UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2014

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

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, CA 91789		91789-3078
(Address of principal executive offices)		(Zip Code)

(909) 594-9500

(Registrant’s telephone number, including area code)

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 Web site, 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).

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

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

FORM 10-Q

INDEX


		Page No.

PART 1. Financial Information

ITEM 1.	Financial Statements

	Condensed Consolidated Balance Sheets at September 30, 2014 (unaudited) and December 31, 2013		1

	Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2014 and 2013		2

	Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013		3

	Unaudited Condensed Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2014 and 2013		4

	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013		5

	Notes to Condensed Consolidated Financial Statements at September 30, 2014 (Unaudited) and December 31, 2013 and for the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)		6

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		52

ITEM 4.	Controls and Procedures		52

PART 2. Other Information

ITEM 1.	Legal Proceedings		54

ITEM 1A.	Risk Factors		54

ITEM 6.	Exhibits		54

SIGNATURES			55

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Balance Sheets

(In thousands)


	September 30, 2014		December 31, 2013
	(unaudited)
Assets
Cash and cash equivalents	$	139,282	$	206,205
Restricted cash		494		1,189
Accounts and other receivables, net		145,957		147,499
Receivables from related parties, net		23,152		32,350
Inventory		1,178,108		1,013,272
Investments in unconsolidated joint ventures		58,436		47,748
Other assets, net		58,216		57,070

Total assets	$	1,603,645	$	1,505,333

Liabilities and equity
Liabilities:
Notes payable	$	761,740	$	751,708
Payables to related parties		7,098		21
Accounts payable		51,522		62,346
Other liabilities		288,081		245,801

Total liabilities		1,108,441		1,059,876
Equity:
SHLP equity:
Owners’ equity		489,691		440,268
Accumulated other comprehensive income		5,122		4,788

Total SHLP equity		494,813		445,056
Non-controlling interests		391		401

Total equity		495,204		445,457

Total liabilities and equity	$	1,603,645	$	1,505,333

See accompanying notes

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Statements of Income

(In thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(unaudited)
Revenues	$	284,489		$	238,309		$	720,687		$	590,579
Cost of sales		(216,595	)		(182,461	)		(547,663	)		(454,769	)

Gross margin		67,894			55,848			173,024			135,810
Selling expenses		(15,482	)		(14,291	)		(41,836	)		(37,293	)
General and administrative expenses		(16,433	)		(14,097	)		(47,957	)		(40,132	)
Equity in income (loss) from unconsolidated joint ventures, net		288			(616	)		2,106			(770	)
Gain on reinsurance transaction		4,001			1,758			6,175			1,599
Interest expense		(160	)		(145	)		(436	)		(4,975	)
Other expense		(324	)		(1,350	)		(792	)		(343	)

Income before income taxes		39,784			27,107			90,284			53,896
Income tax expense		(6,053	)		(1,281	)		(16,555	)		(1,701	)

Net income		33,731			25,826			73,729			52,195
Less: Net loss (income) attributable to non-controlling interests		18			(2	)		25			1

Net income attributable to SHLP	$	33,749		$	25,824		$	73,754		$	52,196

See accompanying notes

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Statements of Comprehensive Income

(In thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(unaudited)
Net income	$	33,731		$	25,826		$	73,729		$	52,195
Other comprehensive income, before tax
Unrealized investment holding gains		96			95			591			520
Less: Reclassification adjustments for investment gains included in net income		0			(2	)		0			(39	)

Comprehensive income, before tax		33,827			25,919			74,320			52,676
Income tax expense		(75	)		(78	)		(257	)		(229	)

Comprehensive income, net of tax		33,752			25,841			74,063			52,447
Less: Comprehensive loss (income) attributable to non-controlling interests		18			(2	)		25			1

Comprehensive income attributable to SHLP	$	33,770		$	25,839		$	74,088		$	52,448

See accompanying notes

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Statements of Changes in Equity

(In thousands)


	Shea Homes Limited Partnership
	Limited Partner							General Partner			Total Owners’ Equity			Accumulated Other Comprehensive Income		Total SHLP Equity			Non- controlling Interests			Total Equity
	Common			Preferred Series B		Preferred Series D		Common			Total Owners’ Equity			Accumulated Other Comprehensive Income		Total SHLP Equity			Non- controlling Interests			Total Equity
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)		0			14,013		38,183		0			52,196			0		52,196			(1	)		52,195
Change in unrealized gain on investments, net		0			0		0		0			0			252		252			0			252

Total comprehensive income (loss)																	52,448			(1	)		52,447

Balance, September 30, 2013 (unaudited)	$	1,863		$	187,568	$	176,596	$	490		$	366,517		$	4,769	$	371,286		$	408		$	371,694

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)		54,587			1,444		3,358		14,365			73,754			0		73,754			(25	)		73,729
Change in unrealized gains on investments, net		0			0		0		0			0			334		334			0			334

Total comprehensive income (loss)																	74,088			(25	)		74,063
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, September 30, 2014 (unaudited)	$	71,321		$	218,378	$	181,224	$	18,768		$	489,691		$	5,122	$	494,813		$	391		$	495,204

(a)	In February 2014, the Company sold property to a related party under common control and, in accordance with U.S. generally accepted accounting principles (“GAAP”), $0.9 million of consideration received in excess of the net book value was recorded as a contribution from owners.

(b)

In January 2014, the Company acquired property from a related party 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

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Statements of Cash Flows

(In thousands)


	Nine Months Ended September 30,
	2014			2013
	(unaudited)			(unaudited)
Operating activities
Net income	$	73,729		$	52,195
Adjustments to reconcile net income to net cash used in operating activities:
Equity in (income) loss from joint ventures		(2,106	)		770
Gain on reinsurance transaction		(6,175	)		(1,599	)
Net gain on sale of available-for-sale investments		0			(15	)
Depreciation and amortization expense		8,088			7,312
Interest capitalized on investment in joint ventures		(2,565	)		(1,473	)
Distributions of earnings from joint ventures		9,425			6,000
Changes in operating assets and liabilities:
Restricted cash		695			10,835
Receivables and other assets		337			(3,577	)
Inventory		(169,983	)		(212,623	)
Payables and other liabilities		20,433			17,726

Net cash used in operating activities		(68,122	)		(124,449	)
Investing activities
Proceeds from sale of available-for-sale investments		174			3,163
Advances on promissory notes from related parties		(4,091	)		(1,170	)
Collections on promissory notes from related parties		13,306			4,207
Investments in unconsolidated joint ventures		(11,528	)		(20,138	)
Distributions from unconsolidated joint ventures		9,102			3,822

Net cash provided by (used in) investing activities		6,963			(10,116	)
Financing activities
Principal payments to financial institutions and others		(2,339	)		(1,993	)
Contributions from non-controlling interests		15			0
Contributions from owners		945			0
Distributions to owners		(4,385	)		0

Net cash used in by financing activities		(5,764	)		(1,993	)

Net decrease in cash and cash equivalents		(66,923	)		(136,558	)
Cash and cash equivalents at beginning of period		206,205			279,756

Cash and cash equivalents at end of period	$	139,282		$	143,198

See accompanying notes

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2014

1. Basis of Presentation

The accompanying unaudited, condensed consolidated financial statements include the accounts of Shea Homes Limited Partnership (“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. The consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these consolidated financial statements do not include all information and notes required by U.S. GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and accompanying notes for the year ended December 31, 2013. Adjustments, consisting of normal, recurring accruals and loss reserves, considered necessary for a fair presentation, are included.

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

Organization

SHLP, a California limited partnership, 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, 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”), that are under common control of Shea family members (collectively, the “Partners”). J.F. Shea, G.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 and sell lots to other homebuilders. Our principal markets are California, Arizona, Colorado, Washington, Nevada, Florida, Virginia, North 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).

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 community openings and other market factors. Since it typically takes three to eight months to construct a home, we close more homes in the second half of the year as spring and summer home sales orders convert to home closings. Because of this seasonality, home starts, construction costs and related cash outflows are historically highest from April to October, and the majority of cash receipts from home closings occur during the second half of the year. Therefore, operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of results expected for the year ended December 31, 2014.

Use of Estimates

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

2. Summary of Significant Accounting Policies

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 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 in each community. Changes to estimated total development costs subsequent to initial home closings in a community are generally allocated on a relative-sales-value method to remaining homes in the community.

Inventory is stated at cost, unless the carrying amount is determined to be unrecoverable, 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 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 expended 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 the objective is to preserve operating margins, the cash flows will be different than if the objective is to increase sales. These objectives may vary significantly by community.

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. The discount rate used in determining each asset’s fair value depends on the community’s projected life and development stage.

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 warranty period. Specific terms and conditions of completed operations claims vary depending on the market where homes close and can range up to ten years from the close 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-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 10 years. 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 differing significantly from estimates.

In accordance with our completed operations insurance policies, completed operations claims costs are recoverable from our subcontractors or insurance carriers. Claims through July 31, 2009 are insured or reinsured by third-party insurance carriers, and claims commencing August 1, 2009 are insured 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 close. Housing and other real estate sales close when all conditions of escrow are met, including delivery of the home or other real estate asset, 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 closes.

Income Taxes

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 if it is more likely than not some or all of the deferred tax asset 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. Assessment of a valuation allowance includes giving appropriate consideration to all positive and negative evidence related to realization of the deferred tax asset. This assessment considers, among other things, the nature, frequency and severity of current and cumulative losses 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.

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).

New Accounting Pronouncements

In April 2014, the FASB issued Accounting Standard Update (“ASU”) 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”), which is intended to change the criteria for reporting discontinued operations and enhance disclosures. Under this new guidance, only disposals representing a strategic shift in operations that have a major effect on the entity’s operations and financial results should be presented as discontinued operations. If the disposal does qualify as a discontinued operation, the entity will be required to provide expanded disclosures, as well as disclosure of the pretax income attributable to the disposal of a significant part of an entity that does not qualify as a discontinued operation. ASU 2014-08 will be effective beginning January 1, 2015 and subsequent interim periods. The adoption of ASU 2014-08 is not expected to have a material effect on 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 will require 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 that requires 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 the Company to perform interim and annual assessments on whether there are conditions or events that raise substantial doubt about the 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 September 30, 2014 and December 31, 2013, restricted cash included cash customer deposits temporarily restricted in accordance with regulatory requirements and cash used in lieu of bonds. At September 30, 2014 and December 31, 2013, restricted cash was $0.5 million and $1.2 million, respectively.

4. Fair Value Disclosures

At September 30, 2014 and December 31, 2013, as required by ASC 825, net book value and estimated fair value of notes payable were as follows:


	September 30, 2014				December 31, 2013
	Net Book Value		Estimated Fair Value		Net Book Value		Estimated Fair Value
	(In thousands)
$750,000 senior secured notes	$	750,000	$	795,000	$	750,000	$	830,625
Secured promissory notes	$	11,740	$	11,740	$	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 period.

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 September 30, 2014 and December 31, 2013, accounts and other receivables, net were as follows:


	September 30, 2014			December 31, 2013
	(In thousands)
Insurance receivables	$	131,793		$	138,610
Escrow receivables		2,715			586
Notes receivables		4,109			3,155
Development receivables		1,317			3,093
Other receivables		8,012			4,031
Reserve		(1,989	)		(1,976	)

Total accounts and other receivables, net	$	145,957		$	147,499

Insurance 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 present are insured or reinsured by third-party and affiliate insurance carriers. At September 30, 2014 and December 31, 2013, insurance receivables from affiliate insurance carriers were $50.9 million and $44.0 million, respectively.

We reserve for uncollectible receivables that are specifically identified.

6. Inventory

At September 30, 2014 and December 31, 2013, inventory was as follows:


	September 30, 2014		December 31, 2013
	(In thousands)
Model homes	$	111,996	$	87,728
Completed homes for sale		41,393		20,285
Homes under construction		373,147		257,662
Lots available for construction		336,712		342,622
Land under development		110,112		122,257
Land held for future development		99,883		70,618
Land held for sale, including water system connection rights of $11.4 million at September 30, 2014 and December 31, 2013		76,630		79,102
Land deposits and preacquisition costs		28,235		32,998

Total inventory	$	1,178,108	$	1,013,272

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 significant development has not occurred. Land held for sale represents residential and commercial land designated for sale, including water system connection rights that will be transferred to homebuyers upon closing of their home, transferred upon sale of land to the respective buyer, sold or leased.

