenture, was 23.4438.

In39 addition, our ability to make joint venture and other restricted payments and investments is governed by the Indenture. We are permitted to make otherwise restricted payments under (i) a $70.0 million revolving basket available solely for joint venture investments and (ii) a broader restricted payment basket available as long as our Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) is at least 2.0 to 1.0. At December 31, 2013, the aggregate amount of the restricted payments made under this broader restricted payment basket cannot exceed 50% of our cumulative Consolidated Net Income (as defined in the Indenture), generated from and including October 1, 2013, plus the aggregate net cash proceeds of, and the fair market value of, any property or other asset received by the Company as a capital contribution or upon the issuance of indebtedness or certain securities by the Company from and including October 1, 2013, plus, to the extent not included in Consolidated Net Income, certain amounts received in connection with dispositions, distributions or repayments of restricted investments, plus the value of any unrestricted subsidiary which is redesignated as a restricted subsidiary under the Indenture. We have a number of joint ventures which have used, and are expected to use, capacity under these restricted payment baskets. During the second quarter of 2013, we entered into a joint venture in Southern California and committed to contribute up to $45.0 million of capital. At December 31, 2013, we made aggregate capital contributions of $15.1 million to this joint venture. We project our peak investment of $45.0 million in this joint venture will occur in the fourth quarter of 2014 and, shortly thereafter, will be returned to us. In addition, we anticipate making additional investments in this joint venture in 2015 at amounts below the $45.0 million commitment, and expect such additional investments will be returned to us by the end of 2015. We anticipate making additional investments in other joint ventures which are not expected to be material.

Our ability to make joint venture and other restricted payments and investments is governed by the Indenture. We are permitted to make restricted payments under (i) a $70.0 million revolving basket available solely for joint venture investments; (ii) a $10 million general basket that can be used for joint venture investments and advances; and (iii) a broader restricted payment basket available if our Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) is at least 2.0 to 1.0. The aggregate amount of restricted payments made under this broader restricted payment basket cannot exceed 50% of our cumulative Consolidated Net Income (as defined in the Indenture) generated from and including October 1, 2013, plus 100% of the aggregate net cash proceeds of, and the fair market value of, any property or other asset received by us as a capital contribution after May 10, 2011 or upon the issuance of indebtedness or certain securities by us after May 10, 2011, plus, to the extent not included in Consolidated Net Income, certain amounts received in connection with dispositions, distributions or repayments of restricted investments, plus the value of any unrestricted subsidiary which is redesignated as a restricted subsidiary after May 10, 2011 under the Indenture. We have joint ventures which have used, and are expected to use, capacity under these restricted payment baskets. In 2013, we entered into an unconsolidated joint venture in Southern California and committed to contribute up to $45.0 million. At December 31, 2013, we made aggregate contributions of $15.1 million to this joint venture. At December 31, 2014, all contributions had been returned to us, however, additional contributions are expected to be made in 2015. We also anticipate making additional contributions to other joint ventures.

Revolver

In February 2014, we replaced our $75.0 million secured letter of credit facility with the Revolver, which bears interest, at our option, either at (i) a daily Eurocurrency base rate as defined in the Credit Agreement, plus a margin of 2.75%, or (ii) a Eurocurrency rate as defined in the Credit Agreement, plus a margin of 2.75%, and matures March 1, 2016. Borrowing availability is determined by a borrowing base formula and we are subject to financial covenants, including minimum net worth and leverage and interest coverage ratios. If we do not maintain compliance with these financial covenants, the Revolver converts to an 18-month amortizing term loan. At December 31, 2014, we were in compliance with these covenants and no amounts were outstanding.

At December 31, 2014, covenant compliance for the Revolver was as follows:


	Actual at December 31, 2014		Covenant Requirements at December 31, 2014
	(Dollars in thousands)
Covenant Requirements:
Minimum Consolidated Tangible Net Worth ^(a)	$	579,189		$371,996
Minimum Liquidity	$	229,416		³$ 5,000
Ratio of Land Assets to Tangible Net Worth		1.23		£2.0
Interest Coverage Ratio		3.53		³1.5
Adjusted Leverage Ratio ^(b)		0.93		£2.5
Permitted Maximum Senior Leverage Ratio		0		£0.75
Actual Borrowings/Permitted Borrowings ^(c)	$	0		$125,000

(a)

Consolidated Tangible Net Worth (“TNW”) cannot be less than the sum of: (a) 75% of consolidated TNW at December 31, 2013, plus (b) 50% of the cumulative Net Cash Proceeds, as defined in the Revolver, of any Equity Issuances received by borrower after February 20, 2014, plus (c) 50% of the cumulative Consolidated Net Income, as defined in the Revolver, minus income taxes at an effective rate of 50%.

(b)	Not to be greater than 2.5 prior to and including December 31, 2014, and 2.0 after December 31, 2014.

(c)	Borrowing capacity under the provision of the borrowing base, as defined in the Credit Agreement.

CONTRACTUAL OBLIGATIONS, COMMERCIAL COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS

Contractual Obligations

Primary contractual obligations are payments under notes payable, operating leases and purchase obligations. Purchase obligations primarily represent land purchase and option contracts, and purchase obligations for water system connection rights.

At December 31, ~~2013~~2014, future estimated payments under existing contractual obligations, including estimated future cash payments, are as follows:

	Payments due by period
	Total		Less than1 Year		2 – 3Years		4 – 5Years		After 5Years
	(In thousands)
Contractual obligations:
Long-term debt principal payments	$	~~751~~761,~~708~~404	$	1,~~708~~904	$	09,500	$	0750,000	$	~~750,000~~0
Long-term debt interest payments		~~355~~291,~~782~~537		6465,~~688~~068		129,~~375~~438		~~129~~97,~~375~~031		~~32,344~~0
Operating leases		119,~~026~~671		2,~~661~~293		32,~~445~~718		12,~~919~~217		32,~~001~~443
Purchase obligations(1)		452,834		199,223		131,199		73,500		48,912
Purchase obligations (1)		423,243		213,534		114,647		56,570		38,492
Total contractual obligations	$	1,~~571~~485,~~350~~855	$	~~268~~282,~~280~~799	$	~~264~~256,~~019~~303	$	~~204~~905,~~794~~818	$	~~834~~40,~~257~~935

(1) Comprised of $~~422~~395.39 million of land purchase and option contracts, and $3027.54 million of water system connection rights purchase obligations.

We expect to fund contractual obligations in the ordinary course of business with existing cash resources, cash flows generated from operations, aour ~~$125.0 million secured revolving credit facility obtained in February 2014~~Revolver, and issuance of new debt as market conditions permit.

Land Purchase and Option Contracts

In the ordinary course of business, we enter into land purchase and option contracts to procure land for construction of homes. These contracts typically require a cash deposit and the purchase is often contingent on satisfaction of certain requirements by land sellers, including securing property and development entitlements. We utilize option contracts to acquire large tracts of land in smaller parcels to better manage financial and market risk of holding land and to reduce use of funds. Option contracts generally require a non-refundable deposit after a diligence period for the right to acquire lots over a specified period of time at a predetermined price. However, in certain circumstances, the purchase price may not, in whole or in part, be determinable and payable until the homes or lots are ~~closed~~delivered. In such instances, an estimated purchase price for the unknown portion is is not included in the total remaining purchase price. At December 31, ~~2013~~2014, we had owned or controlled 7,~~206~~067 lots in Colorado for which the ~~entire~~ purchase price is determined atwhen the ~~time the~~ underlying lots ~~close~~deliver with a ~~home~~homebuyer ~~buyer~~ or other purchaser. In addition, at December 31, 2014, we have an option to purchase 262 lots in Northern California where the purchase price is based on future price and profit appreciation of the ~~lot~~homes delivered (see “Item 13 – Certain Relationships and Affiliate Transactions, and Director Independence”). At our discretion, we generally have rights to terminate our obligations under purchase and option contracts by forfeiting our cash deposit or repaying amounts drawn under our letters of credit with no further financial responsibility to the land seller. However, purchase contracts can contain additional development obligations that must be completed even if a contract is terminated.

Use of option contracts is dependent on the willingness of land sellers, availability of capital, housing market conditions and geographic preferences. Options may be more difficult to obtain from land sellers in stronger housing markets and are more prevalent in certain geographic regions.

At December 31, ~~2013~~2014, we had $2124.08 million in option contract deposits on land with a total remaining purchase price, excluding land subject to option contracts that do not specify a purchase price, of $~~422~~395.39 million, compared to $521.30 million and $~~200~~422.23 million, respectively, at December 31, ~~2012~~2013.

Water System Connection Rights

At a homebuilding project in Colorado, we have a contractual obligation to purchase and receive water system connection rights which, at December 31, ~~2013~~2014, was $3027.54 million., ~~This~~which ~~amount~~ is less than ~~the~~their estimated market value ~~of the water system connection rights~~. These water system connection rights are held, ~~and~~ then transferred to homebuyers upon ~~closing~~delivery of their home, or transferred upon ~~the~~ sale of land to the respective buyer., ~~These water system connection rights can also be~~ sold or leased, but generally only within the local jurisdiction.

3741

Land Development and Homebuilding Joint Ventures

We enter into land development and homebuilding joint ventures for the following purposes:

•

leveraging our capital base;

•

managing and reducing financial and market risks of holding land;

•

establishing strategic alliances;

•

accessing lot positions; and

•

expanding market share.

These joint ventures typically obtain secured acquisition, development and construction financing, each designed to reduce use of corporate funds.

In December 2012, an unconsolidated joint venture, RRWS, LLC (“RRWS”), was formed and is owned 50% by ~~the~~us ~~Company~~ and 50% by a third-party real estate developer (“the RRWS Partner”). Through two wholly-owned subsidiaries, RRWS owns land in two master planned communities in the central coast of California. One subsidiary develops lots and constructs and sells single family attached and detached homes. This subsidiary is also under contract to acquire residential lots from an entity controlled by the RRWS Partner. The other subsidiary owns commercial and residential land in which the residential land is intended to be sold to ~~the~~us ~~Company~~ for construction and sales of active lifestyle targeted homes.

Several acquisition, development and construction loans were entered into by RRWS, each with two-year terms and options to extend for one year, subject to certain conditions. Each loan is cross collateralized and cross-defaulted with the other loan. ~~The~~We ~~Company~~ and RRWS Partner each executed limited completion, interest and carry guarantees and environmental indemnities on a joint and ~~several~~ several basis. In addition, ~~the~~we ~~Company~~ and RRWS Partner executed loan-to-value maintenance agreements for each loan on a joint and several basis. ~~The~~We ~~Company~~have ~~has~~ a maximum aggregate liability under the ~~re-margin~~remargin arrangements of the lesser of 50% of the outstanding ~~balance~~balances in total for these joint venture loans or $35.0 million ~~in total~~. ~~Obligations~~Our ~~of the Company~~ and RRWS Partner’s obligations under the ~~re-margin~~remargin arrangements are limited during the first two years of the loans. In addition to ~~re-margin~~remargin arrangements, the RRWS Partner, and several of its principals, executed repayment guarantees with no limit on their liability. At December 31, 2014 and 2013, outstanding bank notes payable were $43.0 million and $47.7 million, respectively, of which ~~the~~we ~~Company~~have ~~has~~ a maximum remargin obligation of $21.5 million and $23.8 million, respectively. ~~The~~We ~~Company~~ also ~~has~~have an ~~indemnification~~ agreement from RRWS Partner, under which ~~the~~we ~~Company~~ could potentially recover a portion of ~~any remargin~~ payments ~~made~~we ~~by the Company~~made. However, ~~the~~we ~~Company~~ cannot provide assurance itwe could collect under this ~~indemnity~~ agreement. No liabilities were recorded for these guarantees at December 31, 2014 and 2013 as the fair value of the secured real estate assets exceeded the threshold at which a remargin payment is required.

In November 2012, an unconsolidated joint venture, Polo Estates Ventures, LLC (“Polo”), was formed and is owned 50% by ~~the~~us ~~Company~~ and 50% by a third-party investor (“Polo Partner”). Polo entered into acquisition, development and construction loans in July 2013 with two-year terms and options to extend for one year, subject to certain conditions. Each loan is cross collateralized and cross defaulted with the other ~~loans~~loan. ~~The~~We ~~Company~~ and Polo Partner each ~~issued~~executed loan-to-value maintenance arrangements for each loan on a joint and several basis. At December 31, 2014 and 2013, outstanding bank notes payable were $12.7 million and $4.8 million, respectively, and total maximum borrowings permitted on these loans were $21.6 million and $21.6 ~~The~~million, ~~Company~~respectively. We also ~~has~~have reimbursement rights ~~under~~where ~~which~~we ~~the Company~~ could potentially recover a portion of ~~any remargin~~ payments we made ~~by the Company~~. However, ~~the Company~~we cannot provide assurance itwe could collect such ~~reimbursements~~payments. No liabilities were recorded for these guarantees at December 31, 2014 and 2013 as the fair value of the secured real estate assets exceeded the threshold at which a remargin payment is required.

In May 2013, ~~the~~we ~~Company~~ entered into an unconsolidated joint venture, RMV PA2 Development, LLC (“RMV”), to develop and sell land located in Southern California to the joint venture members and other parties. ~~The~~We ~~Company~~have ~~has~~ a preferred interest ~~that~~which earns a stated 10% preferred rate, with ~~the~~ potential to earn additional earnings based on the cash flows of RMV up to a maximum of a 15% internal rate of return. ~~The~~We ~~Company~~ committed to contribute up to $45.0 million ~~of capital~~. At December 31, 2013, ~~the~~we ~~Company~~ made aggregate ~~capital~~ contributions of $15.1 million to RMV, which were returned to us by December 31, 2014. In 2015, we anticipate making additional contributions at amounts below the $45.0 million commitment, and expect such contributions will be returned by the end of 2015.

In December 2011, Vistancia, LLC, a consolidated joint venture, sold its remaining interest in an unconsolidated joint venture (the “Vistancia Sale”). As a result of the Vistancia Sale, no other assets of Vistancia, LLC economically ~~benefited~~benefit the former non-controlling member and we recorded an obligation for the remaining $3.3 million distribution payable to this member, which is paid $0.1 million quarterly. In May 2012, for a nominal amount, SHLP purchased this member’s entire 16.7% interest; however, the distribution payable remained. At December 31, 2014 and 2013, the distribution payable was $2.2 million and $2.5 million, respectively.

3842

At December 31, ~~2013~~2014 and ~~2012~~2013, total unconsolidated joint ventures’ notes payable consisted of the following:

	December 31,
	2013		2012
	2014		2013
	(In thousands)
Bank and seller notes payable:
Guaranteed (subject to remargin obligations)	$	5255,~~515~~675	$	4552,~~610~~515
Non-Guaranteed		1034,~~073~~824		2210,~~894~~073
Total bank and seller notes payable (a)		6290,~~588~~499		6862,~~504~~588
Partner notes payable (b):
Unsecured		1668,~~001~~543		516,~~296~~001
Total unconsolidated joint venture notes payable	$	78159,~~589~~042	$	7378,~~800~~589
Other unconsolidated joint venture notes payable (c)	$	5583,~~441~~847	$	5755,~~839~~441

(a)	All bank and seller notes were secured by real property.

(b) No guarantees were provided on partner notes payables. In January 2014, a $3.2 million partner note from one joint venture was paid ~~off~~in full.

(c) Through indirect effective ownership in two joint ventures of 12.3% and 0.0003%, respectively, that had bank notes payable secured by real property in which we have not provided ~~any~~a guaranty.

At December 31, ~~2013~~2014 and ~~2012~~2013, remargin obligations and guarantees provided on debt of our unconsolidated joint ventures were on a joint and/or several basis and include, but are not limited to, project completion, interest and carry, and loan-to-value maintenance guarantees.

For RRWS, we have a remargin obligation that is limited to the lesser of 50% of the outstanding balances or $35.0 million in total for the joint venture loans, which outstanding loan balances at December 31, 2013 and 2012 were $47.7 million and $45.6 million, respectively. Consequently, our maximum remargin obligation at December 31, 2013 and 2012 was $23.8 million and $22.8 million, respectively. We also have an indemnification agreement where we could potentially recover a portion of any remargin payments made by the Company. However, we cannot provide assurance we could collect under this indemnity agreement.

For Polo, in 2013, we issued a joint and several remargin guarantee on loan obligations, which in total at December 31, 2013 were $4.8 million. At December 31, 2013, the total maximum borrowings permitted on these loans were $21.6 million. We also have reimbursement rights where we could potentially recover a portion of any remargin payments made by the Company. However, we cannot provide assurance we could collect such reimbursements.

No liabilities were recorded for these guarantees at December 31, 2013 and 2012 as the fair value of the secured real estate assets exceeded the threshold at which a remargin payment would be required.

We may be required to use our funds for obligations of these joint ventures, such as:

• loans (including to replace expiring loans, to satisfy loan ~~re-margin~~remargin and land development and construction completion obligations or to satisfy environmental indemnity obligations);

•

development and construction costs;

•

indemnity obligations to surety providers;

•

land purchase obligations; and

•

dissolutions (including satisfaction of joint venture indebtedness through repayment or the assumption of such indebtedness, payments to partners in connection with the dissolution, or payment of the remaining costs to complete, including warranty and legal obligations).

