Form Prospectus Shea Capital Ii, Llc

424B3 - Prospectus [Rule 424(b)(3)]

Published: 2012-04-06 16:42:02
Submitted: 2012-04-06
d233911d424b3.htm FINAL PROSPECTUS


ENT> 424B3 1 d233911d424b3.htm FINAL PROSPECTUS

Final Prospectus

Table of Contents

Filed Pursuant to Rule 424(b)(3)
Registration No. 333-177328

PROSPECTUS

$750,000,000

 

LOGO

SHEA HOMES LIMITED PARTNERSHIP

SHEA HOMES FUNDING CORP.

Exchange Offer for All Outstanding

8.625% Senior Secured Notes due 2019 and Guarantees thereof

(CUSIP Nos. 82088K AA6 and U82091 AA4)

for new 8.625% Senior Secured Notes due 2019 and Guarantees thereof

that have been registered under the Securities Act of 1933

This exchange offer will expire at midnight, New York City time,

                    on May 3, 2012, unless extended.

 

 

We are offering to exchange Shea Homes Limited Partnership and Shea Homes Funding Corp.’s 8.625% Senior Secured Notes due 2019, which have been registered under the Securities Act of 1933, as amended (the “Securities Act”) and which we refer to in this prospectus as the “exchange notes,” for any and all Shea Homes Limited Partnership and Shea Homes Funding Corp.’s 8.625% Senior Secured Notes due 2019 issued on May 10, 2011, which we refer to in this prospectus as the “outstanding notes.” The term “notes” refers to both the exchange notes and the outstanding notes. We refer to the offer to exchange the exchange notes for the outstanding notes as the “exchange offer” in this prospectus.

The Exchange Notes:

 

 

The terms of the registered exchange notes to be issued in the exchange offer are substantially identical to the terms of the outstanding notes, except that the transfer restrictions, registration rights and additional interest provisions relating to the outstanding notes will not apply to the exchange notes.

 

 

We are offering the exchange notes pursuant to a registration rights agreement that we entered into in connection with the issuance of the outstanding notes.

 

 

The exchange notes will bear interest at the rate of 8.625% per annum, payable semi-annually in cash, in arrears, on November 15 and May 15 each year.

 

 

The exchange notes will be guaranteed on a senior basis by each of Shea Homes Limited Partnership’s subsidiaries that have guaranteed the outstanding notes.

Material Terms of the Exchange Offer:

 

 

The exchange offer expires at midnight, New York City time, on May 3, 2012, unless extended.

 

 

Upon expiration of the exchange offer, all outstanding notes that are validly tendered and not withdrawn will be exchanged for an equal principal amount of the exchange notes.

 

 

You may withdraw tendered outstanding notes at any time prior to the expiration of the exchange offer.

 

 

The exchange offer is not subject to any minimum tender condition, but is subject to customary conditions.

 

 

The exchange of the exchange notes for outstanding notes will not be a taxable exchange for U.S. federal income tax purposes.

 

 

Each broker-dealer that receives exchange notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act of 1933, as amended, in connection with any resale of such exchange notes. The letter of transmittal accompanying this prospectus states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for outstanding notes where such exchange notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. We have agreed that for a period of 180 days after the expiration of the exchange offer, we will make this prospectus available to any broker-dealer for use in any such resale. See “Plan of Distribution.”

 

 

There is no existing public market for the outstanding notes or the exchange notes. We do not intend to list the exchange notes on any securities exchange or quotation system.

 

 

See “Risk Factors” beginning on page 14.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or the accuracy of this prospectus. Any representation to the contrary is a criminal offense.

Prospectus dated April 6, 2012


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You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with any information or represent anything about us, our financial results or this offering that is not contained in this prospectus. If given or made, any such other information or representation should not be relied upon as having been authorized by us. We are not making an offer to sell these exchange notes in any jurisdiction where the offer or sale is not permitted.

The information in this prospectus is applicable only as of the date on its cover, and may change after that date. The information in any document incorporated by reference in this prospectus is applicable only as of the date of any such document. For any time after the cover date of this prospectus, we do not represent our affairs are the same as described or the information in this prospectus is correct—nor do we imply those things by delivering this prospectus or issuing exchange notes to you.