Impairment

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

For the three and nine months ended September 30, 2014 and 2013, there were no inventory impairment charges.

Interest Capitalization

Interest is capitalized to inventory and investments in unconsolidated joint ventures during development and other qualifying activities. Interest capitalized as a cost of inventory is included in cost of sales when related units close. Interest capitalized to investments in unconsolidated joint ventures is included in equity in income (loss) from unconsolidated joint ventures when related units in the joint ventures close.

For the three and nine months ended September 30, 2014 and 2013, interest incurred, expensed and capitalized was as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(In thousands)
Interest incurred	$	17,112		$	16,780		$	51,092		$	50,322

Interest expensed^(a)	$	160		$	145		$	436		$	4,975


Interest capitalized as a cost of inventory	$	16,068		$	15,925		$	48,091		$	43,874

Interest previously capitalized as a cost of inventory, included in cost of sales	$	(17,228	)	$	(15,110	)	$	(45,136	)	$	(40,014	)

Interest capitalized in ending inventory ^(b)	$	105,055		$	106,709		$	105,055		$	106,709


Interest capitalized as a cost of investments in unconsolidated joint ventures	$	884		$	710		$	2,565		$	1,473

Interest previously capitalized as a cost of investments in unconsolidated joint ventures, included in equity in income (loss) from unconsolidated joint ventures	$	(106	)	$	(244	)	$	(497	)	$	(829	)

Interest capitalized in ending investments in unconsolidated joint ventures	$	3,157		$	644		$	3,157		$	644

(a)

For the three and nine months ended September 30, 2014, qualifying assets exceeded debt, therefore no interest on the Secured Notes (see Note 10) was expensed; interest expense represents fees charged on the unused revolving credit facility that is not considered a cost of borrowing and is not capitalized. For the three and nine months ended September 30, 2013, assets qualifying for interest capitalization were less than debt; therefore, non-qualifying interest was expensed.

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

7. Investments in 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 and house construction and sales. 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 respective joint ventures. Deficit Distributions are offset by future earnings of, or future contributions to, the joint ventures. At September 30, 2014 and December 31, 2013, Deficit Distributions were $3.5 million and $0.4 million, respectively.

For the three and nine months ended September 30, 2014 and 2013, there were no impairment charges on investments in unconsolidated joint ventures.

At September 30, 2014 and December 31, 2013, total unconsolidated joint ventures’ notes payable were as follows:


	September 30, 2014		December 31, 2013
	(In thousands)
Bank and seller notes payable:
Guaranteed (subject to remargin obligations)	$	61,251	$	52,515
Non-guaranteed		15,941		10,073

Total bank and seller notes payable ^(a)		77,192		62,588

Partner notes payable ^(b):
Unsecured		36,070		16,001

Total unconsolidated joint venture notes payable	$	113,262	$	78,589

Other unconsolidated joint venture notes payable ^(c)	$	32,225	$	55,441

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

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

(c)	Through indirect effective ownership in two joint ventures of 12.3% and .0003%, respectively, that had bank notes payable secured by real property in which we have not provided a guaranty.

At September 30, 2014 and December 31, 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 all joint venture loans or $35.0 million, which outstanding loan balances at September 30, 2014 and December 31, 2013 were $47.0 million and $47.7 million, respectively. Consequently, our maximum remargin obligation at September 30, 2014 and December 31, 2013 was $23.5 million and $23.8 million, respectively. We also have an agreement where we could potentially recover a portion of payments made by the Company. 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 September 30, 2014 and December 31, 2013, were $14.3 million and $4.8 million, respectively. At September 30, 2014 and December 31, 2013, 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 made by the Company. However, we cannot provide assurance we could collect such payments.

No liabilities were recorded for these guarantees at September 30, 2014 and December 31, 2013 as the fair value of the secured real estate assets exceeded the threshold at which a remargin payment is required.

Our ability to make joint venture and other restricted payments and investments is governed by the indenture governing the Secured Notes (the “Indenture”, see Note 10). We are permitted to make restricted payments under (i) a $70.0 million revolving basket available solely for joint venture investments and (ii) 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 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. In 2013, we entered into a joint venture in Southern California and committed to contribute up to $45.0 million of capital. At September 30, 2014 and December 31, 2013, we made aggregate capital contributions of $20.8 million and $15.1 million, respectively, 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. At September 30, 2014 and December 31, 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 September 30, 2014 and December 31, 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 September 30, 2014 and December 31, 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 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 Company and RRWS Partner each executed limited completion, interest and carry guarantees and environmental indemnities on a joint and several basis. In addition, the Company and RRWS Partner executed loan-to-value maintenance agreements for each loan on a joint and several basis. We have a maximum aggregate liability under the re-margin arrangements of the lesser of 50% of the outstanding balances in total or $35.0 million. Obligations of the Company and RRWS Partner under the re-margin arrangements are limited during the first two years of the loans. In addition to re-margin arrangements, the RRWS Partner and several of its principals executed repayment guarantees with no limit on their liability. At September 30, 2014 and December 31, 2013, outstanding bank notes payable were $47.0 million and $47.7 million, respectively, of which we have a maximum remargin obligation of $23.5 million and $23.8 million, respectively. We also have an agreement from the RRWS Partner, under which we could potentially recover a portion of payments made by the Company. However, we cannot provide assurance we could collect under this agreement.

At September 30, 2014 and December 31, 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 the 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 loan. The Company and Polo Partner each executed loan-to-value maintenance arrangements for each loan on a joint and several basis. At September 30, 2014 and December 31, 2013, outstanding bank notes payable were $14.3 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 made by the Company. However, have cannot provide assurance we could collect such payments.

At September 30, 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 the Company and 90% by a third-party investor (“Vistancia West Partner”). A 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 the Company and the Vistancia West Partner. At September 30, 2014, there were no outstanding borrowings.

In accordance with ASC 810, we determined we were not the primary beneficiary of RRWS, Polo and Vistancia West because we did not have the power to direct activities that most significantly impact the economic performance of these entities, 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 September 30, 2014 and December 31, 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 September 30, 2014, we had $1.7 million of refundable and non-refundable cash deposits associated with land option contracts with unconsolidated VIEs, having a $26.9 million remaining purchase price. We also had $23.2 million of refundable and non-refundable cash deposits associated with land option contracts that were not with VIEs, having a $411.2 million remaining purchase price.

Our loss exposure on land option contracts consists of non-refundable deposits, which were $20.3 million and $6.9 million at September 30, 2014 and December 31, 2013, respectively, and capitalized preacquisition costs of $3.4 million and $12.0 million, respectively, which were included in inventory in the consolidated balance sheets.

9. Other Assets, Net

At September 30, 2014 and December 31, 2013, other assets were as follows:


	September 30, 2014		December 31, 2013
	(In thousands)
Income tax receivable	$	1,174	$	2,199
Deferred tax asset (see Note 13)		14,609		16,337
Investments		9,853		9,439
Property and equipment, net		4,352		4,103
Capitalized loan origination fees		10,413		11,089
Prepaid bank fees		117		152
Deposits in lieu of bonds and letters of credit		11,028		10,294
Prepaid insurance		5,456		2,460
Other		1,214		997

Total other assets, net	$	58,216	$	57,070

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 three and nine months ended September 30, 2014 and 2013, there were nominal realized gains on available-for-sale securities.

Capitalized Loan Origination Fees

In accordance with ASC 470, loan origination fees are capitalized and amortized as interest over the term of the related debt.

Deposits in Lieu of Bonds and Letters of Credit

We make cash deposits in lieu of bonds with various agencies for some homebuilding projects. These deposits may be returned as the collateral requirements decrease or replaced with new bonds.

10. Notes Payable

At September 30, 2014 and December 31, 2013, notes payable were as follows:


	September 30, 2014		December 31, 2013
	(In thousands)
$750.0 million 8.625% senior secured notes (the “Secured Notes”), due May 2019	$	750,000	$	750,000
$125.0 million secured revolving credit facility (the “Revolver”), interest currently at the eurocurrency rate plus 2.75%, matures March 1, 2016		0		0
Promissory notes, interest ranging from 1% to 6%, maturing through 2016, secured by deeds of trust on inventory		11,740		1,708

Total notes payable	$	761,740	$	751,708

On May 10, 2011, our Secured Notes were issued 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 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. At September 30, 2014 and December 31, 2013, accrued interest was $24.3 million and $8.1 million, respectively.

The Indenture 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 unto unrelated businesses, and enter in certain transaction with our affiliates. At September 30, 2014 and December 31, 2013, we were in compliance with these covenants.

In February 2014, we replaced our $75.0 million letter of credit facility with the Revolver, which bears interest, at the Company’s option, either at (i) a daily eurocurrency base rate as defined in the credit agreement governing the Revolver (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 September 30, 2014, we were in compliance with these covenants and no amounts were outstanding.

11. Other Liabilities

At September 30, 2014 and December 31, 2013, other liabilities were as follows:


	September 30, 2014		December 31, 2013
	(In thousands)
Completed operations	$	131,793	$	138,610
Warranty reserves		21,092		20,648
Accrued profit and revenue participation arrangements (see Note 12)		22,878		678
Deferred revenue/gain		23,471		29,358
Provisions for closed homes/communities		6,818		10,591
Deposits (primarily homebuyer)		19,446		14,281
Legal reserves		6,265		4,576
Accrued interest		24,299		8,086
Accrued compensation and benefits		18,964		9,389
Distributions payable		2,260		2,531
Deficit Distributions (see Note 7)		3,486		351
Other		7,309		6,702

Total other liabilities	$	288,081	$	245,801

Completed Operations

Reserves for completed operations primarily represent claims for property damage to completed homes and projects outside our one-to-two year warranty period. Specific terms and conditions of completed operations claims vary depending on the market where homes close and can range to ten years from the close 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 or reinsured by third-party and affiliate insurance carriers.

For the three and nine months ended September 30, 2014 and 2013, changes in completed operations reserves were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(In thousands)
Balance, beginning of the period	$	137,418		$	131,248		$	138,610		$	131,519
Reserves provided		3,308			1,718			9,012			4,786
Claims paid		(8,933	)		(5,948	)		(15,829	)		(9,287	)

Balance, end of the period	$	131,793		$	127,018		$	131,793		$	127,018

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 September 30, 2014 and December 31, 2013, insurance receivables were $131.8 million and $138.6 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, claims reporting and settlement patterns, 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.

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 in the markets in which the homes close. 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, historical and anticipated warranty claims, and cost per claim history and trends. We periodically assess adequacy of our warranty liabilities and adjust amounts as necessary.

For the three and nine months ended September 30, 2014 and 2013, changes in warranty liability were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(In thousands)
Balance, beginning of the period	$	20,838		$	18,521		$	20,648		$	17,749
Provision for warranties		3,100			2,804			9,042			7,190
Warranty costs paid		(2,846	)		(2,264	)		(8,598	)		(5,878	)

Balance, end of the period	$	21,092		$	19,061		$	21,092		$	19,061

Deferred Revenue/Gain

Deferred revenue/gain represents deferred revenues or gain on transactions in which an insufficient down payment was received or a future performance, passage of time or event is required. At September 30, 2014 and December 31, 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 deferred and will be recognized as income when related claims are paid. In addition, the deferred gain may increase or decrease based on changes in actuarial estimates. Changes to the deferred gain are recognized as current period income or expense. At September 30, 2014 and December 31, 2013, the unamortized deferred gain was $16.2 million and $18.9 million, respectively. For the three and nine months ended September 30, 2014, we recognized $2.1 million and $2.7 million, respectively, and for the three and nine months ended September 30, 2013, we recognized $0.2 million and $0.8 million, respectively, of this deferral as income, 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 adjustments.

