. Stock Based Compensation

All share and per share amounts, as applicable, have been adjusted for the stock dividend distributed in

December

2016.

Determining Fair Value of Share-Based Payment Awards

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

2015,

we also granted

million Market-Based options

to each of the Chief Executive Officer and the Chief Operating Officer. These options were valued using a Monte Carlo simulation model. Refer to the “Market-Based Stock Option Awards” section below.

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

December

31,

2016,

2015

and

2014

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

	Year Ended December 31,
	2016			2015			2014
Expected lives of options (in years)		5.0			3.9			4.0
Expected volatility		32.1	%		29.6	%		43.2	%
Risk free interest rate		1.6	%		1.2	%		1.3	%
Dividend yield rate		4.4	%		3.5	%		3.5	%

Based on calculations using the Black-Scholes option pricing model, the weighted-average grant date fair values

of stock options granted during

2016,

2015

and

2014

were

$4.04,

$4.55

and

$7.12

, respectively. The expected life of options in the table above represents the weighted-average period for which the options are expected to remain outstanding and are derived primarily from historical exercise patterns.

The expected volatility is determined based on our review of the implied volatility that is derived from the price of exchange traded options of the Company

. The risk-free interest rate assumption is determined based upon observed interest rates appropriate for the expected term of our employee stock options. The dividend yield assumption is based on our history of dividend payouts.

An annual forfeiture rate is estimated at the time of grant for all share-based payment awards which contain service and/or performance conditions. That rate is revised, if necessary, in subsequent periods if the actual forfeiture rate differs from our estimate.

Stock Option Award Activity

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

December

31,

2016,

2015

and

2014

were as follows.

	Year Ended December 31,
	2016					2015					2014
				Weighted-					Weighted-					Weighted-
				Average					Average					Average
	Number of			Exercise		Number of			Exercise		Number of			Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding Stock Option Activity
Outstanding, beginning of year		6,706,123		$	30.46		5,054,623		$	35.91		5,469,948		$	38.03
Granted (1)		42,000			21.68		2,359,500			27.05		268,625			26.96
Exercised		-			-		(31,250	)		21.21		(18,000	)		20.82
Forfeited		(10,000	)		29.80		(121,250	)		28.61		(23,750	)		25.16
Cancelled		(586,000	)		53.26		(555,500	)		66.51		(642,200	)		62.43
Outstanding, end of year		6,152,123		$	28.23		6,706,123		$	30.46		5,054,623		$	35.91

	Year Ended December 31,
	2016					2015					2014
				Weighted-					Weighted-					Weighted-
	Number of			Average		Number of			Average		Number of			Average
	Shares			Fair Value		Shares			Fair Value		Shares			Fair Value
Unvested Stock Option Activity
Outstanding, beginning of year		2,344,061		$	5.63		483,312		$	9.20		872,468		$	8.09
Granted (1)		42,000			4.04		2,359,500			5.26		268,625			7.17
Vested		(85,095	)		8.13		(377,501	)		6.76		(634,031	)		8.30
Forfeited		(10,000	)		6.61		(121,250	)		9.33		(23,750	)		7.60
Unvested, end of year		2,290,966		$	5.50		2,344,061		$	5.63		483,312		$	9.20

(1)

Total options granted in

2015

include a total of

2,100,000

Market-Based options granted to our CEO and COO. See further discussion regarding these grants in the “Market-Based Stock Option Awards” section below.

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

December

31,

2015

and

2014

was

$0.2

million and

$0.1

million

, respectively. No options were exercised during the year ended

December

31,

2016.

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

December

31,

2016.

Exercisable or expected to vest
Number outstanding		6,098,279
Weighted-average exercise price	$	28.25
Aggregate intrinsic value (in thousands)	$	3,149
Weighted-average remaining contractual term (years)		5.59

Exercisable
Number outstanding		3,861,157
Weighted-average exercise price	$	28.96
Aggregate intrinsic value (in thousands)	$	2,970
Weighted-average remaining contractual term (years)		4.01

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

2016

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

December

31,

2016.

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

December

31,

2016.