 

 

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HELPFUL INFORMATION

As used throughout this prospectus, unless the context otherwise requires or indicates:

 

 
 

“SHLP” means Shea Homes Limited Partnership, and not its subsidiaries;

 

 
 

“SHI” means Shea Homes, Inc., a wholly-owned subsidiary of SHLP, and not its subsidiaries;

 

 
 

“Issuers” means SHLP and Shea Homes Funding Corp., and not their subsidiaries;

 

 
 

“Shea,” the “Company,” “we,” “our,” and “us” refer to SHLP and its subsidiaries, including Shea Homes Funding Corp., on a consolidated basis; and

 

 
 

“Guarantors” means the direct and indirect subsidiaries of SHLP that will guarantee the exchange notes.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain parts of this prospectus and the documents incorporated by reference herein contain forward-looking statements and information relating to us that are based on the 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 that are 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 of this prospectus 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 the results that may be expressed or implied by such forward-looking statements. These factors include, among other things:

 

 
 

changes in employment levels;

 

 
 

changes in the 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 prospectus.

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 prospectus 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.

 

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WHERE YOU CAN FIND MORE INFORMATION

SHLP, Shea Homes Funding Corp. and the subsidiary guarantors listed on Schedule A thereto as co-registrants (the “Guarantors”) have filed a registration statement with the Securities and Exchange Commission (the “Commission”) on Form S-4 to register the exchange offer contemplated in this prospectus. This prospectus is part of that registration statement. As allowed by the Commission’s rules, this prospectus does not contain all the information found in the registration statement or the exhibits to the registration statement. This prospectus contains summaries of the material terms and provisions of certain documents and in each instance we refer you to the copy of such document filed as an exhibit to the registration statement.

We have not authorized anyone to give any information or make any representation about us that is different from or in addition to, that contained in this prospectus. Therefore, if anyone does give you information of this sort, you should not rely on it as authorized by us. If you are in a jurisdiction where offers to sell, or solicitations of offers to purchase, the securities offered by this prospectus are unlawful, or if you are a person to whom it is unlawful to direct these types of activities, then the offer presented in this prospectus does not extend to you. Neither the delivery of this prospectus, nor any sale made hereunder, shall under any circumstances create any implication that there has been no change in our affairs since the date on the front cover of this prospectus.

Upon the effectiveness of the registration statement, of which this prospectus forms a part, SHLP, Shea Homes Funding Corp. and the Guarantors will be subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and in accordance therewith will file annual, quarterly and other reports and information with the Commission.

The registration statement (including the exhibits and schedules thereto) and the periodic reports and other information filed by SHLP and Shea Homes Funding Corp. with the Commission may be inspected and copied at the Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for further information on the Public Reference Room. Such information may also be accessed electronically by means of the Commission’s homepage on the Internet at http://sec.report.

You may also obtain this information without charge by writing or telephoning us at the following address and telephone number:

Shea Homes Limited Partnership

655 Brea Canyon Road

Walnut, CA 91789

(909) 594-9500

Attn: Bruce Varker, Chief Financial Officer

To ensure timely delivery, you must request this information no later than five business days before the expiration of the exchange offer.

MARKET INDUSTRY DATA AND FORECASTS

Any market or industry data contained in this prospectus are based on various sources, including internal data and estimates, independent industry publications, government publications, reports by market research firms or other published independent sources. Industry publications and other published sources generally state the information contained therein has been obtained from third-party sources believed to be reliable. Internal data and estimates are based upon information obtained from trade and business organizations and other contacts in the markets in which we operate and management’s understanding of industry conditions, and such information has not been verified by any independent sources.

 

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PROSPECTUS SUMMARY

The following summary contains information about our business and the exchange offer. It does not contain all information that may be important to you in making a decision to exchange outstanding notes for exchange notes. For a more complete understanding of our business and the offering of the notes, we urge you to read this entire prospectus carefully, including the “Risk Factors,” “Cautionary Statement Regarding Forward-Looking Statements” and “Where You Can Find More Information” sections and our financial statements included elsewhere in this prospectus. All financial data provided in this prospectus are financial data of SHLP and its consolidated subsidiaries unless otherwise disclosed.