Second, PIC entered into reinsurance agreements with various unrelated reinsurers that reinsured 100% of its expected completed operations risks from August 1, 2001 to July 31, 2005. As a result of the reinsurance, a $15.6 million gain was deferred and will be recognized as income when the related claims are paid. In addition, the deferred gain may increase or decrease based on changes in actuarial estimates. Changes to the deferred gain are recognized as current period income or expense. At September 30, 2014 and December 31, 2013, the unamortized deferred gain was $4.3 million and $7.8 million, respectively. For the three and nine months ended September 30, 2014, we recognized $1.9 million and $3.5 million, respectively, and for the three and nine months ended September 30, 2013, we recognized $1.5 million and $0.8 million, respectively, of this deferral as income, 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 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 it reinsured.

Distributions 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, no other assets of Vistancia, LLC economically benefit the former non-controlling member of Vistancia, LLC and the Company recorded the remaining $3.3 million distribution payable to this member, which is paid $0.1 million quarterly. At September 30, 2014 and December 31, 2013, the remaining distribution payable was $2.3 million and $2.5 million, respectively.

12. Related Party Transactions

Related Party Receivables and Payables

At September 30, 2014 and December 31, 2013, receivables from related parties, net were as follows:


	September 30, 2014			December 31, 2013
	(In thousands)
Note receivable from JFSCI	$	11,628		$	21,588
Notes receivable from unconsolidated joint ventures		5,036			1,037
Notes receivable from related parties		15,624			18,822
Reserves for note receivables from related parties		(12,898	)		(12,842	)
Receivables from related parties		3,762			3,745

Total receivables from related parties, net	$	23,152		$	32,350

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. In 2014 and 2013, JFSCI elected to make prepayments, including accrued interest, of $14.4 million and $3.8 million, respectively, and applied these prepayments to future installments such that JFSCI would not be required to make a payment until November 2017. At September 30, 2014 and December 31, 2013, the note receivable from JFSCI, including accrued interest, was $11.6 million and $21.6 million, respectively. Quarterly, we evaluate collectability of the note receivable from JFSCI, which includes consideration of JFSCI’s payment history, operating performance and future payment requirements under the note. Based on these criteria, and as JFSCI applied prepayments under the note to defer future installments until November 2017, we do not anticipate collection risks on this note receivable.

At September 30, 2014 and December 31, 2013, notes receivable from unconsolidated joint ventures, including accrued interest, were $5.0 million and $1.0 million, respectively. These notes receivable bear interest ranging from 8% to 12% and mature through 2020. Further, a 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 receivable, which includes consideration of prior payment history, operating performance and future payment requirements under the applicable note receivable. Based on these criteria, we do not anticipate collection risks on these notes receivable.

At September 30, 2014 and December 31, 2013, notes receivable from other related parties, including accrued interest, were $2.7 million and $6.0 million, respectively, net of related reserves of $12.9 million and $12.8 million, respectively. These notes are unsecured and mature from August 2016 through March 2019. At September 30, 2014, these notes bore interest ranging from Prime less .75% (2.5%) to 4.20%, and at December 31, 2013, from Prime less .75% (2.5%) to 4.25%. Quarterly, we evaluate collectability of these notes which includes consideration of prior payment history, operating performance and future payment requirements under the applicable notes. Based on these criteria, two notes receivable were deemed uncollectible and fully reserved. We 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 related parties or payables to related parties, are non-interest bearing, due on demand and generally paid monthly. At September 30, 2014 and December 31, 2013, these receivables were $3.8 million and $3.7 million, respectively, and these payables were $7.1 million and $0.1 million, respectively.

Real Property and Joint Venture Transactions

In January 2014, we entered into a purchase and sale agreement and acquired undeveloped land in Northern California. Consideration included $4.4 million of cash, assumption of a $1.3 million net liability, and future revenue participation payments (the “RAPA”). The RAPA is calculated at 11% of gross revenues from home closings, payable quarterly and limited to $19.6 million. The RAPA liability, based on a third-party real estate appraisal, is estimated to be $19.6 million, which is included in other liabilities (see Note 11). As the transaction is with a related party under common control, the $25.3 million of consideration was recorded as an equity distribution.

In February 2014, we entered into a purchase and sale agreement to sell land in Southern California to a related party under common control for $1.0 million cash and assumption of certain construction obligations. The $0.9 million of net sales proceeds received in excess of the net book value of the land sold was recorded as an equity contribution.

In June 2014, we entered into a purchase and sale agreement (“PSA”) to purchase land in Northern California from an unconsolidated joint venture in which we hold a 33% ownership interest. We paid $2.7 million for 70 lots and acquired an option to purchase 262 lots in seven phases through 2019, estimated in total at $18.5 million. The PSA also includes additional consideration based on future price and profit appreciation for each phase, payable after the last home closing for that respective phase. In conjunction with the purchase of the 70 lots, we deferred $0.9 million of profit representing our proportionate share of the corresponding land sale profit from the joint venture and recorded it as a reduction of inventory.

At September 30, 2014 and 2013, we were the managing member for 11 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. Fees representing cost reimbursement are recorded as an offset to general and administrative expenses; fees in excess of costs are recorded as revenues. For the three and nine months ended September 30, 2014, $2.7 million and $7.0 million, respectively, of management fees were offset to general and administrative expenses, and $0.1 million and $0.5 million, respectively, of management fees were recorded as revenues. For the three and nine months ended September 30, 2013, $2.0 million and $5.6 million, respectively, of management fees were offset to general and administrative expenses, and $0.1 million and $0.2 million, respectively, of management fees were recorded as revenues.

Other Related Party Transactions

JFSCI provides corporate services, including management, legal, tax, information technology, risk management, facilities, accounting, treasury and human resources. For the three and nine months ended September 30, 2014, general and administrative expenses included $7.0 million and $19.8 million, respectively, and for the three and nine months ended September 30, 2013, general and administrative expenses included $6.9 million and $17.9 million, respectively, for these corporate services.

We lease office space from related parties under non-cancelable operating leases with terms up to ten years that generally provide renewal options for terms up to an additional five years. For the three and nine months ended September 30, 2014, related party rental expense was $0.2 million and $0.5 million, respectively, and for the three and nine months ended September 30, 2013, related party rental expense was $0.2 million and $0.3 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. 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 three and nine months ended September 30, 2014, amounts paid to affiliates for this retention insurance coverage were $5.5 million and $15.8 million, respectively, and for the three and nine months ended September 30, 2013, amounts paid to affiliates for this retention insurance coverage were $5.1 million and $12.9 million, respectively.

13. Income Taxes

For the nine months ended September 30, 2014 and 2013, income tax expense was $16.6 million and $1.7 million, respectively. At September 30, 2014 and December 31, 2013, the net deferred tax asset was $14.6 million and $16.3 million, respectively, which primarily related to available loss carryforwards, inventory and investment impairments, and housing and land inventory basis differences. The $0.5 million deferred tax asset valuation allowance related to capital losses that expire in 2016 and 2017, and the impairment of debt securities that mature in 2021 and 2022. We continue to monitor industry and economic conditions, and our ability to generate taxable income to determine the recoverability of the net deferred tax assets.

In 2009, we filed a petition with the United States Tax Court (the “Tax Court”) regarding our position on the completed contract method (“CCM”) of accounting for our homebuilding operations. During 2010 and 2011, we engaged in formal and informal discovery with the IRS and the Tax Court heard trial testimony in July 2012 and ordered the Company and the IRS to exchange briefs, which were filed. On February 12, 2014, the Tax Court ruled in favor of the Company, issuing a formal decision to this effect on April 21, 2014 (the “Tax Court Decision”). Pursuant to the ruling, the Company is permitted to continue to report income and loss from the sale of homes in its planned developments using CCM. As a result, no additional tax, interest or penalties are currently due and owing by the Company or the Partners. On July 15, 2014, the IRS filed an appeal in the U.S. Court of Appeals for the Ninth Circuit (the “Court of Appeals”). The matter will be briefed by the parties and submitted to the Court of Appeals. The Court of Appeals will schedule a hearing after briefing is completed.

Notwithstanding the appeal by the IRS, we believe our position will more likely than not prevail and accordingly, have not recorded a liability for related taxes or interest for SHI. Furthermore, as a limited partnership, income taxes, interest or penalties imposed on SHLP are the Partners’ responsibility and are not reflected in the tax provision in these consolidated financial statements. However, if the Tax Court Decision is overturned in whole or in part, which is reasonably possible, SHI could be obligated to pay the IRS and applicable state taxing authorities up to $68 million and, under the Tax Distribution Agreement, SHLP could be obligated to make a distribution to the Partners up to $111 million to fund their related payments to the IRS and applicable state taxing authorities. However, the Indenture provides the amount we may pay on behalf of SHI and distribute to the Partners of SHLP for the matter may not exceed $70.0 million. Any potential shortfall would be absorbed by the SHLP Partners.

14. Owners’ Equity

Owners’ equity consists of partners’ preferred and common capital. Common capital is comprised of limited partners with a collective 78.38% ownership and a general partner with a 20.62% ownership. Preferred capital is comprised of limited partners with either series B (“Series B”) or series D (“Series D”) classification. Series B holders have no ownership interest but earn a preferred return at 1.2% through December 31, 2016, 2.25% from January 1, 2017 to December 31, 2020, and Prime less 2.05% from January 1, 2021 and thereafter on unreturned capital balances. Series D holders have a 1% ownership interest and earn a preferred return at 2.0% through December 31, 2016, 12.75% from January 1, 2017 to December 31, 2020, and 7.0% from January 1, 2021 and thereafter on unreturned capital balances. At September 30, 2014 and December 31, 2013, accumulated undistributed preferred returns for Series B holders were $24.1 million and $22.7 million, respectively. At September 30, 2014 and December 31, 2013, accumulated undistributed preferred returns for Series D holders were $59.4 million and $56.6 million, respectively.

Net income is allocated to Partners in a priority order that considers previously allocated net losses and preferred return considerations and, thereafter, in proportion to their respective ownership interests. Net loss is allocated in a priority order to Partners generally in proportion to their ownership interests and adjusted capital account balances, and, thereafter, to the general partner.

The general partner, in its sole discretion, may make additional capital contributions or accept additional capital contributions from the limited partners. Cash distributions are made to Partners in proportion to their unpaid preferred returns, unreturned capital and, thereafter, in proportion to their ownership interests. Distributions to Partners are made at the discretion of the general partner, including payment of personal income taxes related to the Company. In addition, distributions to Partners from other entities under control of Shea family members, such as JFSCI, can be used for payment of personal incomes taxes related to the Company and other uses.

15. Contingencies and Commitments

At September 30, 2014 and December 31, 2013, certain unrecorded contingent liabilities and commitments were as follows:


	September 30, 2014		December 31, 2013
	(In thousands)
Tax Court CCM case (capped at $70.0 million, see Note 13)	$	70,000	$	70,000
Remargin obligations and guarantees for unconsolidated joint ventures (see Note 7)		37,756		28,684
Costs to complete on surety bonds for Company projects		78,367		77,276
Costs to complete on surety bonds for joint venture projects		22,744		22,845
Costs to complete on surety bonds for related party projects		1,611		1,614
Water system connection rights purchase obligation		30,506		30,506

Total unrecorded contingent liabilities and commitments	$	240,984	$	230,925

Legal Claims

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 administering these laws and regulations.

We record a reserve for potential legal claims and regulatory matters when the specific facts and circumstances indicate that they are probable of occurring and a potential loss is reasonably estimable, and we revise these estimates when necessary. At September 30, 2014 and December 31, 2013, we had reserves of $6.3 million and $4.6 million, respectively, net of expected recoveries, relating to these claims and matters, and while their outcome cannot be predicted with certainty, we believe we have appropriately reserved for them. However, if the liability arising from their resolution exceeds their recorded reserves, we could incur additional charges that could be significant.