Guarantees, Surety Obligations and Other Contingencies

At December 31, ~~2013~~2014 and ~~2012~~2013, maximum unrecorded loan remargin or other guarantees, surety obligations and certain other contingencies were as follows:

	December 31,
	2013		2012
	2014		2013
	(In thousands)
Tax Court CCM case (capped at $70.0 million)	$	70,000	$	70,000
Remargin obligations for unconsolidated joint venture loans		2834,~~684~~199		2228,~~805~~684
Outstanding letters of credit		0		4,216
Costs to complete on surety bonds for Company projects		66,836		77,276
Costs to complete on surety bonds for Company projects		77,276		85,490
Costs to complete on surety bonds for joint venture projects		22,694		22,845
Costs to complete on surety bonds for joint venture projects		22,845		30,804
Costs to complete on surety bonds for affiliate projects		2,152		1,614
Costs to complete on surety bonds for related party projects		1,614		2,311
Total unrecorded contingent liabilities and commitments	$	195,881	$	200,419
Total unrecorded contingent liabilities and commitments	$	200,419	$	215,626

On May 10, 2011, we entered into a $75.0 million letter of credit facility. At December 31, 2013, there were no letters of credit outstanding. Atunder ~~December 31,~~this ~~2012,~~facility. ~~outstanding~~In ~~letters~~February of2014, ~~credit~~this ~~issued under the letter of~~ credit facility ~~were $4.2 million. This facility~~ was ~~terminated~~replaced inby ~~February 2014 upon~~ the ~~execution~~Revolver, ofwhich ~~the Company’s~~includes ~~new~~a $~~125~~62.05 million ~~revolving~~sublimit ~~credit~~for ~~facility,~~letters ~~under~~of ~~which~~credit. upAt toDecember 31, ~~$62.5~~2014, ~~million~~there ofwere no outstanding letters of credit ~~may~~under bethe ~~issued~~Revolver.

~~We provide~~43 surety bonds that guarantee completion of certain infrastructure serving our homebuilding projects. At December 31, 2013, there were $77.3 million of costs to complete in connection with $169.7 million of surety bonds issued. At December 31, 2012, there were $85.5 million of costs to complete in connection with $186.0 million of surety bonds issued.

We also provided indemnification for bonds issued by certain unconsolidated joint ventures and other related party projects in which we have no ownership interest. At December 31, 2013, there were $22.8 million of costs to complete in connection with $63.7 million of surety bonds issued for unconsolidated joint venture projects, and $1.6 million of costs to complete in connection with $4.9 million of surety bonds issued for related party projects. At December 31, 2012, there were $30.8 million of costs to complete in connection with $71.6 million of surety bonds issued for unconsolidated joint venture projects, and $2.3 million of costs to complete in connection with $6.1 million of surety bonds issued for related party projects.

Certain of our homebuilding projects utilize community facility district, metro-district and other local government bond financing programs to fund acquisition or construction of infrastructure improvements. Interest and principal on these bonds are typically paid from taxes and assessments levied on homeowners following the closing of new homes in the project. Occasionally, we enter into credit support arrangements requiring us to pay interest and principal on these bonds if taxes and assessments levied on landowners and/or homeowners are insufficient to cover such obligations. Furthermore, reimbursement of these payments to us is dependent on the district or local government’s ability to generate sufficient tax and assessment revenues from the new homes. At December 31, 2013 and 2012, in connection with credit support arrangements, there was $8.6 million and $4.9 million, respectively, reimbursable to us from certain agencies in Colorado and, accordingly, recorded these in inventory as a recoverable project cost.

We also pay certain fees and costs associated with the construction of infrastructure improvements in homebuilding projects that utilize these district bond financing programs. These fees and costs are typically reimbursable to us from, and therefore dependent on, bond proceeds or taxes and assessments levied on landowners and/or homeowners. At December 31, 2013 and 2012, in connection with certain funding arrangements, there was $13.1 million and $16.3 million, respectively, reimbursable to us from certain agencies, including $11.9 million and $11.9 million, respectively, from a metro-district in Colorado and, accordingly, recorded these in inventory as a recoverable project cost.

In December 2011, Vistancia, LLC, a consolidated joint venture, sold its remaining interest in an unconsolidated joint venture (the “Vistancia Sale”). As a condition of the Vistancia Sale, and the purchase of the non-controlling member’s remaining interest in Vistancia, LLC, the Company effectively remains a 10% guarantor on certain community facility district bond obligations to which the Company must meet a minimum calculated tangible net worth; otherwise, the Company is required to fund collateral to the bond issuer. At December 31, 2013 and 2012, the Company exceeded the minimum tangible net worth requirement.

We provide surety bonds that guarantee completion of certain infrastructure serving our homebuilding projects. At December 31, 2014, there were $66.8 million of costs to complete in connection with $146.5 million of surety bonds issued. At December 31, 2013, there were $77.3 million of costs to complete in connection with $169.7 million of surety bonds issued.

We also provide indemnification for bonds issued by certain unconsolidated joint ventures and other affiliate projects in which we have no ownership interest. At December 31, 2014, there were $22.7 million of costs to complete in connection with $63.2 million of surety bonds issued for unconsolidated joint venture projects, and $2.2 million of costs to complete in connection with $3.5 million of surety bonds issued for affiliate projects. At December 31, 2013, there were $22.8 million of costs to complete in connection with $63.7 million of surety bonds issued for unconsolidated joint venture projects, and $1.6 million of costs to complete in connection with $4.9 million of surety bonds issued for affiliate projects.

Certain of our homebuilding projects utilize community facility district, metro-district and other local government bond financing programs to fund acquisition or construction of infrastructure improvements. Interest and principal on these bonds are typically paid from taxes and assessments levied on landowners, including land we own, and/or homeowners following the delivery of new homes in the community. Occasionally, we also enter into credit support arrangements requiring us to pay interest and principal on these bonds if taxes and assessments levied on landowners and/or homeowners are insufficient to cover such obligations. Furthermore, reimbursement of these payments to us is dependent on the district or local government’s ability to generate sufficient tax and assessment revenues from the new homes. At December 31, 2014 and 2013, in connection with credit support arrangements, there was $10.9 million and $8.6 million, respectively, reimbursable to us from certain agencies in Colorado and, accordingly, recorded in inventory as a recoverable project cost.

We also pay certain fees and costs associated with the construction of infrastructure improvements in homebuilding projects that utilize these district bond financing programs. These fees and costs are typically reimbursable to us from, and therefore dependent on, bond proceeds or taxes and assessments levied on landowners and/or homeowners. At December 31, 2014 and 2013, in connection with certain funding arrangements, there was $14.0 million and $13.1 million, respectively, reimbursable to us from certain agencies, including $12.8 million and $11.9 million, respectively, from metro-districts in Colorado and, accordingly, were recorded in inventory as a recoverable project cost.

Until bond proceeds or tax and assessment revenues are sufficient to cover our obligations and/or reimburse us, our responsibility to make interest and principal payments on these bonds or pay fees and costs associated with the construction of infrastructure improvements could be prolonged and significant. In addition, if bond proceeds or tax and assessment revenues are not sufficient to cover our obligations and/or reimburse us, these amounts might not be recoverable.

As a condition of the Vistancia Sale, and the purchase of the non-controlling member’s remaining interest in Vistancia, LLC, we remain a 10% guarantor on certain community facility district bond obligations to which the we must meet a minimum calculated tangible net worth; otherwise, we are required to fund collateral to the bond issuer. At December 31, 2014 and 2013, we exceeded the minimum tangible net worth requirement.

CRITICAL ACCOUNTING POLICIES

~~The~~Preparation ~~preparation~~ of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) ~~requires~~ requires us to make estimates and judgments that affect reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, ~~including~~ including those that impact our most critical accounting policies. We base our estimates and judgments on historical experience and various other assumptions believed to be reasonable under the circumstances. Actual results may differ from these ~~estimates~~ estimates under different assumptions or conditions. We believe accounting policies related to the following accounts or activities are those most critical to the portrayal of our consolidated financial condition and results of operations and require the most significant judgments and estimates.

Inventory

We capitalize preacquisition, land, development and other allocated costs, including interest, during development and home construction. Applicable costs incurred after development or construction is substantially complete are charged to selling, general and administrative, and other expenses as appropriate. Preacquisition costs, including non-refundable land deposits, are expensed to other income (expense), net when we determine continuation of the respective project is not probable.

Land, development and other indirect costs are typically allocated to inventory using a methodology that approximates the relative-sales-value method. Home construction costs are recorded using the specific identification method. Cost of sales for homes ~~closed~~delivered includes the specific construction costs of each home and all applicable land acquisition, land development and related costs (both incurred and estimated to be incurred) based upon the total number of homes expected to ~~close~~be delivered in each community. Changes to estimated total development costs subsequent to initial home ~~closings~~deliveries in a community are generally allocated on a relative-sales-value method to remaining homes in the community.

~~Inventory~~44 is stated at cost, unless the carrying amount is determined not to be recoverable, in which case inventory is adjusted to fair value or fair value less cost to sell. Quarterly, we review our real estate assets at each community for indicators of impairment. Real estate assets include projects actively selling, under development, held for future development or held for sale. Indicators of impairment include, but are not limited to, significant decreases in local housing market values and prices of comparable homes, significant decreases in gross margins and sales absorption rates, costs in excess of budget, and actual or projected cash flow losses.

If there are indications of impairment, we analyze the budgets and cash flows of our real estate assets and compare the estimated remaining undiscounted future cash flows of the community to the asset’s carrying value. If the undiscounted cash flows exceed the asset’s carrying value, no impairment adjustment is required. If the undiscounted cash flows are less than the asset’s carrying value, the asset is deemed impaired and adjusted to fair value. For land held for sale, if the fair value less costs to sell exceed the asset’s carrying value, no impairment adjustment is required. These impairment evaluations require use of estimates and assumptions regarding future conditions, including timing and amounts of development costs and sales prices of real estate assets, to determine if estimated future undiscounted cash flows will be sufficient to recover the asset’s carrying value.

When estimating undiscounted cash flows of a community, various assumptions are made, including: (i) the number of homes available and the expected prices and incentives offered by us or builders in other communities, and future price adjustments based on market and economic trends; (ii) expected sales pace and cancellation rates based on local housing market conditions, competition and historical trends; (iii) costs to date and expected to be incurred, including, but not limited to, land and land development, home construction, interest, indirect construction and overhead, and selling and marketing costs; (iv) alternative product offerings that could impact sales pace, sales price and/or building costs; and (v) alternative uses for the property.

Many assumptions are interdependent and a change in one may require a corresponding change to other assumptions. For example, increasing or decreasing sales rates have a direct impact on the estimated price of a home, the level of time sensitive costs (such as indirect construction, overhead and interest), and selling and marketing costs (such as model maintenance and advertising). Depending on the underlying objective of the community, assumptions could have a significant impact on the projected cash flows. For example, if our objective is to preserve operating margins, our cash flows will be different than if the objective is to increase sales. These objectives may vary significantly by community over time.

If assets are considered impaired, the impairment charge is the amount the asset’s carrying value exceeds its fair value. Fair value is determined based on estimated future cash flows discounted for inherent risks associated with real estate assets or other valuation techniques. These discounted cash flows are impacted by expected risk based on estimated land development, construction and delivery timelines; market risk of price erosion; uncertainty of development or construction cost increases; and other risks specific to the asset or market conditions where the asset is located when the assessment is made. These factors are specific to each community and may vary among communities. The discount rate used in determining each asset’s fair value depends on the community’s projected life and development stage. We generally use discount rates ranging from 10% to 25%, subject to perceived risks associated with the community’s cash flow streams relative to its inventory.

Inventory is stated at cost, unless the carrying amount for inventory (other than land held for sale) is determined to be unrecoverable, in which case inventory is adjusted to fair value. For land held for sale, inventory is stated at the lower of cost or fair value less cost to sell. Quarterly, we review our real estate assets at each community for indicators of impairment. Real estate assets include projects actively selling, under development, held for future development or held for sale. Indicators of impairment include, but are not limited to, significant decreases in local housing market values and prices of comparable homes, significant decreases in gross margins and sales absorption rates, costs in excess of budget, and actual or projected cash flow losses.

If there are indications of impairment, we analyze the budgets and cash flows of our real estate assets and compare the estimated remaining undiscounted future cash flows of the community to the asset’s carrying value. If the undiscounted cash flows exceed the asset’s carrying value, no impairment adjustment is required. If the undiscounted cash flows are less than the asset’s carrying value, the asset is deemed impaired and adjusted to fair value. For land held for sale, if the fair value less costs to sell exceeds the asset’s carrying value, no impairment adjustment is required. These impairment evaluations require use of estimates and assumptions regarding future conditions, including timing and amounts of development costs and sales prices of real estate assets, to determine if estimated future undiscounted cash flows will be sufficient to recover the asset’s carrying value.

When estimating undiscounted cash flows of a community, various assumptions are made, including: (i) the number of homes available and expected prices and incentives offered by us or other builders, and future price adjustments based on market and economic trends; (ii) expected sales pace and cancellation rates based on local housing market conditions, competition and historical trends; (iii) costs to date and expected to be incurred, including, but not limited to, land and land development, home construction, interest, indirect construction and overhead, and selling and marketing costs; (iv) alternative product offerings that could impact sales pace, sales price and/or building costs; and (v) alternative uses for the property.

Completed Operations Claim Costs

We maintain, and require our subcontractors to maintain, general liability insurance which includes coverage for completed operations losses and damages. Most subcontractors carry this insurance through our “rolling wrap-up” insurance program, where our risks and risks of participating subcontractors are insured through a common set of master policies.

Completed operations claims reserves primarily represent claims for property damage to completed homes and projects outside of our one- to two-year fit and finish warranty period. Specific length, terms and conditions of completed operations warranties vary depending on the market inwhere ~~which~~ homes ~~are~~deliver ~~closed~~ and can range up to 12ten years from the ~~closing~~delivery of a home.

We record expenses and liabilities for estimated costs of potential completed operations claims based upon aggregated loss experience, which includes an estimate of completed operations claims incurred but not reported and is actuarially estimated using individual case-~~basis~~based valuations and statistical analysis. These estimates make up our entire reserve and are subject to a high degree of variability due to uncertainties such as trends in completed operations claims related to our markets and products built, changes in claims reporting and settlement patterns, third party recoveries, insurance industry practices, insurance regulations and legal precedent. Because state regulations vary, completed operations claims are reported and resolved over an extended period, sometimes exceeding ~~twelve~~ten years. As a result, actual costs may differ significantly from estimates.

~~The~~45 actuarial analyses that determine these incurred but not reported claims consider various factors, including frequency and severity of losses, which are based on our historical claims experience supplemented by industry data. The actuarial analyses of these claims and reserves also consider historical third party recovery rates and claims management expenses. Due to inherent uncertainties related to each of these factors, periodic changes to such factors based on updated relevant information could result in actual costs to differ significantly from estimated costs.

The actuarial analyses that determine these incurred but not reported claims consider various factors, including frequency and severity of losses, which are based on historical claims experience supplemented by industry data. The actuarial analyses of these claims and reserves also consider historical third party recovery rates and claims management expenses. Due to inherent uncertainties related to each of these factors, changes based on updated relevant information could result in actual costs differing significantly from estimates.

In accordance with our completed operations insurance policies, completed operations claims costs are recoverable from our subcontractors or insurance carriers. For policy years from August 1, 2001 through the present, completed operations claims are insured or reinsured by third-party and affiliate insurance carriers.

Revenues

In accordance with Accounting Standards Codification (“ASC”) 360, revenues from housing and other real estate sales are recognized when the respective units ~~are closed~~deliver. Housing and other real estate sales ~~close~~deliver when all conditions of escrow are met, including delivery of the home or other real estate asset to the customer, title passage, appropriate consideration is received or collection of associated receivables, if any, is reasonably assured and when we have no other continuing involvement in the asset. Sales incentives are a reduction of revenues when the respective unit ~~is closed~~delivers.

Income Taxes

SHLP is treated as a partnership for income tax purposes. As a limited partnership, SHLP is subject to certain minimal state taxes and fees; however, taxes on income realized by SHLP are generally the obligation of the Partners and their owners.

SHI and PIC are C corporations. Federal and state income taxes are provided for these entities in accordance with ASC 740. The provision for, or benefit from, income taxes is calculated using the asset and liability method, whereby deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect the year in which differences are expected to reverse.

Deferred tax assets are evaluated to determine whether a valuation allowance should be established based on our determination ofif ~~whether~~ it is more likely than not some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends primarily on generation of future taxable income during periods in which those temporary differences become deductible. ~~The~~Assessment ~~assessment~~ of a valuation allowance includes giving appropriate consideration to all positive and negative evidence related to ~~the~~ realization of the deferred tax asset. This assessment considers, among other things, the nature, frequency and severity of current and cumulative losses ~~over~~in recent years, forecasts of future profitability, ~~the~~ duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards before they expire, and tax planning alternatives. Judgment is required in determining future tax consequences of events that have been recognized in the consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial position or results of operations.

42We follow certain accounting guidance on how uncertain tax positions should be accounted for and disclosed in the consolidated financial statements. The guidance requires assessment of tax positions taken or expected to be taken in the tax returns and to determine whether the tax positions are “more-likely-than-not” of being sustained upon examination by the applicable tax authority. Tax positions deemed to meet the more-likely-than-not criteria would be recorded as a tax benefit or expense in the current year. We are required to assess open tax years, as defined by the statute of limitations, for all major jurisdictions, including federal and certain states. Open tax years are those that are open for examination by taxing authorities. We have examinations in progress but believe no uncertain tax positions exist that do not meet the more-likely-than-not criteria.