			Options Outstanding						Options Exercisable
					Weighted-						Weighted-
					Average						Average
					Remaining		Weighted-				Remaining		Weighted-
					Contractual		Average				Contractual		Average
			Number		Life (in		Exercise		Number		Life (in		Exercise
Range of Exercise Price			Outstanding		years)		Price		Outstanding		years)		Price
$ 15.01	-	$ 20.00		42,000		5.07	$	19.95		42,000		5.07	$	19.95
$ 20.01	-	$ 25.00		1,215,375		5.44		23.21		1,119,346		5.21		23.25
$ 25.01	-	$ 30.00		3,424,748		7.08		27.47		1,249,937		4.88		28.16
$ 30.01	-	$ 35.00		863,625		3.14		31.82		862,312		3.14		31.82
$ 35.01	-	$ 40.00		606,375		1.23		38.02		587,562		1.08		38.04
Total				6,152,123		5.61	$	28.23		3,861,157		4.01	$	28.96

Total compensation expense relating to stock options was

$5.6

million,

$8.1

million and

$3.3

million

for the years ended

December

31,

2016,

2015

and

2014,

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

December

31,

2016,

2015

and

2014

was

$2.1

million,

$3.1

million and

$1.3

million, respectively.

As of

December

31,

2016,

$0.7

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

2.0

years.

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

December

31,

2015

and

2014

was

$0.1

million and

$0,

respectively.

stock options were exercised during the year ended

December

31,

2016.

Marke

Based Stock

Option Awards

May

18,

2015,

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

1,050,000

shares of common stock under the Company’s

2011

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

five

year period,

one

third

of the option shares will vest as of each of the

third,

fourth,

and

fifth

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

out of

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

120%

of the closing price on the date of grant (the “market-based condition”). The option exercise price is equal to the closing price of the Company’s common stock on the date of grant, which was

$27.10

and the expiration date of each option is

May

18,

2025.

As of

December

31,

2016,

no shares are exercisable.

In accordance with ASC

718,

the market-based awards were assigned a fair value of

$5.35

per share (total value of

$11.2

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

2016

second

quarter. The following assumptions were used in the model.

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

Restricted and Unrestricted Stock Award Activity

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

December

31,

2016,

2015

and

2014

and changes during those years were as follows:

	Year Ended December 31,
	2016					2015					2014
				Weighted-					Weighted-					Weighted-
				Average					Average					Average
	Number of			Grant Date		Number of			Grant Date		Number of			Grant Date
	Shares			Fair Value		Shares			Fair Value		Shares			Fair Value
Unvested, beginning of year		99,442		$	29.75		184,201		$	32.26		298,991		$	32.87
Granted		154,703		$	22.06		36,896			26.44		39,381			30.85
Vested		(64,535	)	$	30.71		(111,719	)		32.86		(141,454	)		33.08
Forfeited		-			N/A		(9,936	)		29.11		(12,717	)		33.05
Unvested, end of year		189,610		$	23.15		99,442		$	29.75		184,201		$	32.26

Total compensation expense relating to restricted stock awards was

$1.9

million,

$2.0

million and

$2.7

million

for the years ended

December

31,

2016,

2015

and

2014,

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

December

31,

2016,

2015

and

2014

was

$0.7

million,

$0.8

million and

$1.0

million, respectively.

December

31,

2016,

there was

$2.5

million

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

2.9

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

2016

multiplied by the number of unvested awards) at

December

31,

2016

was $

4.9

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

December

31,

2016,

2015

and

2014

was

$1.3

million,

$2.9

million and

$4.2

million, respectively.

Performance

Stock

Unit Awards

July

25,

2016,

the Company’s Compensation Committee granted long term performance stock unit awards (“PSUs”) to each of the Chief Executive Officer, the Chief Operating Officer, and the Chief Financial Officer under the Company’s

2011

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

three

year period commencing

July

2016

and ending

June

30,

2019

(the “Performance Period”), measured by increasing average home sale revenues over the Base Period. The “Base Period” for the awards is

July

2015

June

30,

2016.

The awards are conditioned upon the Company achieving a minimum average gross margin from home sales percentage (excluding impairments) of at least

fifteen

percent

(15%)

over the Performance Period. Target goals of

105,000

shares for each of the Chief Executive Officer and the Chief Operating Officer and

26,250

shares for the Chief Financial Officer (the “Target Goals”) will be earned if the Company’s

three

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

10%

but less than

20%.

If Performance Revenues exceed the Base Revenues by at least

but less than

10%,

fifty

percent of the Target Goals will be earned. If Performance Revenues exceed the Base Revenues by at least

20%,

twice the Target Goals will be earned.

In accordance with ASC

718,

the PSUs are valued at the fair value on the date of grant. The grant date fair value of these awards was

$22.93

per share and the maximum potential expense that could be recognized by the Company if the maximum of the performance targets were met would be approximately

$10.8

million. ASC

718

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

December

31,

2016,

the Company concluded that achievement of the performance targets remains substantially uncertain and the level of probability required to record compensation expense were not met.