Due to the inherent difficulty of predicting outcomes of legal claims and related contingencies, we generally cannot determine their ultimate resolution, related timing or eventual loss. If our evaluations indicate loss contingencies that could be material are not probable, but are reasonably possible, we will disclose their nature with an estimate of possible range of losses or a statement that such loss is not reasonably estimable. Other than the Tax Court Decision discussed in Note 13, at September 30, 2014, the range of reasonably possible losses in excess of amounts accrued was not material.

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 case was originally filed on or around October 10, 2014. The plaintiffs in the matter purport to bring a claim under the Consumer Protection Act arising out of alleged construction defects involving approximately 589 homes. We intend to vigorously defend against these claims. At this time, we are unable to determine what, if any, the liability exposure may be, or what the ultimate portion of any legal exposure may be covered by insurance. While we do not believe this matter to be material, due to the inherent unpredictability of litigation, there can be no assurance that the ultimate outcome will not have a material impact on the Company’s financial condition or results of operations.

Letters of Credit, Surety Bonds and Project Obligations

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 under this facility. In February 2014, this facility was replaced with the Revolver (see Note 10), which includes a $62.5 million sublimit for letters of credit. At September 30, 2014, there were no outstanding letters of credit under the Revolver.

We provide surety bonds that guarantee completion of certain infrastructure serving our homebuilding projects. At September 30, 2014, there was $78.4 million of costs to complete in connection with $170.6 million of surety bonds issued. At December 31, 2013, there was $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 related party projects in which we have no ownership interest. At September 30, 2014, there was $22.7 million of costs to complete in connection with $63.2 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, 2013, there was $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.

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 and/or 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 September 30, 2014 and December 31, 2013, in connection with credit support arrangements, there was $9.6 million and $8.6 million, respectively, reimbursable to us from certain agencies in Colorado and, accordingly, were 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 September 30, 2014 and December 31, 2013, in connection with certain funding arrangements, there was $13.5 million and $13.1 million, respectively, reimbursable to us from certain agencies, including $12.3 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 the 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 effectively remain a 10% guarantor on certain community facility district bond obligations to which we must meet a minimum calculated tangible net worth; otherwise, we are required to fund collateral to the bond issuer. At September 30, 2014 and December 31, 2013, we exceeded the minimum tangible net worth requirement.

At a consolidated homebuilding project in Colorado, we have a contractual obligation to purchase and receive water system connection rights which, at September 30, 2014 and December 31, 2013, had a contractual purchase price of $30.5 million, which is less than the estimated market value. These water system connection rights are held, then transferred to homebuyers upon closing of their home, transferred upon sale of land to the respective buyer, sold or leased.

16. Supplemental Disclosure to Consolidated Statements of Cash Flows

Supplemental disclosures to the consolidated statements of cash flows were as follows:


	Nine Months Ended September 30,
	2014			2013
	(In thousands)
Supplemental disclosure of cash flow information
Income taxes paid	$	13,271		$	66
Interest paid, net of amounts capitalized	$	436		$	3,235
Supplemental disclosure of non-cash activities
Unrealized gain (loss) on available-for-sale investments, net	$	334		$	252
Reclassification of Deficit Distributions from unconsolidated joint ventures to other liabilities	$	(3,134	)	$	(339	)
Purchase of land in exchange for note payable	$	12,371		$	2,964
Deferred gain on inventory purchased from unconsolidated joint venture	$	901		$	0
Distribution to Owners for assumption of liability and revenue participation payments for land purchased from a related party under common control	$	(20,891	)	$	0
Contribution of inventory to unconsolidated joint venture	$	8,981		$	4,082

17. Segment Information

Our homebuilding business, which is responsible for most of our operating results, constructs and sells single-family attached and detached homes designed to appeal to first-time, move-up and active lifestyle homebuyers. Our homebuilding business also provides management services to joint ventures and other related and unrelated parties. We manage each homebuilding community as an operating segment and have aggregated these communities into reportable segments based 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.

In accordance with ASC 280, in determining the most appropriate aggregation of our homebuilding communities, we also considered similar economic and other characteristics, including product types, average selling prices, gross profits, production processes, suppliers, subcontractors, regulatory environments, land acquisition results, and underlying demand and supply.

Our Corporate segment primarily provides management services to our operating segments, and includes results of our captive insurance provider, which primarily administers claims reinsured by third party carriers and the deductibles and retentions under those third party policies. Results of our insurance brokerage services business are also included in our Corporate segment.

The reportable segments follow the same accounting policies as our consolidated financial statements described in Note 2. Operational results of each reportable segment are not necessarily indicative of the results that would have been achieved had the reportable segment been an independent, stand-alone entity during the periods presented.

Financial information relating to reportable segments was as follows:


	September 30, 2014		December 31, 2013
	(In thousands)
Total assets:
Southern California	$	352,121	$	316,339
San Diego		169,876		160,593
Northern California		328,010		286,513
Mountain West		357,316		316,459
South West		197,780		155,416
East		10,138		5,096

Total homebuilding assets		1,415,241		1,240,416
Corporate		188,404		264,917

Total assets	$	1,603,645	$	1,505,333


	September 30, 2014		December 31, 2013
	(In thousands)
Inventory:
Southern California	$	263,906	$	239,986
San Diego		150,381		142,395
Northern California		286,451		249,111
Mountain West		300,084		247,294
South West		172,039		132,484
East		5,247		2,002

Total inventory	$	1,178,108	$	1,013,272


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(In thousands)				(In thousands)
Revenues:
Southern California	$	119,584	$	39,847	$	261,940	$	136,135
San Diego		26,312		40,534		71,655		81,523
Northern California		58,706		70,989		162,772		152,120
Mountain West		40,845		46,961		100,973		109,150
South West		38,923		37,471		122,885		105,157
East		0		2,277		0		5,807

Total homebuilding revenues		284,370		238,079		720,225		589,892
Corporate		119		230		462		687

Total revenues	$	284,489	$	238,309	$	720,687	$	590,579


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(In thousands)						(In thousands)
Income (loss) before income taxes:
Southern California	$	23,022		$	8,961		$	47,243		$	29,101
San Diego		980			2,836			6,693			2,415
Northern California		9,527			11,109			29,940			18,649
Mountain West		1,577			1,316			(3	)		632
South West		1,176			1,230			4,521			2,691
East		(455	)		(134	)		(2,419	)		(289	)

Total homebuilding income before income taxes		35,827			25,318			85,975			53,199
Corporate		3,957			1,789			4,309			697

Total income before income taxes	$	39,784		$	27,107		$	90,284		$	53,896

18. Supplemental Guarantor Information

The obligations under the Secured Notes are not guaranteed by any SHLP joint venture where SHLP Corp does not own 100% of the economic interest, including those that are consolidated, and the collateral securing the Secured Notes does not include a pledge of the capital stock of any subsidiary if such pledge would result in a requirement that SHLP Corp file separate financial statements with respect to such subsidiary pursuant to Rule 3-16 of Regulation S-X under the Securities Act.

Pursuant to the Indenture, a guarantor may be released from its guarantee obligations only under certain customary circumstances specified in the indenture, namely (1) upon the sale or other disposition (including by way of consolidation or merger) of such guarantor, (2) upon the sale or disposition of all or substantially all the assets of such guarantor, (3) upon the designation of such guarantor as an unrestricted subsidiary for covenant purposes in accordance with the terms of the indenture, (4) upon a legal defeasance or covenant defeasance pursuant, or (5) upon the full satisfaction of our obligations under the indenture.

Presented herein are the condensed consolidated financial statements provided for in Rule 3-10(f) of Regulation S-K under the Securities Act for the guarantor subsidiaries and non-guarantor subsidiaries.

Condensed Consolidating Balance Sheet

September 30, 2014


	SHLP Corp. ^(a)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Total
	(In thousands)
Assets
Cash and cash equivalents	$	96,402	$	34,078	$	8,802	$	0		$	139,282
Restricted cash		294		126		74		0			494
Accounts and other receivables, net		119,247		25,681		16,656		(15,627	)		145,957
Receivables from related parties, net		8,137		11,817		3,198		0			23,152
Inventory		961,983		214,640		4,620		(3,135	)		1,178,108
Investments in unconsolidated joint ventures		28,053		1,411		28,972		0			58,436
Investments in subsidiaries		784,348		75,496		87,381		(947,225	)		0
Other assets, net		27,706		30,377		133		0			58,216
Intercompany		0		562,977		0		(562,977	)		0

Total assets	$	2,026,170	$	956,603	$	149,836	$	(1,528,964	)	$	1,603,645

Liabilities and equity
Liabilities:
Notes payable	$	761,740	$	0	$	0	$	0		$	761,740
Payables to related parties		20		0		1		7,077			7,098
Accounts payable		37,614		13,607		301		0			51,522
Other liabilities		197,977		61,629		44,103		(15,628	)		288,081
Intercompany		534,006		0		39,182		(573,188	)		0

Total liabilities		1,531,357		75,236		83,587		(581,739	)		1,108,441
Equity:
SHLP equity:
Owners’ equity		489,691		876,245		65,858		(942,103	)		489,691
Accumulated other comprehensive income		5,122		5,122		0		(5,122	)		5,122

Total SHLP equity		494,813		881,367		65,858		(947,225	)		494,813
Non-controlling interests		0		0		391		0			391

Total equity		494,813		881,367		66,249		(947,225	)		495,204

Total liabilities and equity	$	2,026,170	$	956,603	$	149,836	$	(1,528,964	)	$	1,603,645

(a)	Includes Shea Homes Funding Corp., whose financial position at September 30, 2014 was not material.

Condensed Consolidating Balance Sheet

December 31, 2013


	SHLP Corp ^(b)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Total
	(In thousands)
Assets
Cash and cash equivalents	$	153,794	$	43,803	$	8,608	$	0		$	206,205
Restricted cash		695		354		140		0			1,189
Accounts and other receivables, net		120,299		26,754		28,696		(28,250	)		147,499
Receivables from related parties, net		9,251		22,027		796		276			32,350
Inventory		749,832		263,213		3,361		(3,134	)		1,013,272
Investments in unconsolidated joint ventures		22,068		1,091		24,589		0			47,748
Investments in subsidiaries		748,326		69,755		90,484		(908,565	)		0
Other assets, net		24,030		32,957		83		0			57,070
Intercompany		0		465,706		0		(465,706	)		0

Total assets	$	1,828,295	$	925,660	$	156,757	$	(1,405,379	)	$	1,505,333

Liabilities and equity
Liabilities:
Notes payable	$	751,708	$	0	$	0	$	0		$	751,708
Payables to related parties		20		0		1		0			21
Accounts payable		36,594		25,334		418		0			62,346
Other liabilities		171,470		41,370		61,211		(28,250	)		245,801
Intercompany		423,447		0		45,117		(468,564	)		0

Total liabilities		1,383,239		66,704		106,747		(496,814	)		1,059,876
Equity:
SHLP equity:
Owners’ equity		440,268		854,168		49,609		(903,777	)		440,268
Accumulated other comprehensive income		4,788		4,788		0		(4,788	)		4,788

Total SHLP equity		445,056		858,956		49,609		(908,565	)		445,056
Non-controlling interests		0		0		401		0			401

Total equity		445,056		858,956		50,010		(908,565	)		445,457

Total liabilities and equity	$	1,828,295	$	925,660	$	156,757	$	(1,405,379	)	$	1,505,333

(b)	Includes Shea Homes Funding Corp., whose financial position at December 31, 2013 was not material.