We follow certain accounting guidance with respect to how uncertain tax positions should be accounted for and disclosed in the consolidated financial statements. The guidance requires the assessment of tax positions taken or expected to be taken in the tax returns and to determine whether the tax positions are “more-likely-than-not” of being sustained upon examination by the applicable tax authority. Tax positions deemed to meet the more-likely-than-not criteria would be recorded as a tax benefit or expense in the current year. We are required to assess open tax years, as defined by the statute of limitations, for all major jurisdictions, including federal and certain states. Open tax years are those that are open for examination by taxing authorities. We have examinations in progress but believe there are no uncertain tax positions that do not meet the more-likely-than-not level of authority.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2 in our accompanying consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk primarily from interest rate fluctuations. Historically, we have incurred fixed-rate and variable-rate debt. For fixed-rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not earnings or cash flow. Conversely, for variable-rate debt, changes in interest rates generally do not affect the fair market value of the debt but do affect earnings and cash flow. We did not utilize swaps, forward or option contracts on interest rates or commodities, or other types of derivative financial instruments at or during the year ended December 31, ~~2013~~2014. We have not entered into and currently do not hold derivatives for trading or speculative purposes. As we do not have an obligation to prepay fixed-rate debt prior to maturity, and we do not currently have a significant amount of variable-rate debt, interest rate risk and changes in fair market value should not have a significant impact on such debt until we refinance.

On46 May 10, 2011, the existing Secured Facilities were paid off from the proceeds of the $750.0 million of Secured Notes that bear interest at a fixed rate of 8.625%. No principal payments on the Secured Notes are due until maturity on May 15, 2019. At December 31, 2013, there was no other material indebtedness outstanding.

In February 2014, we replaced our $75.0 million letter of credit facility with a $125.0 million secured revolving credit facility (the “Revolver”) which bears interest at LIBOR plus 2.75% and matures March 1, 2016. Borrowing availability is determined by a borrowing base formula and we are subject to financial covenants, including minimum net worth and leverage and interest coverage ratios. If we do not maintain compliance with these financial covenants, the Revolver converts to an 18-month amortizing term loan.

In February 2014, we replaced our $75.0 million secured letter of credit facility with the $125.0 million Revolver, which bears interest, at the Company’s option, either at (i) a daily eurocurrency base rate as defined in the Credit Agreement, plus a margin of 2.75%, or (ii) a eurocurrency rate as defined in the Credit Agreement, plus a margin of 2.75%, and matures March 1, 2016. Borrowing availability is determined by a borrowing base formula and we are subject to financial covenants, including minimum net worth and leverage and interest coverage ratios. If we do not maintain compliance with these financial covenants, the Revolver converts to an 18-month amortizing term loan. At December 31, 2014, we were in compliance with these covenants and no amounts were outstanding.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

The Board of Directors, Shareholders and Partners

Shea Homes Limited Partnership

We have audited the accompanying consolidated balance sheets of Shea Homes Limited Partnership (the Company), a California limited partnership, as of December 31, ~~2013~~2014 and ~~2012~~2013, and the related consolidated statements of ~~operations~~income, comprehensive income ~~(loss)~~, changes in equity, and cash flows for each of the three years in the period ended December 31, ~~2013~~2014. These ~~financial~~ financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Shea Homes Limited Partnership at December 31, ~~2013~~2014 and ~~2012~~2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2013~~2014 in conformity with U. S. generally accepted accounting principles.

/s/ Ernst & Young LLP ~~Los Angeles, California March 17, 2014~~

44Los Angeles, California

March 6, 2015

Shea Homes Limited Partnership

(A California Limited Partnership)

Consolidated Balance Sheets

(In thousands)

	December 31,
	2013		2012
	2014		2013
Assets
Cash and cash equivalents	$	~~206~~236,~~205~~902	$	~~279~~206,~~756~~205
Restricted cash		~~1,189~~426		131,~~031~~189
Accounts and other receivables, net		147,~~499~~508		~~141~~147,~~289~~499
Receivables from related parties, net		32,350		34,028
Receivables from affiliates, net		6,403		31,313
Inventory		1,~~013~~173,~~272~~585		~~837~~1,~~653~~013,272
Investments in unconsolidated joint ventures		47,748		28,653
Investments in and advances to unconsolidated joint ventures		42,764		48,785
Other assets, net		5759,~~070~~122		3957,~~127~~070
Total assets	$	1,~~505~~666,~~333~~710	$	1,~~373~~505,~~537~~333
Liabilities and equity
Liabilities:
Notes payable	$	~~751~~761,~~708~~404	$	~~758~~751,~~209~~708
Payables to related parties		21		125
Payables to affiliates		4,797		21
Accounts payable		6267,~~346~~321		62,~~738~~346
Other liabilities		~~245~~278,~~801~~330		~~233~~245,~~218~~801
Total liabilities		1,~~059~~111,~~876~~852		1,~~054~~059,~~290~~876
Equity:
SHLP equity:
Owners’ equity		~~440~~549,~~268~~373		~~314~~440,~~321~~268
Accumulated other comprehensive income		45,~~788~~106		4,~~517~~788
Total SHLP equity		~~445~~554,~~056~~479		~~318~~445,~~838~~056
Non-controlling interests		~~401~~379		~~409~~401
Total equity		~~445~~554,~~457~~858		~~319~~445,~~247~~457
Total liabilities and equity	$	1,~~505~~666,~~333~~710	$	1,~~373~~505,~~537~~333

See accompanying notes

4549

Shea Homes Limited Partnership

(A California Limited Partnership)

Consolidated Statements of ~~Operations~~Income

(In thousands)

	Years Ended December 31,
	2013			2012			2011
	2014			2013			2012
Revenues	$	~~930~~1,~~610~~140,606		$	~~680~~930,~~147~~610		$	~~587~~680,~~770~~147
Cost of sales		(~~709~~885,~~412~~018	)		(~~538~~709,~~434~~412	)		(~~515~~538,~~578~~434	)
Gross margin		~~221~~255,~~198~~588			~~141~~221,~~713~~198			72141,~~192~~713
Selling expenses		(5463,~~338~~429	)		(4554,~~788~~338	)		(45,~~251~~788	)
General and administrative expenses		(5054,~~080~~921	)		(4350,~~747~~080	)		(3743,~~374~~747	)
Equity in income (loss) from unconsolidated joint ventures		(19,~~104~~142	)		~~378~~(1,104	)		~~(5,134~~378	)
Loss on debt extinguishment		0			0			(88,384	)
Gain (loss) on reinsurance transaction		7,177			2,011			(12,013	)
Gain (loss) on reinsurance transaction		2,011			(12,013	)		3,072
Interest expense		(595	)		(5,071	)		(19,862	)
Interest expense		(5,071	)		(19,862	)		(16,806	)
Other income (expense), net		(1,350	)		(778	)		9,119
Other income (expense), net		(778	)		9,119			7,374
Income before income taxes		151,612			111,838			29,800
Income (loss) before income taxes		111,838			29,800			(110,311	)
Income tax benefit (expense)		(18,213	)		14,101			(616	)
Income tax benefit (expense)		14,101			(616	)		3,069
Net income		133,399			125,939			29,184
Net income (loss)		125,939			29,184			(107,242	)
Less: Net loss (income) attributable to non-controlling interests		37			8			(146	)
Less: Net (income) loss attributable to non-controlling interests		8			(146	)		(7,143	)
Net income attributable to SHLP	$	133,436		$	125,947		$	29,038
Net income (loss) attributable to SHLP	$	125,947		$	29,038		$	(114,385	)

See accompanying notes

4650

Shea Homes Limited Partnership

(A California Limited Partnership)

Consolidated Statements of Comprehensive Income ~~(Loss)~~

(In thousands)

	Years Ended December 31,
	2013			2012			2011
	2014			2013			2012
Net income (loss)	$	125,939		$	29,184		$	(107,242	)
Net income	$	133,399		$	125,939		$	29,184
Other comprehensive income (loss), before tax
Other comprehensive income, before tax
Unrealized investment holding gains (losses) during the year		552			1,569			1,927
Unrealized investment holding gains during the year		565			552			1,569
Less: Reclassification adjustments for investment (gains) losses included in net income (loss)		(39	)		(3,976	)		(344	)
Less: Reclassification adjustments for investment gains included in net income		0			(39	)		(3,976	)
Comprehensive income (loss), before tax		126,452			26,777			(105,659	)
Comprehensive income, before tax		133,964			126,452			26,777
Income tax benefit (expense)		(~~242~~247	)		~~532~~(242	)		~~(554~~532	)
Comprehensive income (loss), net of tax		126,210			27,309			(106,213	)
Comprehensive income, net of tax		133,717			126,210			27,309
Less: Comprehensive (income) loss attributable to non-controlling interests		837			~~(146~~8	)		(~~7,143~~146	)
Comprehensive income (loss) attributable to SHLP	$	126,218		$	27,163		$	(113,356	)
Comprehensive income attributable to SHLP	$	133,754		$	126,218		$	27,163

47See accompanying notes

Shea Homes Limited Partnership

(A California Limited Partnership)

Consolidated Statements of Changes in Equity

(In thousands)

	Shea Homes Limited Partnership																					Non-controllingInterests			TotalEquity
	Limited Partner									GeneralPartner			TotalOwners’Equity			AccumulatedOtherComprehensiveIncome (Loss)			TotalSHLPEquity
	Common			PreferredSeries B			PreferredSeries D			Common
Balance, December 31, 2010		71,830			194,240			121,892			18,901			406,863			5,363			412,226			20,087			432,313
Balance, December 31, 2011	$	1		$	173,555		$	120,955		$	0		$	294,511		$	6,392		$	300,903		$	27,100		$	328,003
Comprehensive income (loss):
Comprehensive income :
Net income (loss)		(73,438	)		(20,685	)		(937	)		(19,325	)		(114,385	)		0			(114,385	)		7,143			(107,242	)
Net income		0			0			29,038			0			29,038			0			29,038			146			29,184
Change in unrealized gains on investments, net		0			0			0			0			0			1,029			1,029			0			1,029
Total comprehensive income (loss)																				(113,356	)		7,143			(106,213	)
Contributions from owners and non-controlling interests (a)		1,609			0			0			424			2,033			0			2,033			4,008			6,041
Distributions to non-controlling interests		0			0			0			0			0			0			0			(4,138	)		(4,138	)
Balance, December 31, 2011		1			173,555			120,955			0			294,511			6,392			300,903			27,100			328,003
Comprehensive income (loss):
Net income (loss)		0			0			29,038			0			29,038			0			29,038			146			29,184
Change in unrealized gains on investments, net		0			0			0			0			0			(1,875	)		(1,875	)		0			(1,875	)
Total comprehensive income (loss)																				27,163			146			27,309
Total comprehensive income																				27,163			146			27,309
Redemption of Company’s interest in consolidated joint venture (see Note 12)		0			0			(11,580	)		0			(11,580	)		0			(11,580	)		(28,239	)		(39,819	)
Contributions from owners and non-controlling interests (a)		1,862			0			0			490			2,352			0			2,352			1,746			4,098
Distributions to non-controlling interests		0			0			0			0			0			0			0			(344	)		(344	)
Balance, December 31, 2012	$	1,863		$	173,555		$	138,413		$	490		$	314,321		$	4,517		$	318,838		$	409		$	319,247
Comprehensive income (loss):
Net income (loss)		34,133			43,379			39,453			8,982			125,947			0			125,947			(8	)		125,939
Change in unrealized gains on investments, net		0			0			0			0			0			271			271			0			271
Total comprehensive income (loss)																				126,218			(8	)		126,210
Balance, December 31, 2013	$	35,996		$	216,934		$	177,866		$	9,472		$	440,268		$	4,788		$	445,056		$	401		$	445,457
Comprehensive income (loss):
Net income (loss)		100,340			1,934			4,757			26,405			133,436			0			133,436			(37	)		133,399
Change in unrealized gains on investments, net		0			0			0			0			0			318			318			0			318
Total comprehensive income (loss)																				133,754			(37	)		133,717
Contributions from owners and non-controlling interests (a)		748			0			0			197			945			0			945			15			960
Distributions to owners (b)		(20,010	)		0			0			(5,266	)		(25,276	)		0			(25,276	)		0			(25,276	)
Balance, December 31, 2014	$	117,074		$	218,868		$	182,623		$	30,808		$	549,373		$	5,106		$	554,479		$	379		$	554,858

(a) For the ~~year~~years ended December 31, ~~2012~~2014 and ~~2011~~2012, the Company sold property to ~~related~~affiliates ~~parties~~ under common control and, in accordance with U.S. generally accepted accounting principles (“GAAP”), $20.49 million and $2.04 million, respectively, of consideration received in excess of the net book value was recorded as ana ~~equity~~ contribution from ~~its~~ owners.

(b)	In 2014, the Company acquired property from an affiliate under common control for $4.4 million of cash, assumption of a $1.3 million net liability, and estimated future revenue participation payments of $19.6 million. The $25.3 million of consideration was recorded as a distribution to owners.

See accompanying notes

4852

Shea Homes Limited Partnership

(A California Limited Partnership)

Consolidated Statements of Cash Flows

(In thousands)

	Years Ended December 31,
	2013			2012			2011
	2014			2013			2012
Operating activities
Net income (loss)	$	125,939		$	29,184		$	(107,242	)
Net income	$	133,399		$	125,939		$	29,184
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in (income) loss from joint ventures		1,104			(378	)		2,050
Equity in (income) loss from unconsolidated joint ventures		(9,142	)		1,104			(378	)
Loss on debt extinguishment		0			0			88,384
(Gain) loss on reinsurance transaction		(7,177	)		(2,011	)		12,013
(Gain) loss on reinsurance transaction		(2,011	)		12,013			(3,072	)
Net gain on sale of available-for-sale investments		0			(15	)		(8,806	)
Gain on sale of investment in unconsolidated joint venture		0			0			(5,230	)
Reversal of deferred tax asset valuation allowance		0			(15,630	)		0
Net gain on sale of available-for-sale investments		(15	)		(8,806	)		(565	)
Depreciation and amortization expense		12,630			10,608			8,638
Reversal of deferred tax asset valuation allowance		(15,630	)		0			0
Inventory impairment		9,035			0			0
Depreciation and amortization expense		10,608			8,638			11,296
Net interest capitalized on investments in unconsolidated joint ventures		(2,912	)		(2,278	)		(849	)
Impairment of inventory		0			0			30,600
Distributions of earnings from unconsolidated joint ventures		18,790			7,100			1,400
Impairment of investments in unconsolidated joint ventures		0			0			2,375
Net interest capitalized on investments in unconsolidated joint ventures		(2,278	)		(849	)		(667	)
Distributions of earnings from joint ventures		7,100			1,400			650
Changes in operating assets and liabilities:
Restricted cash		~~11,842~~763			~~687~~11,842			~~(1,271~~687	)
Receivables and other assets		(112,~~192~~607	)		(1713,~~670~~161	)		(618,~~913~~134	)
Inventory		(~~185~~178,~~596~~700	)		(68185,~~733~~596	)		31(68,~~521~~733	)
Payables and other liabilities		1428,~~231~~375			3814,~~323~~231			(338,~~038~~323	)
Net cash provided by (used in) operating activities		~~(45~~2,~~898~~454	)		(647,~~191~~867	)		38(6,~~878~~655	)
Investing activities
Purchase of available-for-sale investments		0			0			(20,205	)
Proceeds from sale of available-for-sale investments		184			3,165			26,547
Proceeds from sale of available-for-sale investments		3,165			26,547			1,724
Collections on promissory notes from affiliates		25,183			4,104			1,881
Proceeds from sale of investments in unconsolidated joint venture		0			0			14,000
Investments in and advances to unconsolidated joint ventures		(29,158	)		(26,145	)		(11,967	)
Net decrease in promissory notes from related parties		3,335			1,987			107,680
Distributions of capital from unconsolidated joint ventures		38,767			4,072			427
Investments in unconsolidated joint ventures		(25,376	)		(11,967	)		(17,281	)
Net cash provided by (used in) investing activities		34,976			(14,804	)		16,888
Distributions of capital from unconsolidated joint ventures		4,072			321			8,012
Purchase of property and equipment		(1,979	)		(464	)		(1,846	)
Proceeds from sale of property and equipment		10			0			12,893
Net cash provided by (used in) investing activities		(16,773	)		16,424			104,977
Financing activities
Repayments on revolving lines of credit		0			0			(80,448	)
Principal payments to financial institutions and others		(3,308	)		(10,880	)		(2,429	)
Issuance of new secured notes		0			0			750,000
Contributions from non-controlling interests		15			0			1,746
Principal payments to financial institutions and others		(10,880	)		(2,429	)		(721,953	)
Distributions to non-controlling interests		0			0			(344	)
Accrued interest on notes payable		0			0			1,839
Contributions from owners		945			0			2,352
Amortization of notes payable discount		0			0			5,527
Distributions to owners		(4,385	)		0			0
Contributions from non-controlling interests		0			1,746			4,008
Other financing activities		0			0			(168	)
Distributions to non-controlling interests		0			(344	)		(3,369	)
Net cash provided by (used in) financing activities		(6,733	)		(10,880	)		1,157
Contributions from owners		0			2,352			2,033
Net increase (decrease) in cash and cash equivalents		30,697			(73,551	)		11,390
Other financing activities		0			(168	)		0
Cash and cash equivalents at beginning of year		206,205			279,756			268,366
Net cash provided by (used in) financing activities		(10,880	)		1,157			(42,363	)
Cash and cash equivalents at end of year	$	236,902		$	206,205		$	279,756
Net increase (decrease) in cash and cash equivalents		(73,551	)		11,390			101,492
Cash and cash equivalents at beginning of year		279,756			268,366			166,874
Cash and cash equivalents at end of year	$	206,205		$	279,756		$	268,366

See accompanying notes

4953

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Consolidated Financial Statements

December 31, ~~2013~~2014

1. Organization

Shea Homes Limited Partnership, a California limited partnership (“SHLP”), was formed January 4, 1989, pursuant to an agreement of partnership (the “Agreement”), as most recently amended August 6, 2013, by and between J.F. Shea, GPG.P., a Delaware general partnership, as general partner, and ~~the~~our ~~Company’s~~ limited partners who are comprised of entities and trusts, including J.F. Shea Co., Inc. (“JFSCI”), ~~under~~that ~~the~~are under common control of Shea family members (collectively, the “Partners”). J.F. Shea, GPG.P. is 96% owned by JFSCI.

