Fair Value Disclosures

9 Months Ended

Sep. 30, 2015

11. Fair Value Disclosures

ASC 820, Fair Value Measurement, defines fair value as the price that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date and requires assets and liabilities carried at fair value to be classified and disclosed in the following three categories:

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.

The following table presents carrying values and estimated fair values of financial instruments (in thousands):



		September 30, 2015				December 31, 2014
	Hierarchy	Carrying		Fair Value		Carrying		Fair Value
Secured note receivable(1)	Level 2	$	2,971	$	2,984	$	—	$	—

6.875% senior notes(2)	Level 2	$	257,777	$	247,000	$	198,605	$	203,013
Revolving line of credit(3)	Level 2		100,000		100,000		20,000		20,000
Land development notes(4)	Level 2		3,528		3,536		5,737		5,724
Insurance premium notes(3)	Level 2		1,021		1,021		5,135		5,135
Capital lease obligations(3)	Level 2		—		—		133		133
Total notes payable and revolving line of credit		$	362,326	$	351,557	$	229,610	$	234,005

Earnout liability(5)	Level 3	$	504	$	504	$	2,426	$	2,426

⁽¹⁾

The estimated fair value of the secured note received in connection with the disposition of the golf course in our Tuscany community in our Nevada operating segment as of September 30, 2015 was based on a cash flow model discounted at market interest rates that considered the underlying risks of the note.

⁽²⁾

Estimated fair value of the Initial Senior Notes at December 31, 2014 was based on a cash flow model discounted at market interest rates that considered underlying risks of the debt. At September 30, 2015, the fair values of the Senior Notes also incorporated recent trading activity of the Exchange Notes and Additional Senior Notes in inactive markets.

⁽³⁾

Carrying amount approximates fair value due to short-term nature and interest rate terms.

⁽⁴⁾

The estimated fair values of the land development notes at September 30, 2015 and December 31, 2014 were based on cash flow models discounted at market interest rates that considered underlying risks of the debt.

⁽⁵⁾

Recognized in connection with the acquisition of Grand View on August 12, 2014. A Monte Carlo model was used to value the earnout by simulating earnings, applying the terms of the earnout in each simulated path, determining the average payment in each year across all the trials of the simulation, and calculating the sum of the present values of the payments in each year. The primary inputs and key assumptions of this Monte Carlo model included a range of forecasted revenue and gross margin scenarios which increased and decreased by 10.1% from our base case and discount rates ranging from 5.1% to 6.3%. We decreased the liability by $1.3 million and $1.9 million during the three and nine months ended September 30, 2015, respectively, to adjust the carrying value of the earnout to fair value. The decrease is included as a reduction to selling, general and administrative expense on our consolidated statement of operations.

The carrying amount of cash and cash equivalents approximates fair value. Non-financial assets and liabilities include items such as inventory and long-lived assets that are measured at fair value when acquired and resulting from impairment, if deemed necessary.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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