Condensed Consolidating Statement of Income and Comprehensive Income

Three Months Ended September 30, 2014


	SHLP Corp. ^(a)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
	(In thousands)
Revenues	$	171,807		$	108,491		$	4,191		$	0		$	284,489
Cost of sales		(136,363	)		(79,919	)		(313	)		0			(216,595	)

Gross margin		35,444			28,572			3,878			0			67,894
Selling expenses		(9,685	)		(4,163	)		(1,634	)		0			(15,482	)
General and administrative expenses		(11,388	)		(4,292	)		(753	)		0			(16,433	)
Equity in income (loss) from unconsolidated joint ventures, net		(237	)		76			449			0			288
Equity in income from subsidiaries		21,246			3,645			11			(24,902	)		0
Gain on reinsurance transaction		0			0			4,001			0			4,001
Interest expense		(160	)		0			0			0			(160	)
Other income (expense), net		(1,472	)		1,167			(19	)		0			(324	)

Income before income taxes		33,748			25,005			5,933			(24,902	)		39,784
Income tax expense		1			(6,052	)		(2	)		0			(6,053	)

Net income		33,749			18,953			5,931			(24,902	)		33,731
Less: Net loss attributable to non-controlling interests		0			0			18			0			18

Net income attributable to SHLP	$	33,749		$	18,953		$	5,949		$	(24,902	)	$	33,749

Comprehensive income	$	33,770		$	18,974		$	5,931		$	(24,923	)	$	33,752

(a)	Includes Shea Homes Funding Corp.; no significant activity occurred in 2014.

Condensed Consolidating Statement of Income and Comprehensive Income

Three Months Ended September 30, 2013


	SHLP Corp. ^(a)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
	(In thousands)
Revenues	$	131,052		$	102,989		$	4,268		$	0		$	238,309
Cost of sales		(106,661	)		(75,615	)		(313	)		128			(182,461	)

Gross margin		24,391			27,374			3,955			128			55,848
Selling expenses		(7,787	)		(5,081	)		(1,423	)		0			(14,291	)
General and administrative expenses		(8,427	)		(5,056	)		(614	)		0			(14,097	)
Equity in income (loss) from unconsolidated joint ventures, net		(579	)		10			(47	)		0			(616	)
Equity in income (loss) from subsidiaries		20,256			908			(822	)		(20,342	)		0
Gain on reinsurance transaction		0			0			1,758			0			1,758
Interest expense		(130	)		(15	)		0			0			(145	)
Other income (expense), net		(1,900	)		797			(119	)		(128	)		(1,350	)

Income before income taxes		25,824			18,937			2,688			(20,342	)		27,107
Income tax benefit (expense)		0			(1,282	)		1			0			(1,281	)

Net income		25,824			17,655			2,689			(20,342	)		25,826
Less: Net income attributable to non-controlling interests		0			0			(2	)		0			(2	)

Net income attributable to SHLP	$	25,824		$	17,655		$	2,687		$	(20,342	)	$	25,824

Comprehensive income	$	25,839		$	17,670		$	2,689		$	(20,357	)	$	25,841

(a)	Includes Shea Homes Funding Corp.; no significant activity occurred in 2013.

Condensed Consolidating Statement of Income and Comprehensive Income

Nine Months Ended September 30, 2014


	SHLP Corp. ^(a)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
	(In thousands)
Revenues	$	398,559		$	309,776		$	12,352		$	0		$	720,687
Cost of sales		(318,844	)		(227,757	)		(1,062	)		0			(547,663	)

Gross margin		79,715			82,019			11,290			0			173,024
Selling expenses		(24,111	)		(12,298	)		(5,427	)		0			(41,836	)
General and administrative expenses		(33,697	)		(12,080	)		(2,180	)		0			(47,957	)
Equity in income (loss) from unconsolidated joint ventures, net		(895	)		102			2,899			0			2,106
Equity in income from subsidiaries		58,259			5,230			39			(63,528	)		0
Gain on reinsurance transaction		0			0			6,175			0			6,175
Interest expense		(436	)		0			0			0			(436	)
Other income (expense), net		(5,078	)		4,373			(87	)		0			(792	)

Income before income taxes		73,757			67,346			12,709			(63,528	)		90,284
Income tax expense		(3	)		(16,531	)		(21	)		0			(16,555	)

Net income		73,754			50,815			12,688			(63,528	)		73,729
Less: Net loss attributable to non-controlling interests		0			0			25			0			25

Net income attributable to SHLP	$	73,754		$	50,815		$	12,713		$	(63,528	)	$	73,754

Comprehensive income	$	74,088		$	51,149		$	12,688		$	(63,862	)	$	74,063

(a)	Includes Shea Homes Funding Corp.; no significant activity occurred in 2014.

Condensed Consolidating Statement of Income and Comprehensive Income

Nine Months Ended September 30, 2013


	SHLP Corp. ^(a)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
	(In thousands)
Revenues	$	332,157		$	242,345		$	16,077		$	0		$	590,579
Cost of sales		(271,041	)		(183,072	)		(1,022	)		366			(454,769	)

Gross margin		61,116			59,273			15,055			366			135,810
Selling expenses		(20,519	)		(12,305	)		(4,469	)		0			(37,293	)
General and administrative expenses		(24,747	)		(13,285	)		(2,100	)		0			(40,132	)
Equity in income (loss) from unconsolidated joint ventures, net		(1,219	)		(12	)		461			0			(770	)
Equity in income (loss) from subsidiaries		44,761			(286	)		(2,154	)		(42,321	)		0
Gain on reinsurance transaction		0			0			1,599			0			1,599
Interest expense		(3,562	)		(1,413	)		0			0			(4,975	)
Other income (expense), net		(3,631	)		2,765			889			(366	)		(343	)

Income before income taxes		52,199			34,737			9,281			(42,321	)		53,896
Income tax expense		(3	)		(1,687	)		(11	)		0			(1,701	)

Net income		52,196			33,050			9,270			(42,321	)		52,195
Less: Net loss attributable to non-controlling interests		0			0			1			0			1

Net income attributable to SHLP	$	52,196		$	33,050		$	9,271		$	(42,321	)	$	52,196

Comprehensive income	$	52,448		$	33,302		$	9,270		$	(42,573	)	$	52,447

(a)	Includes Shea Homes Funding Corp.; no significant activity occurred in 2013

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2014


	SHLP Corp. ^(a)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
	(In thousands)
Operating activities
Net cash provided by (used in) operating activities	$	(159,931	)	$	85,946		$	(1,490	)	$	7,353		$	(68,122	)

Investing activities
Collections on promissory notes from related parties		3,256			10,050			0			0			13,306
Investments in unconsolidated joint ventures		(4,172	)		(99	)		(7,257	)		0			(11,528	)
Distributions from unconsolidated joint ventures		0			34			9,068						9,102
Other investing activities		(1,663	)		(13	)		(2,415	)		0			(4,091	)

Net cash provided by (used in) investing activities		(2,579	)		10,146			(604	)		0			6,963

Financing activities
Intercompany		110,897			(105,817	)		2,273			(7,353	)		0
Distributions to owners		(4,385	)		0			0			0			(4,385	)
Contributions from owners		945			0			0			0			945
Other financing activities		(2,339	)		0			15			0			(2,324	)

Net cash provided by (used in) financing activities		105,118			(105,817	)		2,288			(7,353	)		(5,764	)

Net increase (decrease) in cash and cash equivalents		(57,392	)		(9,725	)		194			0			(66,923	)
Cash and cash equivalents at beginning of period		153,794			43,803			8,608			0			206,205

Cash and cash equivalents at end of period	$	96,402		$	34,078		$	8,802		$	0		$	139,282

(a)	Includes Shea Homes Funding Corp.; no significant activity occurred in 2014.

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2013


	SHLP Corp. ^(a)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
	(In thousands)
Operating activities
Net cash provided by (used in) operating activities	$	(116,651	)	$	(22,609	)	$	10,063		$	4,748		$	(124,449	)

Investing activities
Investments in unconsolidated joint ventures		(8,342	)		(194	)		(11,602	)		0			(20,138	)
Other investing activities		317			6,273			3,432			0			10,022

Net cash provided by (used in) investing activities		(8,025	)		6,079			(8,170	)		0			(10,116	)

Financing activities
Intercompany		38,421			(27,151	)		(6,522	)		(4,748	)		0
Principal payments to financial institutions and others		(1,993	)		0			0			0			(1,993	)

Net cash provided by (used in) financing activities		36,428			(27,151	)		(6,522	)		(4,748	)		(1,993	)

Net increase (decrease) in cash and cash equivalents		(88,248	)		(43,681	)		(4,629	)		0			(136,558	)
Cash and cash equivalents at beginning of period		216,914			48,895			13,947			0			279,756

Cash and cash equivalents at end of period	$	128,666		$	5,214		$	9,318		$	0		$	143,198

(a)	Includes Shea Homes Funding Corp.; no significant activity occurred in 2013.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and accompanying notes included under Item 1 of this Report and our audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2013.

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 in unconsolidated joint ventures varies, but is generally less than or equal to 50%.

•

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.

Overview

The housing market remained relatively healthy during the first nine months of 2014. For the three months ended September 30, 2014, compared to the three months ended September 30, 2013, net homes sales orders increased 6%, primarily attributable to a higher average community count. Homebuilding revenues increased 19% driven by a 21% increase in our average home selling price (“ASP”), which was partially offset by a 2% decrease in homes closed. Gross margin as a percentage of revenues increased from 23.4% last year to 23.9% for the three months ended September 30, 2014.

For the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013, net homes sales orders increased 10%, primarily attributable to a higher average community count. Homebuilding revenues increased 22% as a result of a 21% increase in our ASP and a 1% increase in home closings. Gross margin as a percentage of revenues improved from 23.0% to 24.0% as a result of general home price increases.

We have $149.6 million in cash, cash equivalents, restricted cash and investments at September 30, 2014 and we expect to continue to invest in land opportunities in desirable locations to supplement our existing land positions.


	Three Months Ended September 30,									Nine Months Ended September 30,
	2014			2013			% Change			2014			2013			% Change
	(Dollars in thousands)
Revenues	$	284,489		$	238,309			19	%	$	720,687		$	590,579			22	%
Cost of sales		(216,595	)		(182,461	)		19			(547,663	)		(454,769	)		20

Gross margin		67,894			55,848			22			173,024			135,810			27
Selling expenses		(15,482	)		(14,291	)		8			(41,836	)		(37,293	)		12
General and administrative expenses		(16,433	)		(14,097	)		17			(47,957	)		(40,132	)		19
Equity in income (loss) from unconsolidated joint ventures		288			(616	)		—			2,106			(770	)		—
Gain on reinsurance transaction		4,001			1,758			128			6,175			1,599			286
Interest expense		(160	)		(145	)		10			(436	)		(4,975	)		(91	)
Other expense		(324	)		(1,350	)		(76	)		(792	)		(343	)		131

Income before income taxes		39,784			27,107			47			90,284			53,896			68
Income tax expense		(6,053	)		(1,281	)		373			(16,555	)		(1,701	)		873

Net income		33,731			25,826			31			73,729			52,195			41
Less: Net loss (income) attributable to non-controlling interests		18			(2	)		—			25			1			2,400

Net income attributable to SHLP	$	33,749		$	25,824			31	%	$	73,754		$	52,196			41	%

Comprehensive income, net of tax	$	33,752		$	25,841			31	%	$	74,063		$	52,447			41	%

For the three months ended September 30, 2014, net income attributable to SHLP was $33.7 million compared to $25.8 million for the three months ended September 30, 2013. This increase was primarily attributable to a 19% increase in revenues, a 50 basis point higher gross margin percentage, a $2.2 million improvement in our reinsurance transaction results, a $0.9 million increase in equity income from unconsolidated joint ventures and a $1.0 million decrease in other expense, which were partially offset by a $2.3 million increase in general and administrative expenses (from increased compensation expenses), a $1.2 million increase in selling expenses (from increased volume related costs, such as model costs and advertising) and a $4.8 million increase in income tax expense.

For the nine months ended September 30, 2014, net income attributable to SHLP was $73.8 million compared to $52.2 million for the nine months ended September 30, 2013. This increase was primarily attributable to a 22% increase in revenues, a 100 basis point higher gross margin percentage, a $4.6 million improvement in our reinsurance transaction results, a $2.9 million increase in equity income from unconsolidated joint ventures and a $4.5 million decrease in interest expense, which were partially offset by a $7.8 million increase in general and administrative expenses (from increased compensation expenses), a $4.5 million increase in selling expenses (from increased volume related costs, such as direct selling costs, model costs and advertising) and a $14.9 million increase in income tax expense.