Nature of Operations

Our principal business purpose is homebuilding, which includes acquiring and developing land and constructing and selling new residential homes thereon. To a lesser degree, we develop ~~lots~~ and sell ~~them~~land to other homebuilders. Our principal markets are California, Arizona, Colorado, Washington, Nevada, Florida, Virginia, ~~and~~North ~~Houston,~~Carolina and Texas.

We own a captive insurance company, Partners Insurance Company, Inc. (“PIC”), which provided warranty, general liability, workers’ compensation and completed operations insurance for related companies and third-party subcontractors. Effective for the policy years commencing in 2007, PIC ceased issuing policies for these coverages (see Note 11).

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include ~~the accounts of~~ SHLP and its wholly-owned subsidiaries, including Shea Homes, Inc. (“SHI”) and its wholly-owned subsidiaries. The Company consolidates all joint ventures in which it has a controlling interest or other ventures in which it is the primary beneficiary of a variable interest entity (“VIE”). Material intercompany accounts and transactions are eliminated.

Unless the context otherwise requires, the terms “we”, “us”, “our” and “the Company” refer to SHLP, its subsidiaries and its consolidated joint ventures.

Use of Estimates

Preparation of the consolidated financial statements in conformity with ~~U.S. generally accepted accounting principles (“~~GAAP”) requires ~~the~~us ~~Company~~ to make estimates and assumptions that affect amounts reported in the consolidated financial statements and accompanying notes. Estimates ~~relate~~ primarily relate to valuation of certain real estate and reserves for self-insured risks. Actual results could differ significantly from those estimates.

Reclassifications

Certain reclassifications were made in the ~~2012~~2013 consolidated financial statements to conform to classifications in ~~2013~~2014. At December 31, 2013, in the consolidated balance sheet, advances to unconsolidated joint ventures of $1.0 million were reclassified from receivables from affiliates to investments in and advances to unconsolidated joint ventures. In addition, for the year ended December 31, 2013 and 2012, ~~investments~~in the consolidated statements of cash flows, advances of $120.18 million were reclassified from promissory notes from affiliates to investments in and ~~property~~advances to unconsolidated joint ventures, and ~~equipment~~collections of $20.21 million were reclassified from promissory notes from affiliates to ~~other~~distributions ~~assets~~of incapital ~~the~~from unconsolidated ~~consolidated~~joint ~~balance~~ventures, ~~sheet~~respectively.

Cash and Cash Equivalents

All highly liquid investments (original maturities of 90 days or less) are considered to be cash equivalents.

Concentration of Credit Risk

Financial instruments representing concentrations of credit risk are primarily cash, cash equivalents, investments and insurance receivables.

~~Cash~~54 in banks exceeded the federally insured limits; cash equivalents comprised primarily of money market securities and securities backed by the U.S. government; and insurance receivables were with highly rated insurers and/or collateralized. We have incurred no losses on deposits of cash and cash equivalents and believe our depository institutions are financially sound and present minimal credit risk.

Cash in banks exceeded the federally insured limits; cash equivalents comprised primarily of money market securities and securities backed by the U.S. government; and insurance receivables were with highly rated insurers and/or collateralized. We have incurred no losses on deposits of cash and cash equivalents and believe our depository institutions are financially sound and present minimal credit risk.

Inventory

Inventory is stated at cost, unless the carrying amount (other than land held for sale) is determined ~~not~~ to be ~~recoverable~~unrecoverable, in which case inventory is adjusted to fair value . For land held for sale, inventory is stated at the lower of cost or fair value less cost to sell. Quarterly, we review our real estate assets at each community for indicators of impairment. Real estate assets include projects actively selling, under development, held for future development or held for sale. Indicators of impairment include, but are not limited to, significant decreases in local housing market values and prices of comparable homes, significant decreases in gross margins and sales absorption rates, costs in excess of budget, and actual or projected cash flow losses.

If there are indications of impairment, we analyze the budgets and cash flows of our real estate assets and compare the estimated remaining undiscounted future cash flows of the community to the asset’s carrying value. If the undiscounted cash flows exceed the asset’s carrying value, no impairment adjustment is required. If the undiscounted cash flows are less than the asset’s carrying value, the asset is deemed impaired and adjusted to fair value. For land held for sale, if the fair value less costs to sell ~~exceed~~exceeds the asset’s carrying value, no impairment adjustment is required. These impairment evaluations require use of estimates and assumptions regarding future conditions, including timing and amounts of development costs and sales prices of real estate assets, to determine if estimated future undiscounted cash flows will be sufficient to recover the asset’s carrying value.

When estimating undiscounted cash flows of a community, various assumptions are made, including: (i) the number of homes available and ~~the~~ expected prices and incentives offered by us or ~~builders in~~ other ~~communities~~builders, and future price adjustments based on market and economic trends; (ii) expected sales pace and cancellation rates based on local housing market conditions, competition and historical trends; (iii) costs to date and expected to be incurred, including, but not limited to, land and land development, home construction, interest, indirect construction and overhead, and selling and marketing costs; (iv) alternative product offerings that could impact sales pace, sales price and/or building costs; and (v) alternative uses for the property.

Completed Operations Claim Costs

Completed operations claims reserves primarily represent claims for property damage to completed homes and projects outside of our one- to two-year fit and finish warranty period. Specific length, terms and conditions of completed operations ~~warranties~~claims vary depending on the market inwhere ~~which~~ homes ~~are~~deliver ~~closed~~ and can range up to 12ten years from the ~~closing~~delivery of a home.

51We record expenses and liabilities for estimated costs of potential completed operations claims based upon aggregated loss experience, which includes an estimate of completed operations claims incurred but not reported and is actuarially estimated using individual case-based valuations and statistical analysis. These estimates make up our entire reserve and are subject to a high degree of variability due to uncertainties such as trends in completed operations claims related to our markets and products built, claims reporting and settlement patterns, third party recoveries, insurance industry practices, insurance regulations and legal precedent. Because state regulations vary, completed operations claims are reported and resolved over an extended period, sometimes exceeding ten years. As a result, actual costs may differ significantly from estimates.

~~Table~~The actuarial analyses that determine these incurred but not reported claims consider various factors, including frequency and severity of losses, ~~Contents~~which are based on historical claims experience supplemented by industry data. The actuarial analyses of these claims and reserves also consider historical third party recovery rates and claims management expenses. Due to inherent uncertainties related to each of these factors, changes based on updated relevant information could result in actual costs differing significantly from estimates.

WeIn ~~record~~accordance ~~expenses~~with ~~and~~our ~~liabilities for estimated costs of potential~~ completed operations ~~claims based~~insurance ~~upon aggregated loss experience~~policies, ~~which includes an estimate of~~ completed operations claims ~~incurred~~costs ~~but not reported and is actuarially estimated using individual case-basis valuations and statistical analysis. These estimates make up our entire reserve and~~ are ~~subject~~recoverable tofrom ~~a high degree of variability due to uncertainties such as trends in completed operations claims related to~~ our ~~markets~~subcontractors ~~and products built, changes in claims reporting and settlement patterns, third party recoveries,~~or insurance ~~industry~~carriers. ~~practices,~~For ~~insurance~~policy ~~regulations~~years ~~and~~from ~~legal~~August 1, ~~precedent.~~2001 ~~Because~~through ~~state~~the ~~regulations vary~~present, completed operations claims are ~~reported~~insured ~~and~~or ~~resolved~~reinsured ~~over~~by anthird-party ~~extended~~and ~~period,~~affiliate ~~sometimes~~insurance ~~exceeding twelve years~~carriers. ~~As a result, actual costs may differ significantly from estimates.~~

The actuarial analyses that determine these incurred but not reported claims consider various factors, including frequency and severity of losses, which are based on our historical claims experience supplemented by industry data. The actuarial analyses of these claims and reserves also consider historical third party recovery rates and claims management expenses. Due to inherent uncertainties related to each of these factors, periodic changes to such factors based on updated relevant information could result in actual costs to differ significantly from estimated costs.

In accordance with our underlying completed operations insurance policies, completed operations claims costs are recoverable from our subcontractors or insurance carriers. Completed operations claims through July 31, 2009 are insured or reinsured with third-party insurance carriers and completed operations claims commencing August 1, 2009 are insured with third-party and affiliate insurance carriers.

Revenues

In accordance with Accounting Standards Codification (“ASC”) 360, revenues from housing and other real estate sales are recognized when the respective units ~~close~~deliver. Housing and other real estate sales ~~close~~deliver when all conditions of escrow are met, including delivery of the home or other real estate asset to the customer, title passage, appropriate consideration is received or collection of associated receivables, if any, is reasonably assured and when we have no other continuing involvement in the asset. Sales incentives are a reduction of revenues when the respective unit ~~is closed~~delivers.

Income Taxes

We56 follow certain accounting guidance with respect to how uncertain tax positions should be accounted for and disclosed in the consolidated financial statements. The guidance requires the assessment of tax positions taken or expected to be taken in the tax returns and to determine whether the tax positions are “more-likely-than-not” of being sustained upon examination by the applicable tax authority. Tax positions deemed to meet the more-likely-than-not criteria would be recorded as a tax benefit or expense in the current year. We are required to assess open tax years, as defined by the statute of limitations, for all major jurisdictions, including federal and certain states. Open tax years are those that are open for examination by taxing authorities. We have examinations in progress but believe there are no uncertain tax positions that do not meet the more-likely-than-not level of authority (see Note 13).

Advertising Costs

We expense advertising costs as incurred. For the years ended December 31, 2013, 2012 and 2011, we incurred and expensed advertising costs of $7.4 million, $6.6 million and $6.2 million, respectively.

We follow certain accounting guidance on how uncertain tax positions should be accounted for and disclosed in the consolidated financial statements. The guidance requires assessment of tax positions taken or expected to be taken in the tax returns and to determine whether the tax positions are “more-likely-than-not” of being sustained upon examination by the applicable tax authority. Tax positions deemed to meet the more-likely-than-not criteria would be recorded as a tax benefit or expense in the current year. We are required to assess open tax years, as defined by the statute of limitations, for all major jurisdictions, including federal and certain states. Open tax years are those that are open for examination by taxing authorities. We have examinations in progress but believe no uncertain tax positions exist that do not meet the more-likely-than-not criteria (see Note 13).

Advertising Costs

We expense advertising costs as incurred. For the years ended December 31, 2014, 2013 and 2012, we incurred and expensed advertising costs of $12.1 million, $7.4 million and $6.6 million, respectively.

New Accounting Pronouncements

In ~~February~~April ~~2013~~2014, the ~~Financial~~FASB issued Accounting ~~Standards~~Standard ~~Board~~Update (“~~FASB~~ASU”) ~~issued~~2014-08, ~~Accounting~~Presentation ~~Standards~~of ~~Update~~Financial ~~No. 2013-02~~Statements and Property, Plant, and Equipment: Reporting of ~~Amounts~~Discontinued ~~Reclassified~~Operations ~~Out~~and Disclosures of ~~Accumulated~~Disposals ~~Other~~of ~~Comprehensive~~Components ~~Income~~of an Entity (“ASU ~~2013~~ 2014-0208”), which ~~requires~~is anintended ~~entity~~ to ~~provide~~change ~~information about~~ the ~~amounts~~criteria ~~reclassified~~for ~~out~~reporting ofdiscontinued ~~accumulated~~operations ~~other~~and ~~comprehensive~~enhance disclosures. ~~income~~Under bythis ~~component.~~new ~~In addition~~guidance, ~~ASU~~only ~~2013-02~~disposals ~~requires~~representing ana ~~entity~~strategic toshift ~~present,~~in ~~either~~operations onhaving ~~the~~a ~~face~~major ofeffect ~~the~~on ~~income statement or in~~ the ~~notes~~entity’s tooperations and financial ~~statements,~~results ~~significant~~should ~~amounts~~be ~~reclassified~~presented ~~out~~as ofdiscontinued ~~accumulated~~operations. ~~other~~If ~~comprehensive income by~~ the ~~respective~~disposal ~~line items of~~does ~~net~~qualify ~~income~~as ~~but~~a ~~only~~discontinued ifoperation, the ~~amount~~entity ~~reclassified~~will isbe required ~~under GAAP~~ to beprovide ~~reclassified~~expanded todisclosures, ~~net~~as ~~income~~well inas ~~its~~disclosure ~~entirety~~of in the ~~same~~pretax ~~reporting~~income ~~period.~~attributable ~~For~~to ~~other~~the ~~amounts,~~disposal anof ~~entity~~a issignificant ~~required~~part toof ~~cross-reference~~an toentity ~~other disclosures required under GAAP~~ that ~~provide~~does ~~additional~~not ~~detail~~qualify ~~about~~as ~~those~~a ~~amounts~~discontinued operation. ~~The amendments in~~ ASU ~~2013~~2014-0208 dowill ~~not~~be ~~change~~effective ~~the~~beginning ~~current requirements for reporting net income or other comprehensive income in financial statements. For public entities~~January 1, ~~the~~2015 ~~amendments~~and insubsequent ~~ASU 2013-02~~interim ~~are effective prospectively for reporting~~ periods ~~beginning after December 15, 2012~~. The ~~Company~~adoption ~~adopted~~of ASU ~~2013~~2014-0208 ~~effective~~is ~~January 1,~~not ~~2013,~~expected ~~which~~to ~~concerned~~have ~~disclosure~~a ~~requirements~~material ~~only~~effect ~~and~~on ~~did not impact~~ our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which provides a single comprehensive model in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU No. 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update creates a five-step model requiring entities to exercise judgment when considering the terms of the contract(s) including (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. ASU 2014-09 will be effective beginning January 1, 2017 and subsequent interim periods. We have the option to apply the provisions of ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of applying this ASU recognized at the date of initial application. Early adoption is not permitted. We are evaluating the impact the adoption of ASU 2014-09 will have on our consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, (“ASU 2014-15”). ASU 2014-15 requires us to perform interim and annual assessments on whether there are conditions or events that raise substantial doubt about our ability to continue as a going concern within one year of the date the financial statements are issued and to provide related disclosures, if required. ASU 2014-15 will be effective beginning January 1, 2016 and subsequent interim periods. The adoption of ASU 2014-15 is not expected to have a material effect on our consolidated financial statements.

3. Restricted Cash

At December 31, ~~2013~~2014, restricted cash included customer deposits temporarily restricted in accordance with regulatory requirements and cash used in lieu of bonds. In addition, at December 31, 2012, $10.0 million of restricted cash included cash used as collateral for potential obligations paid by the Company’s bank. In January 2013, this $10.0 million of restricted cash was released to the Company. At December 31, ~~2013~~2014 and December 31, ~~2012~~2013, restricted cash was $10.24 million and $131.02 million, respectively.

4. Fair Value Disclosures

AtASC ~~December 31~~820, ~~2013~~Fair ~~and~~Value ~~2012~~Measurement, defines fair value as ~~required~~the byprice ~~ASC~~that ~~825,~~would ~~the~~be ~~following~~received ~~presents~~for ~~net~~selling ~~book~~an ~~values~~asset or paid to transfer a liability in an orderly transaction between market participants at measurement date and ~~estimated~~requires assets and liabilities carried at fair ~~values of~~value ~~notes~~to ~~payable~~be classified and disclosed in the following three categories:

	December 31, 2013				December 31, 2012
	Net BookValue		EstimatedFair Value		Net BookValue		EstimatedFair Value
	(In thousands)
$750,000 8.625% senior secured notes due May 2019	$	750,000	$	830,625	$	750,000	$	828,750
Secured promissory notes	$	1,708	$	1,708	$	8,209	$	8,209

•

Level 1 — Quoted prices for identical instruments in active markets

•

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are inactive; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at measurement date

•

Level 3 — Valuations derived from techniques where one or more significant inputs or significant value drivers are unobservable in active markets at measurement date

At December 31, 2014, the non-financial instruments measured at fair value on a non-recurring basis were Level 3 inventories with a $23.9 million net book value and a $14.9 million fair value, resulting in an impairment charge of $9.0 million recorded in cost of sales.

Fair values for inventories using Level 3 inputs were primarily based on estimated future cash flows discounted for inherent risk associated with each asset. These discounted cash flows were impacted by expected risk based on estimated land development, construction and delivery timelines; market risk of price erosion; uncertainty of development or construction cost increases; and other risks specific to the asset or market conditions where the asset was located when assessment was made. These factors were specific to each community and may vary among communities. The discount rate used in determining each asset’s fair value depended on the community’s projected life and development stage. We generally use discount rates from 10% to 25%, subject to perceived risks associated with the community’s cash flow streams relative to its inventory.

At December 31, 2014 and 2013, as required by ASC 825, net book value and estimated fair value of notes payable were as follows:


	December 31, 2014				December 31, 2013
	Net Book Value		Estimated Fair Value		Net Book Value		Estimated Fair Value
	(In thousands)
$750,000 8.625% senior secured notes due May 2019	$	750,000	$	787,500	$	750,000	$	830,625
Secured promissory notes	$	11,404	$	11,404	$	1,708	$	1,708

The $750.0 million 8.625% senior secured notes due May 2019 (the “Secured Notes”) are level 2 financial instruments in which fair value was based on quoted market prices in an inactive market at the end of the year.

Other financial instruments consist primarily of cash and cash equivalents, restricted cash, accounts and other receivables, accounts payable and other liabilities and secured promissory notes. Book values of these financial instruments approximate fair value due to their relatively short-term nature. In addition, included in other assets are available-for-sale marketable securities, which are recorded at fair value.

5. Accounts and Other Receivables, Net

At December 31, ~~2013~~2014 and ~~2012~~2013, accounts and other receivables, net were as follows:

	December 31,
	2013			2012
	2014			2013
	(In thousands)
Insurance receivables	$	~~138~~136,~~610~~155		$	~~131~~138,~~519~~610
Escrow receivables		~~586~~3,965			~~576~~586
Notes receivables		34,~~155~~091			3,~~662~~155
Development receivables		31,~~093~~317			3,~~325~~093
Other receivables		43,~~031~~941			4,~~147~~031
Reserve		(1,~~976~~961	)		(1,~~940~~976	)
Total accounts and other receivables, net	$	147,~~499~~508		$	~~141~~147,~~289~~499

~~Insurance~~58 receivables are from insurance carriers for reimbursable claims pertaining to resultant damage from construction defects on closed homes (see Note 11). Closed homes for policy years August 1, 2001 to July 31, 2009 are insured or reinsured with third-party insurance carriers, and closed homes for policy years commencing August 1, 2009 are insured with third-party and affiliate insurance carriers. At December 31, 2013 and 2012, insurance receivables from affiliate insurance carriers were $44.0 million and $30.2 million, respectively.

We reserve for uncollectible receivables that are specifically identified.

Insurance receivables are from insurance carriers for reimbursable claims pertaining to resultant damage from construction defects on delivered homes (see Note 11). Delivered homes for policy years August 1, 2001 to present are insured or reinsured by third-party and affiliate insurance carriers. At December 31, 2014 and 2013, insurance receivables from affiliate insurance carriers were $61.4 million and $44.0 million, respectively.

We reserve for uncollectible receivables that are specifically identified.

6. Inventory

At December 31, ~~2013~~2014 and ~~2012~~2013, inventory was as follows:

	December 31,
	2013		2012
	2014		2013
	(In thousands)
Model homes	$	8786,~~728~~340	$	6987,~~210~~728
Completed homes for sale		2032,~~285~~350		1420,~~015~~285
Homes under construction		~~257~~310,~~662~~318		~~189~~257,~~929~~662
Lots available for construction		~~342~~402,~~622~~001		~~249~~342,~~463~~622
Land under development		~~122~~107,~~257~~120		~~175~~122,~~922~~257
Land held for future development		70126,~~618~~925		6070,~~466~~618
Land held for sale, including water system connection rights		79,102		71,381
Land held for sale		78,845		79,102
Land deposits and preacquisition costs		3229,~~998~~686		732,~~267~~998
Total inventory	$	1,~~013~~173,~~272~~585	$	~~837~~1,~~653~~013,272

Model homes, completed homes for sale and homes under construction include all costs associated with home construction, including land, development, indirects, permits and vertical construction. Lots available for construction include costs incurred prior to home construction such as land, development, indirects and permits. Land under development includes costs incurred during site development such as land, development, indirects and permits. Land under development transfers to lots available for construction once site development is complete and is ready for vertical construction. Land is classified as held for future development if no significant development has not occurred. Land held for sale, ~~including water system connection rights,~~ represents residential and commercial land designated for sale, asincluding ~~well as~~ water system connection rights ~~held~~ that will be transferred to homebuyers upon ~~closing~~delivery of their home, transferred upon sale of land to the respective buyer, sold or leased, but generally only within the local jurisdiction. At December 31, 2014 and 2013, land held for sale included water system connection rights of $12.6 million and $11.4 million, respectively.

Impairment

Inventory, including the captions above, are stated at cost, unless the carrying amount is determined to be unrecoverable, in which case inventories are adjusted to fair value or fair value less costs to sell (see Note 2).

For the years ended December 31, ~~2013~~2014, ~~2012~~ 2013 and ~~2011~~2012, inventory impairment charges were as follows:

	Years Ended December 31,
	2013		2012		2011
	2014		2013		2012
	(Dollars in thousands)
Inventory impairment charge	$	09,035	$	0	$	~~30,600~~0
Remaining carrying value of inventory impaired at end of year	$	014,888	$	0	$	~~27,427~~0
Projects impaired		03		0		100
Projects evaluated for impairment (a)		~~126~~145		~~132~~126		~~131~~132

(a)	Large land parcels not subdivided into communities are counted as one project. Once parcels are subdivided, the project count will increase accordingly.

Write-off of Deposits and Preacquisition Costs

Land deposits and preacquisition costs for potential acquisitions and land option contracts are included in inventory. When a potential acquisition or land option contract is abandoned, related deposits and preacquisition costs are written off to other income (expense), net. For the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, write-offs of deposits and preacquisition costs were $1.43 million, $21.04 million and $0.2.0 million, respectively.

Interest Capitalization

Interest is capitalized to inventory ~~and investments in unconsolidated joint ventures~~ during development and other qualifying activities~~. Interest~~ ~~capitalized~~and ~~as a cost of inventory~~ is ~~included~~charged into cost of sales as related units ~~close~~ deliver. Interest is capitalized to investments in unconsolidated joint ventures isduring ~~included~~the period the joint venture has activities in progress to commence its planned principal operations, and is charged to equity in income (loss) from unconsolidated joint ventures ~~when related~~over ~~units~~the inuseful life of the joint ~~ventures~~venture’s ~~close~~assets.

54For the years ended December 31, 2014, 2013 and 2012, interest incurred, capitalized and expensed was as follows:


	Years Ended December 31,
	2014			2013			2012
	(In thousands)
Interest incurred	$	68,204		$	67,048		$	66,857

Interest expensed ^(a)	$	595		$	5,071		$	19,862


Interest capitalized as a cost of inventory	$	64,697		$	59,699		$	46,146

Interest previously capitalized as a cost of inventory, included in cost of sales	$	(68,780	)	$	(60,448	)	$	(54,733	)

Interest capitalized in ending inventory ^(b)	$	98,017		$	102,100		$	102,849


Interest capitalized as a cost of investments in unconsolidated joint ventures	$	2,912		$	2,278		$	849

Interest previously capitalized as a cost of investments in joint ventures, included in equity in income (loss) from unconsolidated joint ventures	$	(2,444	)	$	(1,189	)	$	(849	)

Interest capitalized in ending investments in unconsolidated joint ventures	$	1,557		$	1,089		$	0

(a) For the ~~years~~eight months ended ~~December~~ August 31, 2013 and for the year ended December 31, 2012, ~~and~~assets ~~2011,~~qualifying for interest ~~incurred~~capitalization were less than debt; therefore, ~~capitalized~~non-qualifying ~~and~~ interest was expensed. For the period from September 2013 to December 2014, qualifying assets exceeded debt; therefore, no interest on the Secured Notes (see Note 10) was asexpensed. ~~follows:~~2014 interest expense represents fees charged on the unused Revolver (see Note 10) that is not considered a cost of borrowing and is not capitalized.

	Years Ended December 31,
	2013			2012			2011
	(In thousands)
Interest incurred	$	67,048		$	66,857		$	69,961
Interest expensed (a)	$	5,071		$	19,862		$	16,806
Interest capitalized as a cost of inventory during the year	$	59,699		$	46,146		$	51,840
Interest previously capitalized as a cost of inventory, included in cost of sales	$	(60,448	)	$	(54,733	)	$	(45,944	)
Interest previously capitalized as a cost of inventory, transferred to property and equipment and from investments in joint ventures, net	$	0		$	0		$	(411	)
Interest capitalized in ending inventory (b)	$	102,100		$	102,849		$	111,436
Interest capitalized as a cost of investments in joint ventures during the year	$	2,278		$	849		$	1,315
Interest previously capitalized as a cost of investments in joint ventures, included in equity in income (loss) from joint ventures	$	(1,189	)	$	(849	)	$	(1,619	)
Interest previously capitalized as a cost of investments in joint ventures, transferred to inventory	$	0		$	0		$	(642	)
Interest capitalized in ending investments in joint ventures	$	1,089		$	0		$	0

(a) For the eight months ended August 31, 2013 and for the years ended December 31, 2012 and 2011, assets qualifying for interest capitalization were less than debt; therefore, non-qualifying interest was expensed. For the period from September 2013 to December 2013, qualifying assets exceeded debt; therefore, no interest was expensed.

(b)	Inventory impairment charges were recorded against total inventory of the respective community. Capitalized interest reflects the gross amount of capitalized interest as impairment charges recognized were generally not allocated to specific components of inventory.

Model Homes Costs

Certain costs of model homes are capitalized ~~and~~to ~~subsequently~~inventory and amortized as selling expense when the related units in the respective communities ~~close~~deliver. For the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, amortized model homes costs were $1012.30 million, $810.23 million and $98.92 million, respectively.

7. Investments in and Advances to Unconsolidated Joint Ventures

Unconsolidated joint ventures, which we do not control but have significant influence through ownership interests generally up to 50%, are accounted for using the equity method of accounting. These joint ventures are generally involved in real property development. Earnings and losses are allocated in accordance with terms of joint venture agreements.

Losses and distributions from joint ventures in excess of the carrying amount of our investment (“Deficit Distributions”) are included in other liabilities. We record Deficit Distributions since we are liable for this deficit to the respective joint ventures. Deficit Distributions are offset by future earnings of, or future contributions to, the joint ventures. At December 31, ~~2013~~2014 and ~~2012~~2013, Deficit Distributions were $0.43 million and $0.74 million, respectively.

~~For~~60 ~~the year ended December 31, 2011, impairment charges on investments in joint ventures were $2.4 million and included in equity in income (loss) from joint ventures.~~

At December 31, ~~2013~~2014 and ~~2012, and for the years ended December 31,~~ 2013, ~~2012~~investments in and ~~2011,~~ ~~condensed~~advances ~~financial~~to ~~information for our~~ unconsolidated joint ventures were ~~was~~ as follows:


	December 31,
	2014		2013
	(In thousands)
Equity investments	$	34,037	$	47,748
Loan advances		8,727		1,037

Total investments in and advances to unconsolidated joint ventures	$	42,764	$	48,785

At December 31, 2014 and 2013, and for the years ended December 31, 2014, 2013 and 2012, condensed financial information for our unconsolidated joint ventures was as follows:

Condensed Balance Sheet Information

	December 31,
	2013		2012
	2014		2013
	(In thousands)
Assets
Real estate inventory	$	~~267~~253,~~460~~422	$	~~121~~267,~~446~~460
Other assets		~~130~~83,~~840~~674		52130,~~143~~840
Total assets	$	~~398~~337,~~300~~096	$	~~173~~398,~~589~~300
Liabilities and equity
Notes payable	$	78159,~~589~~042	$	7678,~~957~~589
Other liabilities		9958,~~395~~376		1699,~~435~~395
Total liabilities		~~177~~217,~~984~~418		93177,~~392~~984
Equity:
The Company (a)		4733,~~397~~731		2747,~~937~~397
Others		~~172~~85,~~919~~947		52172,~~260~~919
Total equity		~~220~~119,~~316~~678		80220,~~197~~316
Total liabilities and equity	$	~~398~~337,~~300~~096	$	~~173~~398,~~589~~300

Condensed Income Statement Information

	Years Ended December 31,
	2013			2012			2011
	2014			2013			2012
	(In thousands)
Revenues	$	90288,~~743~~623		$	4690,~~586~~743		$	4146,~~530~~586
Expenses		(85223,~~594~~899	)		(4885,~~079~~594	)		(5848,~~189~~079	)
Net income (loss)		564,~~149~~724			(15,~~493~~149	)		(161,~~659~~493	)
The Company’s share of net income (loss)	$	(19,~~104~~142	)	$	~~378~~(1,104	)	$	~~(5,134~~378	)

(a) At December 31, ~~2013~~2014 and ~~2012~~2013, includes Deficit Distributions of $0.43 million and $0.74 million, respectively.

At61 ~~December 31, 2013 and 2012, total unconsolidated joint ventures’ notes payable consisted of the following:~~

	December 31,
	2013		2012
	(In thousands)
Bank and seller notes payable:
Guaranteed (subject to remargin obligations)	$	52,515	$	45,610
Non-Guaranteed		10,073		22,894
Total bank and seller notes payable (a)		62,588		68,504
Partner notes payable (b):
Unsecured		16,001		8,453
Total unconsolidated joint venture notes payable	$	78,589	$	76,957
Other unconsolidated joint venture notes payable(c)	$	55,441	$	57,839

At December 31, 2014 and 2013, total unconsolidated joint ventures’ notes payable consisted of the following:


	December 31,
	2014		2013
	(In thousands)
Bank and seller notes payable:
Guaranteed (subject to remargin obligations)	$	55,675	$	52,515
Non-Guaranteed		34,824		10,073

Total bank and seller notes payable ^(a)		90,499		62,588

Partner notes payable ^(b) :
Unsecured		68,543		16,001

Total unconsolidated joint venture notes payable	$	159,042	$	78,589

Other unconsolidated joint venture notes payable^(c)	$	83,847	$	55,441

(a)	All bank and seller notes were secured by real property.

(b) No guarantees were provided on partner notes payables. In January 2014, a $3.2 million partner note from one joint venture was paid ~~off~~in full.

56At December 31, 2014 and 2013, remargin obligations and guarantees provided on debt of our unconsolidated joint ventures were on a joint and/or several basis and include, but are not limited to, project completion, interest and carry, and loan-to-value maintenance guarantees.

For a joint venture, RRWS, LLC (“RRWS”), we have a remargin obligation that is limited to the lesser of 50% of the outstanding balance in total for these joint venture loans or $35.0 million, which outstanding loan balances at December 31, 2014 and 2013 were $43.0 million and $47.7 million, respectively. Consequently, our maximum remargin obligation at December 31, 2014 and 2013 was $21.5 million and $23.8 million, respectively. We also have an agreement where we could potentially recover a portion of payments we made. However, we cannot provide assurance we could collect under this agreement.

For a second joint venture, Polo Estates Ventures, LLC (“Polo”), we have a joint and several remargin guarantee on loan obligations which, in total at December 31, 2014 and 2013 were $12.7 million and $4.8 million, respectively. At December 31, 2014 and 2013, the total maximum borrowings permitted on these loans were $21.6 million and $21.6 million, respectively. We also have reimbursement rights where we could potentially recover a portion of payments we made. However, we cannot provide assurance we could collect such payments.

No liabilities were recorded for these guarantees at December 31, 2014 and 2013 as the fair value of the secured real estate assets exceeded the threshold at which a remargin payment is required.

At December 31, 2014 and 2013, loan advances to unconsolidated joint ventures, including accrued interest, were $8.7 million and $1.0 million, respectively. These notes receivable bear interest ranging from 7.5% to 12% and mature through 2021. Further, a loan advance bearing 8% interest can earn additional interest to achieve a 17.5% internal rate of return, subject to available cash flows of the joint venture, and can be repaid prior to 2020. Quarterly, we evaluate collectability of these loan advances, which includes consideration of prior payment history, operating performance and future payment requirements under the applicable note. Based on these criteria, we do not anticipate collection risks on these loan advances.

AtOur ~~December 31,~~ability ~~2013~~to make joint venture and ~~2012~~other restricted payments and investments is governed by the Indenture governing the Secured Notes (the “Indenture”, ~~remargin~~see ~~obligations~~Note 10). We are permitted to make restricted payments under (i) a $70.0 million revolving basket available solely for joint venture investments and ~~guarantees~~advances; ~~provided~~(ii) a $10 onmillion ~~debt~~general basket that can be used for joint venture investments and advances; and (iii) a broader restricted payment basket available if our Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) is at least 2.0 to 1.0. The aggregate amount of restricted payments made under this broader restricted payment basket cannot exceed 50% of our cumulative Consolidated Net Income (as defined in the Indenture) generated from and including October 1, 2013, plus the ~~unconsolidated~~aggregate ~~joint~~net ~~ventures~~cash ~~were~~proceeds onof, and the fair market value of, any property or other asset received by the Company as a ~~joint~~capital ~~and/~~contribution or ~~several~~upon ~~basis~~the issuance of indebtedness or certain securities by the Company from and ~~include~~including October 1, 2013, ~~but~~plus, ~~are~~to the extent not ~~limited~~included toin Consolidated Net Income, ~~project~~certain ~~completion~~amounts received in connection with dispositions, ~~interest~~distributions or repayments of restricted investments, plus the value of any unrestricted subsidiary which is redesignated as a restricted subsidiary under the Indenture. We have joint ventures which have used, and ~~carry~~are expected to use, capacity under these restricted payment baskets. In 2013, we entered into a joint venture in Southern California and ~~loan-~~committed to~~-value~~ contribute ~~maintenance~~up ~~guarantees~~to $45.0 million. At December 31, 2013, we made aggregate contributions of $15.1 million to this joint venture, which were returned to us by December 31, 2014.

For a joint venture, RRWS, LLC (“RRWS”), we have a remargin obligation that is limited to the lesser of 50% of the outstanding balances or $35.0 million in total for the joint venture loans, which outstanding loan balances at December 31, 2013 and 2012 were $47.7 million and $45.6 million, respectively. Consequently, our maximum remargin obligation at December 31, 2013 and 2012 was $23.8 million and $22.8 million, respectively. We also have an indemnification agreement where we could potentially recover a portion of any remargin payments made by the Company. However, we cannot provide assurance we could collect under this indemnity agreement.