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 community openings and other market factors. Since it typically takes three to eight months to construct a new home, we close more homes in the second half of the year as spring and summer home sales orders convert to home closings. Because of this seasonality, home starts, construction costs and related cash outflows are historically highest from April to October, and the majority of cash receipts from home closings occur during the second half of the year. Therefore, operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of results expected for the year ended December 31, 2014.

Revenues

Revenues are derived primarily from home closings and land sales. House and land revenues are recorded at closing. Management fees from homebuilding 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.


	Three Months Ended September 30,							Nine Months Ended September 30,
	2014		2013		% Change			2014		2013		% Change
	(Dollars in thousands)
Revenues:
House revenues	$	279,044	$	234,938		19	%	$	707,898	$	578,817		22	%
Land revenues		3,892		2,750		42			8,831		9,891		(11	)
Other homebuilding revenues		1,434		391		267			3,496		1,184		195

Total homebuilding revenues		284,370		238,079		19			720,225		589,892		22
Other revenues		119		230		(48	)		462		687		(33	)

Total revenues	$	284,489	$	238,309		19	%	$	720,687	$	590,579		22	%

For the three months ended September 30, 2014, total revenues were $284.5 million compared to $238.3 million for the three months ended September 30, 2013. This increase was primarily attributable to a 19% increase in house revenues, which was driven by a 21% increase in the ASP of homes closed, partially offset by a 2% decrease in homes closed. The increase in the ASP of homes closed was primarily attributable to the general increase in new home prices combined with a greater percentage of our home closings coming from our Southern California segment, which delivers more expensive homes compared to our other segments.

For the nine months ended September 30, 2014, total revenues were $720.7 million compared to $590.6 million for the nine months ended September 30, 2013. This increase was primarily attributable to a 22% increase in house revenues, which was driven by a 1% increase in homes closed and a 21% increase in the ASP of homes closed. The increase in the ASP of homes closed was primarily attributable to the general increase in new home prices combined with a greater percentage of home closings coming from our Southern California segment, which delivers more expensive homes compared to our other segments.

For the three and nine months ended September 30, 2014 and 2013, homebuilding revenues by segment were as follows:


	Three Months Ended September 30,							Nine Months Ended September 30,
	2014		2013		% Change			2014		2013		% Change
	(Dollars in thousands)
Southern California:
House revenues	$	119,483	$	39,841		200	%	$	261,581	$	133,940		95	%
Land revenues		0		0		0			56		2,175		(97	)
Other homebuilding revenues		101		6		1,583			303		20		1,415

Total homebuilding revenues	$	119,584	$	39,847		200	%	$	261,940	$	136,135		92	%

San Diego:
House revenues	$	26,310	$	40,532		(35	)%	$	71,584	$	81,515		12	%
Land revenues		0		0		—			67		0		100
Other homebuilding revenues		2		2		0			4		8		(50	)

Total homebuilding revenues	$	26,312	$	40,534		(35	)%	$	71,655	$	81,523		(12	)%

Northern California:
House revenues	$	58,127	$	70,824		(18	)%	$	161,332	$	151,615		6	%
Land revenues		0		0		0			0		0		0
Other homebuilding revenues		579		165		251			1,440		505		185

Total homebuilding revenues	$	58,706	$	70,989		(17	)%	$	162,772	$	152,120		7	%

Mountain West:
House revenues	$	36,528	$	44,128		(17	)%	$	91,700	$	101,169		(9	)%
Land revenues		3,892		2,750		42			8,708		7,716		13
Other homebuilding revenues		425		83		412			565		265		113

Total homebuilding revenues	$	40,845	$	46,961		(13	)%	$	100,973	$	109,150		(7	)%

South West:
House revenues	$	38,596	$	37,336		3	%	$	121,701	$	104,771		16	%
Land revenues		0		0		0			0		0		0
Other homebuilding revenues		327		135		142			1,184		386		207

Total homebuilding revenues	$	38,923	$	37,471		4	%	$	122,885	$	105,157		17	%

East:
House revenues	$	0	$	2,277		(100	)%	$	0	$	5,807		(100	)%
Land revenues		0		0		0			0		0		0
Other homebuilding revenues		0		0		0			0		0		0

Total homebuilding revenues	$	0	$	2,277		(100	)%	$	0	$	5,807		(100	)%

For the three and nine months ended September 30, 2014 and 2013, homes closed and ASP of homes closed by segment were as follows:


	Three Months Ended September 30,							Nine Months Ended September 30,
	2014		2013		% Change			2014		2013		% Change
Homes closed:
Southern California		146		48		204	%		311		179		74	%
San Diego		49		85		(42	)		137		176		(22	)
Northern California		86		138		(38	)		252		315		(20	)
Mountain West		83		98		(15	)		200		229		(13	)
South West		118		116		2			370		333		11
East		0		8		(100	)		0		23		(100	)

Total consolidated		482		493		(2	)%		1,270		1,255		1	%

Southern California		15		0		100	%		65		36		81	%
Northern California		12		3		300			34		12		183
Mountain West		28		21		33			51		34		50
East		15		18		(17	)		46		38		21

Total unconsolidated joint ventures		70		42		67	%		196		120		63	%

Total homes closed		552		535		3	%		1,466		1,375		7	%


	Three Months Ended September 30,							Nine Months Ended September 30,
	2014		2013		% Change			2014		2013		% Change
ASP of homes closed:
Southern California	$	818,377	$	830,021		(1	)%	$	841,096	$	748,268		12	%
San Diego		536,939		476,847		13			522,511		463,153		13
Northern California		675,895		513,217		32			640,206		481,317		33
Mountain West		440,096		450,286		(2	)		458,500		441,786		4
South West		327,085		321,862		2			328,922		314,628		5
East		0		284,625		(100	)		0		252,478		(100	)

Total consolidated	$	578,929	$	476,548		21	%	$	557,400	$	461,209		21	%

Southern California	$	380,406	$	0		100	%	$	378,190	$	280,105		35	%
Northern California		531,709		571,764		(7	)		518,431		552,037		(6	)
Mountain West		354,126		345,859		2			385,202		370,766		4
East		280,889		261,224		8			274,718		255,520		8

Total unconsolidated joint ventures	$	374,500	$	325,714		15	%	$	380,056	$	325,200		17	%

Total ASP of homes closed	$	553,005	$	464,707		19	%	$	533,690	$	449,339		19	%

For the three months ended September 30, 2014 compared to 2013, home closings increased for Southern California and South West, partially offset by decreased closings in all other segments. The decrease in closings for San Diego and Northern California was due to a lower beginning backlog for the 2014 third quarter versus the 2013 third quarter. The increase in closings for Southern California was primarily attributable to the opening of several new communities, which contributed to a higher year-over-year beginning backlog for the 2014 third quarter. The increase in average selling price of homes closed was primarily attributable to general price increases and the delivery of a greater percentage of homes from our more expensive Southern California segment.

For the nine months ended September 30, 2014 compared to 2013, home closings increased for Southern California and South West, partially offset by decreased closings in all other segments. The increase in closings for Southern California and South West were primarily attributable to the opening of new communities, which contributed to a larger year-over-year beginning backlog for the year. The decrease in closings for the other segments was primarily attributable to a lower year-over-year beginning backlog for the year. The increase in the average selling price of homes closed was primarily attributable to general price increases in all segments, combined with the delivery of a greater percentage of homes from our more expensive Southern California segment.

Gross Margin

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

Gross margin for the three and nine months ended September 30, 2014 and 2013 was as follows:


	Three Months Ended September 30,										Nine Months Ended September 30,
	2014		Gross Margin %			2013		Gross Margin %			2014		Gross Margin %			2013		Gross Margin %
	(Dollars in thousands)
Gross margin	$	67,894		23.9	%	$	55,848		23.4	%	$	173,024		24.0	%	$	135,810		23.0	%

For the three months ended September 30, 2014, total gross margin was $67.9 million compared to $55.8 million for the three months ended September 30, 2013. This increase was primarily attributable to a 19% increase in revenues.

For the nine months ended September 30, 2014, total gross margin was $173.0 million compared to $135.8 million for the nine months ended September 30, 2013. This increase was primarily attributable to a 22% increase in revenues combined with a higher gross margin percentage resulting from general price increases experienced in most of our segments.

Selling, General and Administrative Expense

Selling, general and administrative expense for the three and nine months ended September 30, 2014 and 2013 were as follows:


	Three Months Ended September 30,									Nine Months Ended September 30,
	2014			2013			% Change			2014			2013			% Change
	(Dollars in thousands)
Total homebuilding revenues	$	284,370		$	238,079			19	%	$	720,225		$	589,892			22	%
Selling expense	$	15,482		$	14,291			8	%	$	41,836		$	37,293			12	%

% of total homebuilding revenues		5.4	%		6.0	%					5.8	%		6.3	%

General and administrative expense	$	16,433		$	14,097			17	%	$	47,957		$	40,132			19	%

% of total homebuilding revenues		5.8	%		5.9	%					6.7	%		6.8	%

Total selling, general and administrative expense	$	31,915		$	28,388			12	%	$	89,793		$	77,425			16	%

% of total homebuilding revenues		11.2	%		11.9	%					12.5	%		13.1	%

Selling Expense

For the three months ended September 30, 2014, selling expense was $15.5 million compared to $14.3 million for the three months ended September 30, 2013. The increase was primarily attributable to higher volume related costs, such as model costs, advertising costs and co-op advertising paid to other homebuilders for master plan communities. Selling expense as a percentage of revenue decreased due to certain fixed selling costs, primarily salaries, on a higher revenue base. As homebuilding revenues increase, we generally achieve economies of scale and efficiencies on certain expenses that are fixed in nature.

For the nine months ended September 30, 2014, selling expense was $41.8 million compared to $37.3 million for the nine months ended September 30, 2013. The increase was primarily attributable to higher volume related costs, such as direct selling costs, including sales commissions, model costs, advertising costs and co-op advertising. Selling expense as a percentage of revenue decreased due to leveraging certain fixed selling costs, primarily salaries, on a higher revenue base.

General and Administrative Expense

For the three months ended September 30, 2014, general and administrative expense was $16.4 million compared to $14.1 million for the three months ended September 30, 2013. For the nine months ended September 30, 2014, general and administrative expense was $48.0 million compared to $40.1 million for the nine months ended September 30, 2013. The increases were primarily due to increased compensation expenses. G&A expenses as a percentage of revenue were lower for both the three month and nine month periods in 2014, compared to 2013, as a result of greater efficiencies as we continue to leverage certain fixed expenses over an increased level of revenues.

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 in homebuilding and land development.

For the three months ended September 30, 2014, equity in income (loss) from unconsolidated joint ventures was $0.3 million compared to $(0.6) million for the three months ended September 30, 2013. For the nine months ended September 30, 2014, equity in income (loss) from unconsolidated joint ventures was $2.1 million compared to $(0.8) million for the nine months ended September 30, 2013. The increase in income was primarily attributable to increased profitability of a Southern California joint venture that is near completion, partially offset by start up costs of new joint ventures.

Gain 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 deferred and to be recognized as income when related claims are paid. In addition, the deferred gain can be adjusted based on current changes in actuarial estimates. Any changes to the deferred gain are recognized in the current period.

For the three months ended September 30, 2014, the reinsurance gain was $4.0 million compared to $1.8 million for the three months ended September 30, 2013. For the nine months ended September 30, 2014, reinsurance gain was $6.2 million compared to $1.6 million for the nine months ended September 30, 2013. The gain recognized for the three and nine months ended September 30, 2014 was based on claims paid. The gain recognized for the three and nine months ended September 30, 2013 was based on claims paid, partially offset by actuarial estimate adjustments.

Interest Expense

Interest expense is interest incurred and not capitalized. For the three and nine months ended September 30, 2014, substantially all interest incurred was capitalized. For the three and nine months ended September 30, 2013, most interest incurred was capitalized to inventory with the remainder expensed since debt exceeded the qualified asset 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.