For a second joint venture, Polo Estates Ventures, LLC (“Polo”), in 2013 we issued a joint and several remargin guarantee on loan obligations, which in total at December 31, 2013 were $4.8 million. At December 31, 2013, the total maximum borrowings permitted on these loans were $21.6 million. We also have reimbursement rights where we could potentially recover a portion of any remargin payments made by the Company. However, we cannot provide assurance we could collect such reimbursements.

Our ability to make joint venture and other restricted payments and investments is governed by the Indenture governing the Secured Notes (the “Indenture”). We are permitted to make otherwise restricted payments under (i) a $70.0 million revolving basket available solely for joint venture investments and (ii) a broader restricted payment basket available as long as our Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) is at least 2.0 to 1.0. The aggregate amount of restricted payments made under this broader restricted payment basket cannot exceed 50% of our cumulative Consolidated Net Income (as defined in the Indenture) generated from and including October 1, 2013 plus the aggregate net cash proceeds of, and the fair market value of, any property or other asset received by the Company as a capital contribution or upon the issuance of indebtedness or certain securities by the Company from and including October 1, 2013, plus, to the extent not included in Consolidated Net Income, certain amounts received in connection with dispositions, distributions or repayments of restricted investments, plus the value of any unrestricted subsidiary which is redesignated as a restricted subsidiary under the Indenture. We have joint ventures which have used, and are expected to use, capacity under these restricted payment baskets. During the second quarter of 2013, we entered into a joint venture in Southern California and committed to contribute up to $45.0 million of capital. At December 31, 2013, we made aggregate capital contributions of $15.1 million to this joint venture.

8. Variable Interest Entities

ASC 810 requires a VIE to be consolidated in the financial statements of a company if it is the primary beneficiary of the VIE. Accordingly, the primary beneficiary has the power to direct activities of the VIE that most significantly impact the VIE’s economic performance, and the obligation to absorb its losses or the right to receive its benefits. ~~All VIEs with~~At ~~which we were involved at~~ December 31, ~~2013~~2014 and ~~2012~~2013, all VIEs were evaluated to determine the primary beneficiary.

Joint Ventures

We enter into joint ventures for homebuilding and land development activities. Investments in these joint ventures may create a variable interest in a VIE, depending on contractual terms of the venture. We analyze our joint ventures in accordance with ASC 810 to determine whether they are VIEs and, if so, whether we are the primary beneficiary. At December 31, ~~2013~~2014 and ~~2012~~2013, these joint ventures were not consolidated in our consolidated financial statements since they were not VIEs, or if they were VIEs, we were not the primary beneficiary.

At December 31, ~~2013~~2014 and ~~2012~~2013, we had a variable interest in an unconsolidated joint venture determined to be a VIE. The joint venture, RRWS, was formed in December 2012 and is owned 50% by ~~the~~us ~~Company~~ and 50% by a third-party real estate developer (the “RRWS Partner”). Several acquisition, development and construction loans were entered into by RRWS, each with two-year terms and options to extend for one year, subject to certain conditions. Each loan is cross collateralized and cross defaulted with the other loan. ~~The~~We ~~Company~~ and RRWS Partner each executed limited completion, interest and carry guarantees and ~~environmental~~ environmental indemnities on a joint and several basis. In addition, ~~the~~we ~~Company~~ and RRWS Partner executed loan-to-value maintenance agreements for each loan on a joint and several basis. ~~The~~We ~~Company~~have ~~has~~ a maximum aggregate liability under the ~~re-margin~~ remargin arrangements of the lesser of 50% of the outstanding balances in total for these joint venture loans or $35.0 million ~~in total~~. ~~Obligations~~Our ~~of the Company~~ and RRWS Partner’s obligations under the ~~re-margin~~remargin arrangements are limited during the first two years of the loans. In addition to ~~re-margin~~ remargin arrangements, the RRWS Partner, and several of its principals, executed repayment guarantees with no limit on their liability. At December 31, ~~2013~~2014 and ~~2012~~2013, outstanding bank notes payable were $4743.70 million and $4547.67 million, respectively, of which ~~the~~we ~~Company~~have ~~has~~ a maximum remargin obligation of $2321.85 million and $2223.8 million, respectively. ~~The~~We ~~Company~~ also ~~has~~have an ~~indemnification~~ agreement from the RRWS Partner, under which ~~the~~we ~~Company~~ could potentially recover a portion of ~~any remargin~~ payments ~~made~~we ~~by the Company~~made. However, ~~the~~we ~~Company~~ cannot provide assurance itwe could collect under this ~~indemnity~~ agreement.

57At December 31, 2014 and 2013, we had a variable interest in a second unconsolidated joint venture determined to be a VIE. The joint venture, Polo, was formed in November 2012 and is owned 50% by us and 50% by a third-party investor (“Polo Partner”). Polo entered into acquisition, development and construction loans in July 2013 with two-year terms and options to extend for one year, subject to certain conditions. Each loan is cross collateralized and cross defaulted with the other loan. We and Polo Partner each executed loan-to-value maintenance arrangements for each loan on a joint and several basis. At December 31, 2014 and 2013, outstanding bank notes payable were $12.7 million and $4.8 million, respectively, and total maximum borrowings permitted on these loans were $21.6 million and $21.6 million, respectively. We also have reimbursement rights where we could potentially recover a portion of payments we made. However, we cannot provide assurance we could collect such payments.

At December 31, 2014 and December 31, 2013, we had a variable interest in a third unconsolidated joint venture determined to be a VIE. The joint venture, Vistancia West Holdings LP (“Vistancia West”), was formed in August 2013 and is owned 10% by us and 90% by a third-party investor (“Vistancia West Partner”). A wholly-owned subsidiary of Vistancia West entered into a $27.5 million revolving credit facility in September 2014 with a three-year term, renewable annually subject to certain conditions. The revolving credit facility is secured by the underlying property and is non-recourse to us and the Vistancia West Partner. At December 31, 2014, outstanding bank notes payable were $3.8 million.

AtIn ~~December 31,~~accordance ~~2013~~with ~~and~~ASC ~~2012~~810, we ~~had a variable interest in a second unconsolidated joint venture~~ determined towe bewere anot ~~VIE.~~the ~~The~~primary ~~joint~~beneficiaries ~~venture,~~of ~~Polo~~RRWS, ~~was formed in November 2012 and is owned 50% by the Company and 50% by a third-party investor (“~~Polo ~~Partner”). Polo entered into acquisition, development~~ and ~~construction loans in~~ ~~July~~Vistancia ~~2013~~West ~~with~~because ~~two-year~~we ~~terms~~did ~~and~~not ~~options~~have tothe ~~extend~~power ~~for one year, subject~~ to ~~certain~~direct ~~conditions.~~activities ~~Each~~that ~~loan~~most issignificantly ~~cross~~impact ~~collateralized and cross defaulted with~~ the ~~other~~economic ~~loans.~~performance ~~The~~of ~~Company~~these ~~and~~entities, ~~Polo~~such ~~Partner~~as ~~each~~determining ~~issued~~or ~~loan-to-value~~limiting ~~maintenance arrangements~~the ~~for~~scope ~~each~~or ~~loan~~purpose onof athe ~~joint~~respective ~~and several basis. At December 31~~entity, ~~2013,~~selling ~~outstanding~~or ~~bank notes payable were $4.8 million and total maximum borrowings permitted on these loans were $21.6 million. The Company also has reimbursement rights~~transferring ~~where~~property ~~the~~owned ~~Company~~or ~~could~~controlled ~~potentially recover a portion of any remargin payments made~~ by the ~~Company.~~respective ~~However~~entity, ~~the~~and ~~Company~~arranging ~~cannot~~financing ~~provide~~for ~~assurance~~the itrespective ~~could collect such reimbursements~~entity.

In accordance with ASC 810, we determined we were not the primary beneficiaries of RRWS and Polo because we did not have the power to direct activities that most significantly impact the economic performance of RRWS and Polo, such as determining or limiting the scope or purpose of the respective entity, selling or transferring property owned or controlled by the respective entity, and arranging financing for the respective entity.

Land Option Contracts

We enter into land option contracts to procure land for home construction. Use of land option and similar contracts allows us to reduce market risks associated with direct land ownership and development, reduces capital and financial commitments, including interest and other carrying costs, and minimizes land inventory. Under these contracts, we pay a specified deposit for the right to purchase land, usually at a predetermined price. Under the requirements of ASC 810, certain contracts may create a variable interest with the land seller.

In accordance with ASC 810, we analyzed our land option and similar contracts to determine if respective land sellers are VIEs and, if so, if we are the primary beneficiary. Although we do not have legal title to the optioned land, ASC 810 requires us to consolidate a VIE if we are the primary beneficiary. At December 31, ~~2013~~2014 and ~~2012~~2013, we determined we were not the primary beneficiary of such VIEs because we did not have the power to direct activities of the VIE that most significantly impact the VIE’s economic performance, such as selling, transferring or developing land owned by the VIE.

At December 31, ~~2013~~2014, we had $14.52 million of refundable and non-refundable cash deposits associated with land option contracts with unconsolidated VIEs, having a $7260.76 million remaining purchase price. We also had $1921.52 million of refundable and non-refundable cash deposits associated with land option contracts that were not with VIEs, having a $~~349~~450.6 million remaining purchase price.

Our loss exposure on land option contracts consists of non-refundable deposits, which were $624.98 million and $56.09 million at December 31, ~~2013~~2014 and ~~2012~~2013, respectively, and capitalized preacquisition costs of $124.04 million and $212.0 million, respectively, which were ~~included~~ in inventory in the consolidated balance sheets.

9. Other Assets, Net

At December 31, ~~2013~~2014 and ~~2012~~2013, other assets were as follows:

	December 31,
	2013		2012
	2014		2013
	(In thousands)
Income tax receivable	$	21,~~199~~384	$	32,~~497~~199
Deferred tax asset (see Note 13)		1620,~~337~~159		016,337
Investments		9,~~439~~815		129,~~078~~439
Property and equipment, net		4,~~103~~140		24,~~237~~103
Capitalized loan origination fees		119,~~089~~730		1011,~~140~~089
Prepaid bank fees		152		403
Deposits in lieu of bonds and letters of credit		8,653		10,294
Deposits in lieu of bonds and letters of credit		10,294		7,110
Prepaid insurance		2,589		2,460
Prepaid insurance		2,460		2,148
Other		2,652		1,149
Other		997		1,515
Total other assets, net	$	59,122	$	57,070
Total other assets, net	$	57,070	$	39,127

Investments

Investments consist of available-for-sale securities, primarily private debt obligations, and are measured at fair value, which is based on quoted market prices or cash flow models. Accordingly, unrealized gains and temporary losses on investments, net of tax, are reported as accumulated other comprehensive income (loss). Realized gains and losses are determined using the specific identification method.

For the ~~years~~year ended December 31, 2013 ~~and 2012~~, there were $0.1 million ~~and $8.8 million~~ of realized gains on available-for-sale securities. For the year ended December 31, 2014, there were no realized gains or losses.

Capitalized Loan Origination Fees

In accordance with ASC 470, ~~these amounts are~~ loan origination fees, ~~which~~ are capitalized and amortized as interest over the term of the related debt ~~and, in 2013, include $2~~.5 ~~million paid to obtain senior secured note holder consent for a secured revolving credit facility executed in February 2014 (see Note 21).~~

Deposits in Lieu of Bonds and Letters of Credit

We ~~are required to~~ make cash deposits in lieu of bonds or letters of credit with various agencies for some of our homebuilding projects. These deposits may be returned as the collateral requirements decrease or they are replaced with new bonds or letters of credit.

10. Notes Payable

At December 31, ~~2013~~2014 and ~~2012~~2013, notes payable were as follows:

	December 31,
	2013		2012
	2014		2013
	(In thousands)
$750.0 million 8.625% senior secured notes, due May 2019	$	750,000	$	750,000
Promissory notes, interest ranging from 1% to 6%, maturing through 2014, secured by deeds of trust on inventory		1,708		8,209
$125.0 million secured revolving credit facility (the “Revolver”), interest currently at the applicable Eurocurrency rate plus 2.75%, matures March 1, 2016		0		0
Total notes payable	$	751,708	$	758,209
Promissory notes, interest ranging from 1% to 4%, maturing through 2016, secured by deeds of trust on inventory		11,404		1,708
Total notes payable	$	761,404	$	751,708

OnOur ~~May 10, 2011, our~~ Secured Notes were issued inon ~~the~~May 10, ~~aggregate~~2011 ~~principal~~at ~~amount of~~ $750.0 million, ~~and the~~bear ~~outstanding~~interest ~~obligations~~at of8.625% ~~the~~paid semi-annually ~~Company’s~~on ~~secured~~May 15 ~~revolving~~and ~~lines~~November 15, ~~of credit~~ and ~~notes~~do ~~payable~~not ~~(the~~require ~~“Secured~~principal ~~Facilities”)~~payments ~~were~~until ~~paid~~maturity ~~off~~on ~~and~~May 15, ~~terminated~~2019. ~~Principal~~The ~~and interest paid in 2011under the~~ Secured ~~Facilities~~Notes ~~was~~are ~~$779.6 million and $2.5 million~~redeemable, ~~respectively.~~in ~~Concurrent~~whole ~~with~~or ~~the~~in ~~payoff~~part, ofat the ~~Secured~~Company’s ~~Facilities,~~option anbeginning ~~$88.4 million loss~~ on ~~debt extinguishment was recognized~~May 15, ~~which~~2015 ~~included~~at a price ~~$65.0 million write-off~~ of ~~the~~104.313 per ~~discount~~bond, ~~related~~reducing to ~~the~~102.156 ~~Secured~~on ~~Facilities~~May 15, ~~which~~ ~~increased~~2016 ~~the~~and ~~principal~~are toredeemable ~~its~~at ~~face~~par ~~value~~beginning ofon ~~$779.6 million~~May 15, ~~and a $23~~2017.4 ~~million~~The ~~write-off~~Secured ofNotes ~~prepaid~~may ~~professional~~be ~~and~~redeemed ~~loan~~prior ~~fees~~to ~~incurred~~May 15, in2015 ~~connection~~subject ~~with~~to ~~the~~a ~~Secured~~make-whole ~~Facilities~~premium. ~~All~~At ~~payable-in-kind interest~~December 31, 2014 ~~$5.0 million of principal~~ and ~~certain~~ ~~fees were waived~~2013, ~~all~~accrued ofinterest ~~which~~was ~~were netted against the~~ $888.~~4 million charge. In addition, of the $19.~~1 million ~~of then outstanding letters of credit, $4.0 million were returned~~ and $158.1 million ~~were paid by the Company~~, ~~of which $14~~respectively.~~5 million~~ ~~was reimbursed by JFSCI for its share of the letters of credit paid by the Company.~~

The ~~Secured~~Indenture ~~Notes~~contains ~~bear~~covenants ~~interest~~that atlimit, ~~8.625%~~among other ~~paid~~things, ~~semi-annually~~our onability ~~May 15~~to ~~and~~incur ~~November 15,~~additional ~~and~~indebtedness do(including ~~not~~the ~~require~~issuance ~~principal~~of ~~payments~~certain ~~until~~preferred ~~maturity~~stock), pay dividends and distributions on ~~May 15,~~our ~~2019.~~equity ~~The~~interests, ~~Secured~~repurchase ~~Notes~~our ~~are~~equity ~~redeemable~~interests, inretire ~~whole~~unsecured or insubordinated ~~part,~~notes atmore ~~the~~than ~~Company’s~~one year ~~option~~prior ~~beginning~~to ontheir ~~May 15~~maturity, ~~2015~~make ~~at a~~investments ~~price~~in ofsubsidiaries ~~104.313 per~~and ~~bond~~joint ventures that are not restricted subsidiaries that guarantee the Secured Notes, ~~reducing~~sell tocertain ~~102.156~~assets, onincur ~~May 15~~liens, ~~2016~~merge ~~and~~with ~~are~~or ~~redeemable~~into atother ~~par~~companies, ~~beginning~~expand oninto ~~May 15~~unrelated businesses, ~~2017~~and enter in certain transactions with our affiliates. At December 31, ~~2013~~2014 and ~~2012~~2013, ~~accrued~~we ~~interest~~were ~~was~~in ~~$8.1~~compliance ~~million~~with ~~and~~these $8covenants.1 ~~million, respectively.~~

~~The~~In ~~Indenture~~February ~~governing~~2014, ~~the~~we ~~Secured~~replaced ~~Notes~~our ~~contains~~$75.0 ~~covenants~~million ~~that~~letter ~~limit,~~of ~~among~~credit ~~other~~facility ~~things~~with the Revolver, ~~our~~which ~~ability~~bears tointerest, ~~incur~~at ~~additional~~the ~~indebtedness~~Company’s option, either at (~~including~~i) a ~~the~~daily ~~issuance~~eurocurrency ofbase ~~certain~~rate ~~preferred~~as ~~stock),~~defined ~~pay~~in ~~dividends~~the ~~and~~credit ~~distributions~~agreement ongoverning ~~our~~the ~~equity~~Revolver ~~interests~~(the “Credit Agreement”), ~~repurchase~~plus ~~our~~a ~~equity~~margin ~~interests~~of 2.75%, ~~retire~~or ~~unsecured~~(ii) a oreurocurrency ~~subordinated~~rate ~~notes~~as ~~more~~defined ~~than~~in ~~one~~the ~~year~~Credit ~~prior~~Agreement, toplus a ~~their~~margin ~~maturity~~of 2.75%, ~~make~~and ~~investments~~matures ~~in subsidiaries~~March 1, ~~and~~2016. ~~joint~~Borrowing ~~ventures~~availability ~~that~~is ~~are~~determined ~~not~~by ~~restricted~~a ~~subsidiaries~~borrowing ~~that~~base ~~guarantee~~formula ~~the~~and ~~Secured~~we ~~Notes,~~are ~~sell~~subject ~~certain~~to ~~assets~~financial covenants, ~~incur~~including ~~liens,~~minimum ~~merge~~net ~~with~~worth orand ~~into~~leverage ~~other~~and ~~companies,~~interest ~~expand~~coverage ~~into~~ratios. ~~unrelated~~If ~~businesses~~we do not maintain compliance with these financial covenants, ~~and~~the ~~enter~~Revolver ~~into~~converts ~~certain~~to ~~transactions~~an ~~with our~~18-month ~~affiliates~~amortizing term loan. At December 31, ~~2013 and 2012~~2014, we were in compliance with these covenants and no amounts were outstanding.