For the three months ended September 30, 2014, interest expense was $0.2 million compared to $0.1 million for the three months ended September 30, 2013. For the nine months ended September 30, 2014, interest expense was $0.4 million compared to $5.0 million for the nine months ended September 30, 2013. This decrease was primarily attributable to higher qualified assets. Interest expense for the three and nine months ended September 30, 2014 represents fees for the unused portion of our $125.0 million secured revolving credit facility (the “Revolver”) and is not capitalized.

Other Expense, Net

Other 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 party notes receivables, investments and interest bearing cash accounts.

For the three and nine months ended September 30, 2014 and 2013, other expense, net was as follows:


	Three Months Ended September 30,									Nine Months Ended September 30,
	2014			2013			% Change			2014			2013			% Change
	(Dollars in thousands)
Other income (expense), net:
Interest income	$	386		$	534			(28	)%	$	1,143		$	1,711			(33	)%
Gain on sale of investments		0			5			(100	)		0			15			(100	)
Preacquisition cost and option deposit write-offs		(192	)		(389	)		(51	)		(662	)		(582	)		14
Property tax expense		(581	)		(699	)		(17	)		(1,822	)		(2,107	)		(14	)
Deposit forfeitures and cancellation fees		173			60			188			486			799			(39	)
Other income (expense)		(110	)		(861	)		(87	)		63			(179	)		—

Total other income (expense), net	$	(324	)	$	(1,350	)		(76	)%	$	(792	)	$	(343	)		131	%

For the three months ended September 30, 2014, other expense, net was $(0.3) compared to $(1.4) million for the three months ended September 30, 2013. This decrease was primarily attributable to decreased property tax expense and preacquisition cost and option deposit write-offs, and increased deposit forfeitures and cancellation fees.

For the nine months ended September 30, 2014, other expense, net was $(0.8) compared to $(0.3) million for the nine months ended September 30, 2013. This increase was primarily attributable to decreased interest income on bank and investment accounts and decreased deposit forfeitures and cancellation fees. Cancelation fees for the nine months ended September 30, 2013 included a $0.5 million fee received for the termination of a managed real estate project.

Income Tax Expense

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 SHLP’s general and limited partners (the “Partners”) and their owners. As SHI is a C corporation, federal and state income taxes are included in these consolidated financial statements.

At September 30, 2014 and December 31, 2013, net deferred tax assets of SHI before reserves were $15.1 million and $16.8 million, respectively, which primarily related to available loss carryforwards, inventory and investment impairments, and housing and land inventory basis differences. At December 31, 2013, SHI had net operating loss carryforwards of approximately $18.8 million that 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. At September 30, 2014 and December 31, 2013, the deferred tax asset valuation allowance was $0.5 million and $0.5 million, respectively, and related to capital losses that expire in 2016 and 2017, and the impairment of debt securities that mature in 2021 and 2022, as it is unknown if these deferred tax assets will be realized.

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 our deferred tax assets and related valuation allowances, and could also materially impact 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.

For the nine months ended September 30, 2014, income tax expense was $16.6 million compared to $1.7 million for the nine months ended September 30, 2013. This increase was primarily attributable to the valuation allowance reduction (and corresponding reduction in income tax expense) for the nine months ended September 30, 2013, combined with a year-over-year increase in taxable income for the nine months ended September 30, 2014.

Net 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 loss attributable to non-controlling interests represents the share of loss attributable to the parties having a non-controlling interest.

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 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 three and nine months ended September 30, 2014 and 2013, home sales orders, net of cancellations, were as follows:


	Three Months Ended September 30,							Nine Months Ended September 30,
	2014		2013		% Change			2014		2013		% Change
Home sales orders, net:
Southern California		101		107		(6	)%		407		211		93	%
San Diego		60		33		82			211		198		7
Northern California		82		84		(2	)		301		305		(1	)
Mountain West		102		72		42			340		306		11
South West		111		135		(18	)		342		438		(22	)
East		4		3		33			17		9		89

Total consolidated		460		434		6	%		1,618		1,467		10	%

Southern California		21		22		(5	)%		96		35		174	%
Northern California		11		11		0			40		33		21
Mountain West		38		25		52			78		59		32
East		33		19		74			99		61		62

Total unconsolidated joint ventures		103		77		34	%		313		188		66	%

Total home sales orders, net		563		511		10	%		1,931		1,655		17	%

For the three and nine months ended September 30, 2014 and 2013, cancellation rates were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Cancellation rates:
Southern California		14	%		9	%		10	%		9	%
San Diego		25			34			20			21
Northern California		11			15			13			12
Mountain West		20			22			17			15
South West		19			16			17			14
East		20			0			6			18

Total consolidated		18	%		17	%		15	%		14	%

Southern California		28	%		8	%		17	%		10	%
Northern California		0			31			22			30
Mountain West		7			22			11			14
East		33			39			28			31

Unconsolidated joint ventures		21	%		25	%		20	%		23	%

Total cancellation rates		18	%		18	%		16	%		15	%

For the three and nine months ended September 30, 2014 and 2013, average active selling communities were as follows:


	Three Months Ended September 30,							Nine Months Ended September 30,
	2014		2013		% Change			2014		2013		% Change
Average active selling communities:
Southern California		11		7		57	%		10		5		100	%
San Diego		10		7		43			9		7		29
Northern California		13		14		(7	)		14		13		8
Mountain West		13		15		(13	)		12		15		(20	)
South West		17		17		0			17		16		6
East		2		1		100			1		1		0

Total consolidated		66		61		8	%		63		57		11	%

Southern California		4		2		100	%		4		2		100	%
Northern California		4		4		0			4		3		33
Mountain West		5		5		0			5		5		0
East		3		2		50			3		2		50

Total unconsolidated joint ventures		16		13		23	%		16		12		33	%

Total average active selling communities		82		74		11	%		79		69		14	%

For the three months ended September 30, 2014, consolidated home sales orders per active selling community were 7.0, or 2.3 per month, compared to 7.1, or 2.4 per month, for the three months ended September 30, 2013. For the nine months ended September 30, 2014, consolidated home sales orders per active selling community were 25.7, or 2.9 per month, compared to 25.7, or 2.9 per month, for the nine months ended September 30, 2013. The decrease in the 2014 third quarter monthly sales absorption rate was primarily attributable to a slowdown in the sales pace in Southern California and South West, partially offset by an increase in the Mountain West.

The Company’s consolidated cancellation rate increased from 17% in the 2013 third quarter to 18% in the 2014 third quarter.

Sales Order Backlog

Sales order backlog represents homes sold and under contract to be built, but not closed. Backlog sales value is the revenue estimated to be realized at closing. 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 when all conditions of escrow are met, including delivery of the home, title passage, and appropriate consideration is received or collection of associated receivables, if any, is reasonably assured. A sold home is classified “in backlog” during the time between its sale and close. 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.

The increase in homes in backlog at September 30, 2014 compared to September 30, 2013 was primarily attributable to a 10% increase in home sales orders for the nine months ended September 30, 2014 compared to the same period in 2013, partially offset by a 1% increase in homes closed for the same period, and a 7% lower beginning backlog at December 31, 2013 compared to December 31, 2012.

At September 30, 2014 and 2013, sales order backlog was as follows:


	Homes							Sales Value							ASP
	September 30,							September 30,							September 30,
	2014		2013		%			2014		2013		%			2014		2013		%
								(In thousands)							(In thousands)
Backlog:
Southern California		256		155		65	%	$	199,871	$	120,173		66	%	$	781	$	775		1	%
San Diego		174		129		35			114,712		67,494		70			659		523		26
Northern California		193		231		(16	)		140,058		139,286		1			726		603		20
Mountain West		347		289		20			173,741		133,650		30			501		462		8
South West		211		318		(34	)		67,918		102,163		(34	)		322		321		—
East		17		2		750			6,746		747		803			397		374		6

Total consolidated		1,198		1,124		7	%	$	703,046	$	563,513		25	%	$	587	$	501		17	%

Southern California		57		26		119	%	$	27,197	$	9,077		200	%	$	477	$	349		37	%
Northern California		29		31		(6	)		16,340		16,430		(1	)		563		530		6
Mountain West		50		36		39			21,221		14,258		49			424		396		7
East		103		59		75			31,398		16,271		93			305		276		11

Total unconsolidated joint ventures		239		152		57	%	$	96,156	$	56,036		72	%	$	402	$	369		9	%

Total backlog		1,437		1,276		13	%	$	799,202	$	619,549		29	%	$	556	$	486		14	%

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, these costs are relieved from inventory and charged to cost 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 classified as sold or unsold.

Inventory at September 30, 2014 increased from December 31, 2013 primarily due to increased land acquisitions and homes under construction resulting from favorable housing market conditions and the seasonal build-up of inventory for deliveries in the fourth quarter, net of inventory relieved through cost of sales.

At September 30, 2014, December 31, 2013 and September 30, 2013, total lots owned or controlled were as follows:


	September 30, 2014		December 31, 2013		% Change from December 31, 2013			September 30, 2013		% Change from September 30, 2013
Lots owned or controlled by segment:
Southern California		1,799		1,890		(5	)%		1,982		(9	)%
San Diego		572		640		(11	)		687		(17	)
Northern California		4,046		3,731		8			3,239		25
Mountain West		9,731		9,841		(1	)		10,075		(3	)
South West		2,303		2,063		12			2,242		3
East		765		765		—			767		—

Total consolidated		19,216		18,930		2			18,992		1
Unconsolidated joint ventures		4,963		4,455		11			4,733		5

Total lots owned or controlled		24,179		23,385		3	%		23,725		2	%

Lots owned or controlled by ownership type:
Lots owned for homebuilding		6,481		6,277		3	%		6,581		(2	)%
Lots owned and held for sale		3,442		3,313		4			3,435		—
Lots optioned or subject to contract for homebuilding		6,259		6,306		(1	)		5,942		5
Lots optioned or subject to contract that will be held for sale		3,034		3,034		—			3,034		—
Unconsolidated joint venture lots		4,963		4,455		11			4,733		5

Total lots owned or controlled		24,179		23,385		3	%		23,725		2	%

At September 30, 2014, December 31, 2013 and September 30, 2013, total homes under construction and completed homes were as follows:


	September 30, 2014		December 31, 2013		% Change from December 31, 2013			September 30, 2013		% Change from September 30, 2013
Homes under construction:
Sold		862		611		41	%		816		6	%
Unsold		228		149		53			188		21

Total consolidated		1,090		760		43			1,004		9
Unconsolidated joint ventures		227		119		91			115		97

Total homes under construction		1,317		879		50	%		1,119		18	%

Completed homes:^(a)
Sold^(b)		114		49		133	%		98		16	%
Unsold		49		34		44			20		145

Total consolidated		163		83		96			118		38
Unconsolidated joint ventures		23		8		188			20		15

Total completed homes		186		91		104	%		138		35	%

(a)	Excludes model homes.

(b)	Sold but not closed.

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 and land sales, net of the underlying expenditures to fund these operations. In addition, the Company has, and will continue to utilize, land option contracts, public and private note offerings, land seller notes, 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 party notes receivable as sources of liquidity. In addition, as an additional source of liquidity, we obtained a $125.0 million secured revolving credit facility (the “Revolver”) in February 2014 (see below). At September 30, 2014, cash and cash equivalents were $139.3 million, restricted cash was $0.5 million and total debt was $761.7 million, compared to cash and cash equivalents of $206.2 million, restricted cash of $1.2 million and total debt of $751.7 million at December 31, 2013. Restricted cash includes customer deposits temporarily restricted in accordance with regulatory requirements and cash used in lieu of bonds.

We believe the Revolver, combined with other available sources, such as existing cash, cash equivalents and cash from operations, are 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 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.

Availability 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 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.

If the Tax Court Decision is overturned in whole or in part, which is reasonably possible, SHI could be obligated to pay the IRS and applicable state taxing authorities up to $68 million and, under the Tax Distribution Agreement, SHLP could be obligated to make a distribution to the Partners up to $111 million to fund their related payments to the IRS and applicable state taxing authorities.

Notwithstanding, the indenture governing the Secured Notes (the “Indenture”) restricts SHLP’s ability to make distributions to its partners pursuant to 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. 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 CCM and payments made by SHLP on certain guarantee obligations described in the Indenture. Payments of CCM-related tax liabilities by SHLP pursuant to the Tax Distribution Agreement or by SHI will not impact our Consolidated Fixed Charge Coverage Ratio (as defined below) or our ability to incur additional indebtedness under the terms of the 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 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 “Risk Factors—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” and “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” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

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 “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 “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” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

For the nine months ended September 30, 2014 and 2013, cash provided by (used in) operating, investing and financing activities was as follows:


	Nine Months Ended September 30,
	2014			2013
	(In thousands)
Cash provided by (used in):
Operating activities	$	(68,122	)	$	(124,449	)
Investing activities		6,963			(10,116	)
Financing activities		(5,764	)		(1,993	)

Net decrease in cash	$	(66,923	)	$	(136,558	)

Cash from Operating Activities

For the nine months ended September 30, 2014, cash used in operating activities was $(68.1) million compared to $(124.4) million for the nine months ended September 30, 2013. This decrease in cash used was primarily attributed to increased cash receipts from home closings of $129.9 million, partially offset by increased land acquisitions, land development and house construction costs of $62.0 million and increased selling, general and administrative costs of $13.0 million. Further, in 2013, $10.3 million of restricted cash was released.

Cash from Investing Activities

For the nine months ended September 30, 2014, cash provided by (used in) investing activities was $7.0 million compared to $(10.1) million for the nine months ended September 30, 2013. This improvement was primarily attributable to $6.2 million of increased net payments received on promissory notes, primarily the note receivable from JFSCI, and $13.9 million of decreased net investments in unconsolidated joint ventures, partially offset by $3.0 million of decreased proceeds from the sale of available-for-sale investments. Investments in unconsolidated joint ventures fluctuate quarterly depending on the timing and need for capital, including the timing of initial capital contributions for new joint ventures.

Cash from Financing Activities

For the nine months ended September 30, 2014, cash used in financing activities was $(5.8) million compared to $(2.0) million for the nine months ended September 30, 2013. This increase in cash used was primarily attributable to a $4.4 million cash payment for the acquisition of land from a related party under common control.

Notes Payable

At September 30, 2014 and December 31, 2013, notes payable were as follows:


	September 30, 2014		December 31, 2013
Notes payable:
Secured Notes	$	750,000	$	750,000
Revolver		0		0
Other secured promissory notes		11,740		1,708

Total notes payable	$	761,740	$	751,708

Secured Notes

The Indenture 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 affiliates. At September 30, 2014 and December 31, 2013, we were in compliance with these covenants.

The Indenture provides that we and our restricted subsidiaries may not incur or guarantee payment of any indebtedness (other than certain specified types of permitted indebtedness) unless, immediately after giving effect to such incurrence or guarantee and 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 such 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 September 30, 2014, our Consolidated Fixed Charge Coverage Ratio, determined as specified in the Indenture, was 2.92.

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 and (ii) 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 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. In 2013, we entered into a joint venture in Southern California and committed to contribute up to $45.0 million of capital. At September 30, 2014, we made aggregate capital contributions of $20.8 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 2015, we anticipate making additional investments in this joint venture at amounts below the $45.0 million commitment, and expect such additional investments will be returned by the end of 2015. We anticipate making additional investments in 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 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 September 30, 2014, we were in compliance with these covenants and no amounts were outstanding.

At September 30, 2014, covenant compliance for the Revolver was as follows:


	Actual at September 30, 2014		Covenant Requirements at September 30, 2014
	(Dollars in thousands)
Covenant Requirements:
Minimum Consolidated Tangible Net Worth ^(a)	$	519,535	$	356,664
Minimum Liquidity	$	130,664		³ $ 5,000
Ratio of Land Assets to Tangible Net Worth		1.19		£ 2.0
Interest Coverage Ratio		3.26		³ 1.5
Adjusted Leverage Ratio ^(b)		1.22		£ 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 as of December 31, 2013, plus (b) 50% of the cumulative Net Cash Proceeds, as defined in the Revolver Agreement, of any Equity Issuances received by borrower after February 20, 2014, plus (c) 50% of the cumulative consolidated Net Income 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 September 30, 2014, there were no material changes to contractual obligations from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

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. In such instances, an estimated purchase price for the unknown portion is not included in the total remaining purchase price. At September 30, 2014, we owned or controlled 7,092 lots in Colorado for which the purchase price is determined when the underlying lots close with a home buyer or other purchaser of the lot. In addition, at September 30, 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 homes sold (see “Related Party Transactions”). 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 September 30, 2014, we had $24.9 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 $438.2 million, compared to $21.0 million and $422.3 million, respectively, at December 31, 2013.

Water System Connection Rights

At a consolidated homebuilding project in Colorado, we have a contractual obligation to purchase and receive water system connection rights which, at September 30, 2014, had a contractual purchase price of $30.5 million, which is less than the estimated market value. These water system connection rights are held, then transferred to homebuyers upon closing of their home, transferred upon the sale of land to the respective buyer, sold or leased.

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.

At September 30, 2014 and December 31, 2013, total unconsolidated joint ventures’ notes payable were as follows:


	September 30, 2014		December 31, 2013
	(In thousands)
Bank and seller notes payable:
Guaranteed (subject to remargin obligations)	$	61,251	$	52,515
Non-Guaranteed		15,941		10,073

Total bank and seller notes payable ^(a)		77,192		62,588

Partner notes payable ^(b):
Unsecured		36,070		16,001

Total unconsolidated joint venture notes payable	$	113,262	$	78,589

Other unconsolidated joint venture notes payable ^(c)	$	32,225	$	55,441

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

(b)	No guarantees were provided on partner notes payable. In January 2014, a $3.2 million partner note from one joint venture was paid 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 guarantee.

For a second joint venture, Polo Estate Ventures, LLC (“Polo”), we have a joint and several remargin guarantee on loan obligations that, in total, at September 30, 2014 and December 31, 2013, were $14.3 million and $4.8 million, respectively. At September 30, 2014 and December 31, 2013, 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 made by the Company. However, we cannot provide assurance we could collect such payments.

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

•

loans (including to replace expiring loans, to satisfy loan re-margin 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 September 30, 2014 and December 31, 2013, certain unrecorded loan remargin or other guarantees, surety obligations and other contingencies were as follows:


	September 30, 2014		December 31, 2013
	(In thousands)
Tax Court CCM case (capped at $70.0 million)	$	70,000	$	70,000
Remargin obligations and guarantees for unconsolidated joint ventures		37,756		28,684
Costs to complete on surety bonds for Company projects		78,367		77,276
Costs to complete on surety bonds for joint venture projects		22,744		22,845
Costs to complete on surety bonds for related party projects		1,611		1,614

Total unrecorded contingent liabilities and commitments	$	210,478	$	200,419

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 under this facility. In February 2014, this facility was replaced with the Revolver, which includes a $62.5 million sublimit for letters of credit. At September 30, 2014, there were no outstanding letters of credit under the Revolver.

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 and/or 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 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 new homes. At September 30, 2014 and December 31, 2013, in connection with credit support arrangements, there was $9.6 million and $8.6 million, respectively, reimbursable to us from certain agencies in Colorado and, accordingly, were recorded in inventory as a recoverable project cost.

In December 2011, our consolidated joint venture, Vistancia, LLC, 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, we effectively remain a 10% guarantor on certain community facility district bond obligations to which we must meet a minimum calculated tangible net worth; otherwise, we are required to fund collateral to the bond issuer. At September 30, 2014 and December 31, 2013, we exceeded the minimum tangible net worth requirement.

RELATED PARTY TRANSACTIONS

In January 2014, we entered into a purchase and sale agreement and acquired undeveloped land in Northern California. Consideration included $4.4 million of cash, assumption of a $1.3 million net liability, and future revenue participation payments (the “RAPA”). The RAPA is calculated at 11% of gross revenues from home closings, payable quarterly and limited to $19.6 million. The RAPA liability, based on a third-party real estate appraisal, is estimated to be $19.6 million. As the transaction is with a related party under common control, the $25.3 million of consideration was recorded as an equity distribution.

At September 30, 2014 and 2013, we were the managing member for 11 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. Fees representing cost reimbursement are offset to general and administrative expenses; fees in excess of costs are recorded as revenues. For the three and nine months ended September 30, 2014, $2.7 million and $7.0 million, respectively, of management fees were offset against general and administrative expenses, and $0.1 million and $0.5 million, respectively, of management fees were recorded as revenues. For the three and nine months ended September 30, 2013, $2.0 million and $5.6 million, respectively, of management fees were offset against general and administrative expenses, and $0.1 million and $0.2 million, respectively, of management fees were recorded as revenues.

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. Some of these policies are purchased by affiliate entities and we pay premiums to these affiliates for the coverages 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 affiliate entities to insure these large retentions or deductibles. For the three and nine months ended September 30, 2014, amounts paid to affiliates for this retention insurance coverage were $5.5 million and $15.8 million, respectively, and for the three and nine months ended September 30, 2013, amounts paid to affiliates for this retention insurance coverage were $5.1 million and $12.9 million, respectively.

CRITICAL ACCOUNTING POLICIES

We believe no significant changes occurred to our critical accounting policies during the nine months ended September 30, 2014, as compared to those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations for December 31, 2013 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

NEW ACCOUNTING PRONOUNCEMENTS

See Note 2 of our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for a discussion of new accounting pronouncements applicable to the Company.

ITEM 3.

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 nine months ended September 30, 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 outstanding, interest rate risk and changes in fair market value should not have a significant impact on such debt until we refinance.

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 September 30, 2014, we were in compliance with these covenants and no amounts were outstanding.

Other than the Revolver described above, we believe no significant changes to our market risks occurred during the nine months ended September 30, 2014, as compared to those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures at September 30, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Based on the evaluation of our disclosure controls and procedures at September 30, 2014, our Chief Executive Officer and Chief Financial Officer have concluded, at such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Internal Control Over Financial Reporting

We made no change in internal control over financial reporting during the 2014 third quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Controls

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all errors and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all of our control issues and instances of fraud, if any, have been detected.

FORWARD-LOOKING STATEMENTS

Some of the statements in this Quarterly Report on Form 10-Q, contain forward-looking statements and information relating to us that 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 the “Risk Factors” section included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 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 demands;

•

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 Quarterly Report on Form 10-Q.

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 Quarterly Report on Form 10-Q 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.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We record a reserve for potential legal claims and regulatory matters when they are probable of occurring and a potential loss is reasonably estimable. We accrue for these matters based on facts and circumstances specific to each matter and revise these estimates when necessary. In such cases, there may exist an exposure to loss in excess of amounts accrued. In view of the inherent difficulty of predicting the outcome of legal claims and related contingencies, we generally cannot determine their ultimate resolution, related timing or eventual loss. While their outcome cannot be predicted with certainty, we believe we have appropriately reserved for these claims or matters. Other than the CCM matter described in “Liquidity and Capital 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 required to be disclosed pursuant to this Item at this time. However, to the extent liabilities arising from the ultimate resolution of legal claims or regulatory matters exceed their recorded reserves, we could incur additional charges that could be material.

ITEM 1A.

RISK FACTORS

There were no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

ITEM 6.

EXHIBITS


31.1		Certification of Chief Executive Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials from Shea Homes Limited Partnership’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Income and Comprehensive Income, (iii) Unaudited Condensed Consolidated Statements of Changes in Equity, (iv) Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	SHEA HOMES LIMITED PARTNERSHIP
		(Registrant)

Dated: November 13, 2014	By:	/s/ Roberto F. Selva
		Roberto F. Selva
		Chief Executive Officer
		(Principal Executive Officer)

Dated: November 13, 2014	By:	/s/ Andrew H. Parnes
		Andrew H. Parnes
		Chief Financial Officer
		(Principal Financial Officer)

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Shea Homes Limited Partnership 10-Q