5965

11. Other Liabilities

At December 31, ~~2013~~2014 and ~~2012~~2013, other liabilities were as follows:

	December 31,
	2013		2012
	2014		2013
	(In thousands)
Completed operations reserves	$	~~138~~136,~~610~~155	$	~~131~~138,~~519~~610
Warranty reserves		2022,~~648~~698		1720,~~749~~648
Deferred revenue/gain		30,036		30,902
Accrued profit and revenue participation arrangements (see Note 12)		23,815		678
Provisions for closed homes/communities		10,591		8,135
Deferred revenue/gain		22,769		29,358
Deposits (primarily homebuyer)		14,281		15,684
Provisions for delivered homes/communities		9,116		10,591
Legal reserves		4,576		4,916
Deposits (primarily homebuyer)		17,869		14,281
Accrued interest		8,086		8,086
Legal reserves		15,705		4,576
Accrued compensation and benefits		9,389		4,697
Accrued interest		8,127		8,086
Distributions payable		2,531		2,892
Accrued compensation and benefits		12,534		9,389
Deficit Distributions (see Note 7)		351		716
Distributions payable		2,169		2,531
Other		6,702		7,922
Deficit Distributions (see Note 7)		307		351
Total other liabilities	$	245,801	$	233,218
Other		7,066		6,702
Total other liabilities	$	278,330	$	245,801

Completed Operations Reserves

Reserves for completed operations primarily represent claims for property damage to completed homes and projects outside of our one-to-two year fit and finish warranty period. Specific length, terms and conditions of completed operations claims vary depending on the market in which homes ~~close~~deliver and can range up to 12ten years from the ~~close~~delivery of a home. Expenses and liabilities are recorded for potential completed operations claims based upon aggregated loss experience, which includes an estimate of completed operations claims incurred but not reported, and is actuarially estimated using individual case-based valuations and statistical analysis. For policy years from August 1, 2001 through the present, completed operations claims are insured ~~through~~or areinsured ~~combination~~by of third-party and affiliate insurance carriers.

For the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, changes in completed operations reserves were as follows:

	Years Ended December 31,
	2013			2012			2011
	2014			2013			2012
	(In thousands)
Insured completed operations
Balance, beginning of the year	$	~~131~~138,~~519~~610		$	~~109~~131,~~390~~519		$	~~102~~109,~~860~~390
Reserves provided		1915,~~002~~133			4019,~~087~~002			140,~~160~~087
Insurance purchased (see below)		0			0			16,520
Claims paid		(17,588	)		(11,911	)		(17,958	)
Claims paid		(11,911	)		(17,958	)		(11,150	)
Total completed operations reserves	$	136,155		$	138,610		$	131,519
Balance, end of the year		138,610			131,519			109,390
Self-insured completed operations
Balance, beginning of the year		0			0			15,613
Reserves provided		0			0			907
Insurance purchased		0			0			(16,520	)
Balance, end of the year		0			0			0
Total completed operations reserves	$	138,610		$	131,519		$	109,390

Reserves provided for completed operations are generally fully offset by changes in insurance receivables (see Note 5); however, premiums paid for completed operations insurance policies are included in cost of sales. For actual completed operations claims and estimates of completed operations claims incurred but not reported, we estimate and record corresponding insurance receivables under applicable policies when recovery is probable. At December 31, ~~2013~~2014 and ~~2012~~2013, insurance receivables were $~~138~~136.62 million and $~~131~~138.56 million, respectively.

Expenses, liabilities and receivables related to these claims are subject to a high degree of variability due to uncertainties such as trends in completed operations claims related to our markets and products built, ~~claim~~claims reporting and settlement patterns, ~~and~~ insurance industry practices, insurance regulations and legal precedent. Although considerable variability is inherent in such estimates, we believe reserves for completed operations claims are adequate.

6066

Warranty Reserve

We offer a limited one or two year fit and finish warranty for our homes. Specific terms and conditions of these warranties vary ~~depending~~in on the ~~market in~~markets in which homes ~~close~~deliver. We estimate warranty costs to be incurred and record a liability and a charge to cost of sales when home revenue is recognized. We also include in our warranty reserve the uncovered losses related to completed operations coverage, which approximates 12.5% of the total property damage estimate. Factors affecting warranty liability include number of homes ~~closed~~delivered, historical and anticipated warranty claims, and cost per claim history and trends. We ~~periodically~~regularly assess the adequacy of our warranty liabilities and adjust amounts as necessary.

For the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, changes in warranty liability were as follows:

	Years Ended December 31,
	2013			2012			2011
	2014			2013			2012
	(In thousands)
Balance, beginning of the year	$	1720,~~749~~648		$	17,~~358~~749		$	1617,~~238~~358
Provision for warranties		1114,~~188~~363			811,~~958~~188			98,~~636~~958
Warranty costs paid		(812,~~289~~313	)		(8,~~567~~289	)		(8,~~516~~567	)
Balance, end of the year	$	2022,~~648~~698		$	1720,~~749~~648		$	17,~~358~~749

Deferred Revenue/Gain

Deferred revenue/gain represents deferred revenues or ~~profit~~gains on transactions ~~where~~in which an insufficient down payment was received or a future performance, passage of time or event is required. At December 31, ~~2013~~2014 and ~~2012~~2013, deferred revenue/gain primarily represents the PIC Transaction described below.

Completed operations claims were insured through PIC for policy years August 1, 2001 to July 31, 2007. In December 2009, PIC entered into a series of novation and reinsurance transactions (the “PIC Transaction”).

First, PIC entered into a novation agreement with JFSCI to novate its deductible reimbursement obligations related to its workers’ compensation and general liability risks at September 30, 2009 for policy years August 1, 2001 to July 31, 2007, and its completed operations risks from August 1, 2005 to July 31, 2007. Concurrently, JFSCI entered into insurance arrangements with ~~unrelated~~ third party insurance carriers to insure these policies. As a result of this novation, a $19.2 million gain was ~~generated but was~~ deferred and towill be recognized as income when related claims are paid. In addition, the deferred gain may bechange ~~increased or decreased~~ based on changes in actuarial estimates. ~~Any~~Changes ~~changes~~ to the deferred gain ~~will~~are be recognized as a current period ~~gain~~income or ~~charge~~expense. At December 31, ~~2013~~2014 and ~~2012~~ 2013, the unamortized deferred gain was $1814.9 million and $2018.39 million, respectively. For the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, we recognized $1.4.1 million, $(41.7)4 million and $1(4.07) million, respectively, of this deferral as income (expense), which was included in gain (loss) on reinsurance transaction, and includes both the impact of income recognized from claims paid asand ~~well~~ as income or expense from increases or decreases to the deferred gain from changes in actuarial estimates.

Second, PIC entered into reinsurance agreements with unrelated reinsurers that reinsured 100% of ~~the~~its ~~completed~~expected completed operations risks from August 1, 2001 to July 31, 2005. As a result of the reinsurance, a $15.6 million gain was ~~generated but was~~ deferred and towill be recognized as income when the related claims are paid. In addition, the deferred gain may bechange ~~increased or decreased~~ based on changes in actuarial estimates. ~~Any~~Changes ~~changes~~ to the deferred gain ~~will~~are be recognized as a current period ~~gain~~income or ~~charge~~expense. At December 31, ~~2013~~2014 and ~~2012~~2013, the unamortized deferred gain was $74.87 million and $87.48 million, respectively. For the years ended December 31, ~~2013~~2014, ~~2012~~2013, and ~~2011~~2012, we recognized $03.61 million, $(70.3)6 million and $2(7.13) million, respectively, of this deferral as income (expense), which was included in gain (loss) on reinsurance transaction, and includes both the impact of income recognized from claims paid as well as income or expense from increases or decreases to the deferred gain from changes in actuarial ~~estimates~~adjustments.

As a result of the PIC Transaction, if the estimated ultimate loss to be paid under these policies exceeds the policy limits under the novation and reinsurance transactions, the shortfall is expected to be funded by JFSCI for the policies novated to JFSCI and by PIC for the policies ~~they~~it reinsured.

~~Distributions~~67 ~~Payable~~

In December 2011, our consolidated joint venture, Vistancia, LLC, sold its remaining interest in an unconsolidated joint venture (the “Vistancia Sale”). As a result of the Vistancia Sale, since no other assets of Vistancia, LLC economically benefit the former non-controlling member of Vistancia, LLC, the Company recorded the remaining $3.3 million distribution payable to this member, which is paid $0.1 million quarterly. At December 31, 2013 and 2012, the distribution payable was $2.5 million and $2.9 million, respectively.

~~12.~~Distributions ~~Related~~Payable ~~Party Transactions~~

~~Related~~In ~~Party~~December ~~Receivables~~2011, our consolidated joint venture, Vistancia, LLC, sold its remaining interest in an unconsolidated joint venture (the “Vistancia Sale”). As a result of the Vistancia Sale, no other assets of Vistancia, LLC economically benefit the former non-controlling member of Vistancia, LLC and ~~Payables~~we recorded the remaining $3.3 million distribution payable to this member, which is paid $0.1 million quarterly. At December 31, 2014 and 2013, the distribution payable was $2.2 million and $2.5 million, respectively.

At12. ~~December 31,~~Affiliate ~~2013~~Transactions ~~and 2012, receivables from related parties, net were as follows:~~

	December 31,
	2013			2012
	(In thousands)
Note receivables from JFSCI	$	21,588		$	24,498
Note receivables from unconsolidated joint ventures		1,037			268
Note receivables from related parties		18,822			19,940
Reserves for note receivables from related parties		(12,842	)		(12,766	)
Receivables from related parties		3,745			2,088
Total receivables from related parties, net	$	32,350		$	34,028

Affiliate Receivables and Payables

In May 2011, concurrent with issuance of the Secured Notes, the previous unsecured receivable from JFSCI was partially paid down and the balance converted to a $38.9 million unsecured term note receivable, bearing 4% interest, payable in equal quarterly installments and maturing May 15, 2019. During 2013 and 2012, JFSCI elected to make prepayments, including accrued interest, of $3.8 million and $1.9 million, respectively, and applied these prepayments to future installments such that JFSCI would not be required to make a payment until February 2015. At December 31, ~~2013~~2014 and ~~2012,~~ ~~the note receivable from JFSCI~~2013, ~~including~~receivables ~~accrued interest, was $21.6 million and $24.5 million, respectively. Quarterly, we evaluate collectability of the note receivable~~ from ~~JFSCI~~affiliates, ~~which~~net ~~includes~~were ~~consideration of JFSCI’s payment history, operating performance and future payment requirements under the note. Based on these criteria, and~~ as ~~JFSCI~~follows: ~~applied prepayments under the note to defer future installments until February 2015, we do not anticipate collection risks on the note receivable from JFSCI.~~

At December 31, 2013 and 2012, notes receivable from unconsolidated joint ventures, including accrued interest, were $1.0 million and $0.3 million, respectively. These notes receivable bear interest ranging from 8% to 12% and mature in 2020. Further, the note bearing 8% interest can earn additional interest to achieve a 17.5% internal rate of return, subject to available cash flows of the joint venture, and can be repaid prior to 2020. Quarterly, we evaluate collectability of these notes, which includes consideration of prior payment history, operating performance and future payment requirements under the applicable note. Based on these criteria, we do not anticipate collection risks on these notes.


	December 31,
	2014			2013
	(In thousands)
Note receivable from JFSCI	$	0		$	21,588
Notes receivable from affiliates		15,303			18,822
Reserves for notes receivable from affiliates		(12,917	)		(12,842	)
Receivables from affiliates		4,017			3,745

Total receivables from affiliates, net	$	6,403		$	31,313

~~At December~~In May 312011, ~~2013~~concurrent ~~and~~with ~~2012,~~issuance ~~notes~~of ~~receivable~~the ~~from~~Secured ~~other related parties~~Notes, ~~including~~the ~~accrued~~previous ~~interest,~~unsecured ~~were~~receivable ~~$6.0~~from ~~million~~JFSCI was ~~and~~partially ~~$7.2~~paid ~~million,~~down ~~respectively,~~and ~~net~~the ofbalance ~~related~~converted ~~reserves~~to ofa $1238.89 million ~~and $12.8 million, respectively. These notes are~~ unsecured ~~and~~term ~~mature~~note ~~from August 2016 through April 2021. At December 31~~receivable, ~~2013~~bearing ~~and~~4% ~~2012~~interest, ~~these~~payable ~~notes~~in ~~bore~~equal ~~interest~~quarterly ~~ranging~~installments ~~from~~and ~~Prime~~maturing ~~less 0.75% (2.5%)~~May to15, ~~Prime plus 1% (4~~2019.~~25%).~~ ~~Quarterly~~During 2013, weJFSCI ~~evaluate~~elected ~~collectability~~to ofmake ~~these notes which~~prepayments, ~~includes~~including ~~consideration~~accrued ~~of prior payment history~~interest, ~~operating~~of ~~performance and future payment requirements under the applicable notes~~$3.8 ~~Based~~million onand ~~these~~in ~~criteria~~2014, ~~two~~paid ~~notes~~the ~~receivable~~balance ~~were~~in ~~deemed uncollectible and fully reserved~~full. ~~We do not anticipate collection risks on the other notes.~~

~~The~~At ~~Company~~December 31, ~~entities~~2014 ~~under~~and ~~common~~2013, ~~control~~notes ~~and~~receivable from ~~certain~~affiliates, ~~unconsolidated~~including ~~joint~~accrued ~~ventures~~interest, ~~also~~were ~~engage~~$2.4 ~~in transactions~~million onand ~~behalf~~$6.0 ofmillion, ~~the other~~respectively, ~~such~~net asof ~~payment~~related reserves of ~~invoices~~$12.9 million and ~~payroll~~$12.8 ~~Amounts~~million, ~~resulting~~respectively. ~~from~~These ~~these~~notes ~~transactions~~ are ~~recorded~~unsecured inand ~~receivables~~mature from ~~related~~August ~~parties~~2016 orthrough ~~payables~~March to2019. ~~related~~At December 31, ~~parties~~2014, ~~are~~these ~~non-~~notes bore interest ~~bearing,~~ranging ~~due~~from onPrime ~~demand~~less ~~and generally~~0.75% ~~paid~~(2.5%) to ~~monthly~~4.20%, Atand at December 31, 2013, ~~and~~from ~~2012~~Prime less .75% (2.5%) to 4.25%. Quarterly, we evaluate collectability of these ~~receivables~~notes ~~were~~which ~~$3.7~~includes consideration ~~million~~of ~~and~~prior ~~$2.1~~payment ~~million~~history, ~~respectively,~~operating performance and future payment requirements under the applicable notes. Based on these ~~payables~~criteria, two notes receivable were ~~$0.1~~deemed ~~million~~uncollectible in 2009 and $0fully reserved.1 ~~million,~~We ~~respectively~~do not anticipate collection risks on the other notes receivable.

The Company, entities under common control and certain unconsolidated joint ventures also engage in transactions on behalf of the other, such as payment of invoices and payroll. Amounts resulting from these transactions are recorded in receivables from affiliates or payables to affiliates, are non-interest bearing, due on demand and generally paid monthly. At December 31, 2014 and 2013, these receivables were $4.0 million and $3.7 million, respectively, and these payables were $4.8 million and $0.1 million, respectively.

Real Property and Joint Venture Transactions

Redemption or Purchase of Interest in Joint Venture

In March 2012, ~~the~~our ~~Company’s~~ entire 58% interest in Shea Colorado, LLC (“SCLLC”), a consolidated joint venture with Shea Properties II, LLC, aan affiliate ~~related party~~ and the non-controlling member, was redeemed by SCLLC. In valuing ~~its~~our 58% interest in SCLLC, and to ensure receipt of net assets of equal value to ~~its~~our ownership interest, ~~the~~we ~~Company~~ used third-party real estate appraisals. The estimated fair value of the assets received by ~~the~~us ~~Company~~ was $30.8 million. However, as the non-controlling member is aan ~~related~~affiliate ~~party~~ under common control, the assets and liabilities received by ~~the~~us ~~Company~~ were recorded at net book value and the difference in ~~the~~our ~~Company’s~~ investment in SCLLC and the net book value of the assets and liabilities received was recorded as a reduction to ~~the~~our ~~Company’s~~ equity.

62As consideration for the redemption, SCLLC distributed assets and liabilities to us having a net book value of $24.0 million, including $2.2 million of cash, a $3.0 million secured note receivable, $20.0 million of inventory and $1.2 million of other liabilities. As a result of this redemption, effective March 31, 2012, SCLLC is no longer included in these consolidated financial statements. This transaction resulted in a net reduction of $41.8 million in assets and $2.0 million in liabilities, and a $39.8 million reduction in total equity, of which $11.6 million was attributable to our equity and $28.2 million was attributable to non-controlling interests.

As consideration for the redemption, SCLLC distributed assets and liabilities to the Company having a net book value of $24.0 million, including $2.2 million of cash, a $3.0 million secured note receivable, $20.0 million of inventory and $1.2 million of other liabilities. As a result of this redemption, effective March 31, 2012, SCLLC is no longer included in these consolidated financial statements. This transaction resulted in a net reduction of $41.8 million in assets and $2.0 million in liabilities, and a $39.8 million reduction in total equity, of which $11.6 million was attributable to the Company’s equity and $28.2 million was attributable to non-controlling interests.

In December 2011, Vistancia, LLC, a consolidated joint venture, sold its remaining interest in an unconsolidated joint venture to the joint venture partner for $14.0 million, of which $3.0 million was distributed to non-controlling interests (the “Vistancia Sale”). We realized a $5.2 million gain, of which $5.9 million was included in other income (expense), net and $0.7 million of interest expense previously capitalized to our investment was written off to equity in income (loss) from joint ventures. In addition, as no other assets of Vistancia, LLC economically benefit the non-controlling member, the Company recorded the remaining $3.3 million distribution payable to this member, which is included in other liabilities in the consolidated balance sheets with a corresponding charge to other income (expense), net in the consolidated statements of operations. In May 2012, for a nominal amount, SHLP purchased the non-controlling member’s entire 16.7% interest in Vistancia, LLC; however, the distribution payable remained, which is paid $0.1 million quarterly. At December 31, 2013 and 2012, the distribution payable was $2.5 million and $2.9 million, respectively (see Note 11).

As a condition of the Vistancia Sale, and the purchase of the non-controlling member’s remaining interest in Vistancia, LLC, the Company effectively remains a 10% guarantor on certain community facility district bond obligations to which the Company must meet a minimum calculated tangible net worth; otherwise, the Company is required to fund collateral to the bond issuer. At December 31, 2013 and 2012, the Company exceeded the minimum tangible net worth requirement.

Other Real Property and Joint Venture Transactions

In ~~October~~January ~~2012~~2014, ~~the~~we ~~Company~~entered ~~sold~~into a purchase and sale agreement with an affiliate and acquired undeveloped land in ~~Colorado~~Northern toCalifornia. Consideration included $4.4 million of cash, assumption of a ~~related~~$1.3 million net liability, and future revenue participation payments (the “RAPA”), which is calculated at 11% of gross revenues from home deliveries, payable quarterly and limited to $19.6 million. The RAPA liability, based on a third-party ~~for~~real estate appraisal, is estimated to be $419.6 million, which is included in other liabilities (see Note 11). As the ~~related~~transaction ~~party~~ is with an affiliate under common control, ~~the~~ the $225.43 million of ~~net~~consideration ~~sales~~to ~~proceeds~~be ~~received~~paid in excess of ~~the net~~ book value ~~of the land sold~~ was recorded as an equity ~~contribution~~distribution.

In ~~November~~February ~~2011~~2014, ~~through~~we ~~our~~entered into ~~consolidated~~a ~~joint~~purchase ~~venture~~and ~~SCLLC,~~sale weagreement ~~sold~~to sell land in ~~Colorado~~Southern California to aan ~~related~~affiliate ~~party~~under common control for $01.80 million. Ascash ~~the~~and ~~related party~~assumption isof ~~under~~certain ~~common~~construction ~~control,~~obligations. ~~the~~The $0.59 million of ~~consideration~~net sales proceeds received in excess of the net book value of the land sold was recorded as an equity contribution.

In ~~September~~June ~~2011~~2014, we ~~sold~~entered ~~fixed~~into ~~assets~~a purchase and sale agreement (“PSA”) to purchase land in ~~Colorado,~~Northern ~~comprised~~California offrom ~~three~~an ~~buildings~~unconsolidated ~~and~~joint ~~related~~venture ~~improvements~~in ~~and~~which ~~land,~~we tohave a ~~related~~33% ~~party~~ownership interest. ~~Consideration~~ ~~received~~We ~~was~~paid $142.47 million ~~cash~~for 70 lots and aacquired an option to purchase 262 lots in seven phases through 2019 for an estimated $618.5 million. ~~note~~The ~~receivable~~PSA atalso ~~4.2%~~includes ~~interest~~additional consideration based on future price and profit appreciation for each phase, payable inafter ~~equal~~the ~~monthly~~last ~~installments~~home ~~and~~delivery ~~maturing~~for ~~August~~that ~~2016~~respective phase. AsIn ~~the~~conjunction ~~related~~with ~~party~~the ispurchase ~~under~~of ~~common~~the ~~control~~70 lots, we ~~the~~deferred $10.59 million of ~~consideration received~~profit inrepresenting ~~excess~~our proportionate share of ~~net~~the ~~book~~corresponding ~~value~~land ~~was~~sale profit from the joint venture and recorded it as ana ~~equity~~reduction ~~contribution~~of inventory.

In ~~April~~October ~~2011~~2012, ~~through our consolidated joint venture SCLLC,~~ we ~~entered~~sold ~~into~~land ~~transactions with the joint venture partner of two unconsolidated joint ventures~~ in Colorado, ~~in which we have a 50% ownership interest in each, SB Meridian Villages, LLC (“SBMV”) and TCD Bradbury LLC (“TCDB”). First, we assigned our membership interest in SBMV~~ to ~~our~~an ~~joint~~affiliate ~~venture partner~~ for $4.56 million,. ~~resulting~~As inthe aaffiliate ~~$0.5~~is ~~million~~under ~~gain.~~common ~~Second~~control, wethe ~~contributed~~ $112.~~5 million in cash to TCDB and received $15.~~4 million of ~~land with a $0.6 million secured~~net ~~promissory~~sales ~~note~~proceeds ~~payable, and the joint venture partner~~ received ~~$12.2~~in ~~million~~excess of ~~land~~the ~~and~~net ~~$6.5~~book ~~million~~value of ~~cash.~~the ~~TCDB~~land ~~then~~sold ~~paid off a bank note payable that~~ was ~~secured~~recorded byas ~~the~~an ~~land~~equity ~~distributed to the TCDB partners~~contribution.

At December 31, 2014 ~~2013~~ and ~~2012~~2013, we were the managing member for ~~ten~~13 and 10, respectively, unconsolidated joint ventures and received management fees from these joint ventures as reimbursement for direct and overhead costs incurred on behalf of the joint ventures ~~and other associated costs~~. Fees ~~from these unconsolidated joint ventures~~ representing cost reimbursement ~~of our costs~~ are recorded as aan ~~reduction~~offset of to general and administrative expense.; ~~Fees~~fees ~~from these unconsolidated joint ventures representing amounts~~ in excess of ~~our~~ costs are recorded as revenues. For the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, $811.04 million, $48.30 million and $34.63 million, respectively, of management fees, ~~respectively,~~ were offset against general and administrative expenses,; and $01.51 million, $0.25 million and $10.72 million, respectively, of management fees, ~~respectively,~~ were included in revenues.

Other ~~Related~~Affiliate ~~Party~~ Transactions

JFSCI provides corporate services ~~to us~~, including ~~services for~~ management, legal, tax, information technology, risk management, facilities, accounting, treasury and human resources. For the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, general and administrative expenses included $2023.3 million, $1820.13 million and $1618.41 million, respectively, for these corporate services ~~provided by JFSCI~~.

63We obtain workers compensation insurance, commercial general liability insurance and insurance for completed operations losses and damages with respect to our homebuilding operations from affiliate and unrelated third-party insurance providers. Some of these policies are purchased by affiliate entities and we pay premiums to these affiliates for the coverage provided by these third party and affiliate insurance providers. Policies covering these risks from unrelated third party insurance providers are written at various coverage levels but include a large self-insured retention or deductible. We have retention liability insurance from affiliated entities to insure these large retentions or deductibles. For the years ended December 31, 2014, 2013 and 2012, amounts paid to affiliates for this retention insurance coverage were $21.3 million, $14.1 million and $13.1 million, respectively.

We obtain workers compensation insurance, commercial general liability insurance and insurance for completed operations losses and damages with respect to our homebuilding operations from affiliate and unrelated third-party insurance providers. These policies are purchased by affiliate entities and we pay premiums to these affiliates for the coverage provided by these third party and affiliate insurance providers. Policies covering these risks are written at various coverage levels but include a large self-insured retention or deductible. We have retention liability insurance from affiliated entities to insure these large retentions or deductibles. For the years ended December 31, 2013, 2012 and 2011, amounts paid to affiliates for this retention insurance coverage were $14.1 million, $13.1 million and $12.9 million, respectively.

13. Income Taxes

Income Tax Benefit (Expense)

For the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, major components of the income tax benefit (expense), primarily for SHI, were as follows:

	Years Ended December 31,
	2013			2012			2011
	2014			2013			2012
	(In thousands)
Current:
Federal	$	0(19,361	)	$	0		$	~~3,000~~0
State		(13,~~766~~673	)		(781,766	)		~~140~~(78	)
Total current		(123,~~766~~034	)		(781,766	)		~~3,140~~(78	)
Deferred:
Federal		134,~~385~~577			~~(532~~13,385	)		~~603~~(532	)
State		~~2,482~~244			(62,482	)		(~~674~~6	)
Total deferred		154,~~867~~821			~~(538~~15,867	)		(71538	)
Total income tax benefit (expense)	$	14(18,~~101~~213	)	$	~~(616~~14,101	)	$	~~3,069~~(616	)

Reconciliation of Expected Income Tax Benefit (Expense)

For the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, the effective tax rate differed from the 35% federal statutory rate due to the following:

	Years Ended December 31,
	2013			2012			2011
	2014			2013			2012
	(Dollars in thousands)
Income (loss) before income taxes	$	111,838		$	29,800		$	(110,311	)
Income before income taxes	$	151,612		$	111,838		$	29,800
Income tax benefit (expense) computed at statutory rate	$	(39,143	)	$	(10,430	)	$	38,609
Income tax expense computed at statutory rate	$	(53,064	)	$	(39,143	)	$	(10,430	)
Increase (decrease) resulting from:
Non-taxable entities income (loss) (a)		25,275			7,134			(36,195	)
Non-taxable entities income (a)		35,893			25,275			7,134
State taxes, net of federal income tax benefit		(12,~~901~~603	)		(1,~~045~~901	)		~~613~~(1,045	)
Small insurance company election (831b)		~~198~~1,057			~~(2,583~~198	)		(242,583	)
Write-off of deferred tax assets		0			0			(9,500	)
Section 199 deduction		1,313			875			0
Change in valuation allowance for deferred tax assets		~~32,223~~247			532,~~461~~223			105,~~648~~461
Other, net		(21,~~551~~056	)		~~847~~(3,426	)		~~(1,082~~847	)
Total income tax benefit (expense)	$	14(18,~~101~~213	)	$	~~(616~~14,101	)	$	~~3,069~~(616	)
Effective tax rate		(12.60	)%		2(12.16	)%		2.81	%

(a) Non-taxable entities represent income or loss related to SHLP, non-controlling interests and consolidated limited partnerships and limited liability companies in which the taxable income or loss is reflected on the respective partners’ tax return.

6470

Deferred Income Taxes

At December 31, ~~2013~~2014 and ~~2012~~2013, the tax effects of temporary differences that give rise to significant portions of deferred taxes for SHI were as follows:

	December 31,
	2013			2012
	2014			2013
	(In thousands)
Deferred tax assets:
Housing and land inventory basis differences	$	814,~~746~~214		$	128,~~389~~746
Available loss carryforwards		74,~~696~~961			197,~~322~~696
Impairment of inventory and investments		~~782~~482			~~2,366~~782
Other		1,~~166~~399			21,~~797~~166
Total deferred tax assets		1821,~~390~~056			3618,~~874~~390
Deferred tax liabilities
Income recognition		(~~1,544~~635	)		(41,~~142~~544	)
Total deferred tax liabilities		(~~1,544~~635	)		(41,~~142~~544	)
Subtotal		1620,~~846~~421			3216,~~732~~846
Valuation allowance		(~~509~~262	)		(~~32,732~~509	)
Net deferred tax assets	$	1620,~~337~~159		$	016,337

Due to a change in ownership of Shea Homes Southwest, Inc., formerly known as Foundation Administration Services Corp., a wholly-owned subsidiary, in 2001, NOL carryforwards utilized in a given year to offset future taxable income are subject to an annual limitation of approximately $4.6 million pursuant to Section 382 of the ~~Internal~~U.S. Internal Revenue Code of 1986, as amended. As a result of this annual limitation, available NOL carryforwards have been reduced by the amount expected to expire. At December 31, ~~2013~~2014, SHI had NOL carryforwards of approximately $1814.82 million, net, ~~that~~ which expire by 2018 and are subject to annual limitations of $4.6 million.

Valuation Allowance

In accordance with ASC 740, deferred tax assets are evaluated to determine if valuation allowances are required. ASC 740 requires companies to assess valuation allowances based on evidence using a “more-likely-than-not” standard. A valuation allowance reflects the estimated amount of deferred tax assets that may not be realized due to inherent uncertainty of future income from homebuilding operations of SHI and potential expiration of net operating loss (the “NOL”) carryforwards. The deferred tax asset amount considered realizable may change in the future, depending on profitability.

Because of the continued annual pretax losses for SHI through the year ended December 31, 2009, the Company determined it was more-likely-than-not that at December 31, 2009, the net deferred tax assets of $51.9 million would not be realized. Accordingly, for the year ended December 31, 2009, the deferred tax asset valuation allowance increased $32.7 million to fully reserve the net deferred tax asset. At December 2011 and 2010, our assessment of deferred tax assets was consistent with 2009 and the net deferred tax asset of $38.2 million and $48.8 million, respectively, remained fully reserved. For the year ended December 31, 2012, SHI generated pretax income for the first time since 2007, a result of the beginning of a housing industry recovery. However, since we only returned to profitability in 2012 and the housing recovery ~~being~~was in its early stages, the $32.7 million net deferred tax assets at December 31, 2012 remained fully reserved.

At December 31, 2013, the Company determined it was more-likely-than-not most of the net deferred tax assets would be realized, which, during the 2013 fourth quarter, resulted in a $15.6 million reversal of the valuation allowance on its deferred tax assets. The Company evaluated positive and negative evidence, ~~such~~including as financial performance, ~~as the case may be,~~ to determine its ability to realize its deferred tax assets. In its evaluation, the Company gave more weight to objective evidence, such as sales backlog, compared to subjective evidence, such as tax planning strategies. Also, significant weight was given to evidence directly related to the Company’s recent financial performance, such as customer traffic at its communities and cancellation rates, compared to indirect evidence, such as mortgage interest rates, or less recent evidence.

At December 31, 2013, in evaluating the valuation allowance, the Company gave more weight to its improving financial results in 2013, ~~especially~~ particularly growth in pre-tax income, gross margins and backlog sales value. The Company also estimated that if its pre-tax income continued, the NOLs would be realized before they expire in 2018. Additionally, the Company considered the subjective, direct positive evidence of improving market fundamentals and its plan to open new communities.

6571

Prior to December 31, 2013, the Company gave substantial weight to its losses incurred during the housing downturn in addition to other negative, indirect evidence, such as weakness in the economy, consumer confidence and housing market and a more restrictive mortgage lending environment.

At December 31, 2014 and 2013, the valuation allowance ~~relates~~related to capital losses that expire in 2016 and 2017, and the impairment of debt securities that mature in 2021 and 2022. It is unknown if these deferred tax assets will be realized.

Uncertain Tax Positions

InSince ~~2009~~2002, weSHLP ~~filed~~and aSHI ~~petition~~used the completed contract method of accounting (“CCM”) to determine when to recognize taxable income or loss with respect to the ~~United~~majority ~~States~~of ~~Tax~~their ~~Court~~respective (homebuilding operations. Federal law allows homebuilders like SHLP and SHI to defer taxable income/loss recognition from their homebuilding operations until the ~~“Tax~~tax ~~Court”)~~year ~~regarding~~in ~~our~~which ~~position~~the contracts are substantially complete, rather than annually based on the ~~completed~~percentage ~~contract~~ of completion method. The U.S. Internal Revenue Service (the “~~CCM~~IRS”) ofobjected ~~accounting~~to ~~for~~SHLP’s ~~homebuilding~~and ~~operations.~~SHI’s ~~During~~use ~~2010~~of the CCM and ~~2011~~assessed a tax deficiency against them, contending wethey ~~engaged~~did not accurately and appropriately apply the relevant U.S. Treasury Regulations in ~~formal~~calculating their respective homebuilding projects’ income/loss pursuant to the CCM for years 2004 through 2008, and ~~informal~~years ~~discovery~~2003 through 2008, respectively. SHLP and SHI believe their use of the CCM complies with the ~~IRS~~relevant regulations and filed a petition in 2009 with the United States Tax Court ~~heard~~(the ~~trial~~“Tax ~~testimony~~Court”) into ~~July~~contest ~~2012~~the ~~and~~notice ~~ordered~~of ~~the~~deficiency ~~Company~~ and ~~IRS~~ to ~~exchange briefs,~~challenge ~~which~~the ~~were filed~~IRS position. On February 12, 2014, the Tax Court ruled in our favor, ofissuing ~~the~~a ~~Company~~formal decision on April 21, 2014 (the “Tax Court Decision”). Pursuant to the ruling, ~~the~~we

Large accelerated filer

Accelerated filer

Non-accelerated filer

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Smaller reporting company

Filing Compare · Shea Homes Limited Partnership