Overview

We are one of the largest private homebuilders in the United States by total number of closings according to data compiled for Builder Magazine’s 2010 “Builder 100” List. We design, build and market single-family detached and attached homes across various geographic markets in California, Arizona, Colorado, Washington, Nevada and Florida. We serve a broad customer base including entry, move-up, luxury and active adult buyers. We have been recognized by industry professionals and our homebuyers for quality, customer service and craftsmanship, as evidenced by receipt of some of the homebuilding industry’s most prominent awards, including being named as “Builder of the Year” in 2007 by Professional Builder magazine and one of “America’s Best Builders” in 2005 by the National Association of Homebuilders and Builder magazine. In February 2011, Shea Homes was honored as one of 40 brands in the country to be named a J.D. Power “Customer Service Champion” and is the only homebuilder to receive this honor.

For the twelve months ended December 31, 2011, we closed 1,348 homes having an average selling price of approximately $423,000. Our total revenues from sales of homes, land and homebuilding related activities for the twelve months ended December 31, 2011 were $587.8 million and the net loss attributable to SHLP for the same period was $114.4 million. At December 31, 2011, our total debt was $752.1 million. In addition, we have a significant number and amount of contingent liabilities which could have a material adverse effect on our liquidity, financial condition, and results of operations if they are required to be satisfied by us. See “—Risks Relating to Us and Our Business—We have a significant number of contingent liabilities, and if any are required to be satisfied by us, could have a material adverse effect on our financial condition and results of operations.” At December 31, 2011, we were selling homes in 70 communities, with home prices ranging from approximately $89,000 to $1,400,000 and we had sold but not closed 461 homes, which comprise our sales order backlog. The value of this backlog was approximately $184.7 million of revenue anticipated to be realized at closing occurring primarily from January 2012 to December 2012. However, because sales order contracts can be cancelled by the buyer in certain circumstances, not all homes in backlog will result in closings.

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, Orange, Riverside and San Bernardino Counties;

 

 
 

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

 

 
 

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

 

 
 

Mountain West, comprised of communities in Colorado and Washington;

 

 
 

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

 

 
 

Other, comprised of communities in Florida.

 

 

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In accordance with ASC 280, Segment Reporting, 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.

We are one of a group of companies owned by the Shea family (collectively, the “Shea Family Owned Companies”). Since 1881 in Portland, Oregon, beginning with a plumbing contractor business, the Shea family has owned and operated homebuilding, heavy construction and commercial property businesses. The Shea Family Owned Companies have grown but remained privately held by the Shea family. The Shea family began building homes in 1968 through J.F. Shea Co., Inc. (“JFSCI”) and, in 1989, homebuilding under the Shea Homes brand was moved to the newly-formed SHLP, an entity under the broader umbrella of JFSCI. In all, the Shea Homes brand has enjoyed a 40-plus year legacy of consistent family management and support.

We operate under three brands: Shea Homes, Trilogy and SPACES. Each reflects our value proposition: homes designed to meet the needs of our customers, with standard energy-efficient features, built in an environmentally-responsible manner.

 

 
 

Shea Homes, our flagship brand, targets first-time and move-up buyers. Each segment builds and markets houses under the Shea Homes brand;

 

 
 

Trilogy, master-planned communities designed and built to meet the needs and active lifestyles of the “baby boomer” generation. These communities combine quality homes with diverse resort-like amenities in our Southern California, Northern California, Mountain West and South West segments; and

 

 
 

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

 

 

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THE ISSUERS AND THE GUARANTORS

The chart below illustrates our corporate structure and is provided for illustrative purposes only and does not purport to represent all legal entities owned or controlled by the Issuers. Certain of our wholly-owned direct and indirect subsidiaries guarantee the notes. The obligations under the notes are not guaranteed by our subsidiary Partners Insurance Company, Inc. (“PIC”) (which is an unrestricted subsidiary under the indenture governing the notes) or by any joint venture with respect to which we do not own 100% of the economic interest, including certain of our joint ventures that are consolidated for financial reporting purposes (collectively, the “Consolidated Joint Ventures”)
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. See “Description of the Notes— The Guarantees.”

 

LOGO

 

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Shea Homes Southwest, Inc. owns 100% of the economic and voting interests in Vistancia Marketing, LLC and Vistancia Construction, LLC, both guarantors of the notes.

 

 

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THE SHEA FAMILY OWNED COMPANIES

We are one of the Shea Family Owned Companies. The Shea Family Owned Companies are operated in three major groups: homebuilding, heavy construction and commercial property development and management. Much of the Shea Family Owned Companies’ business has traditionally been operated and managed through JFSCI, with each of the homebuilding, heavy construction and commercial property businesses providing management, administrative, financial and credit support to one another. Over the past several years, the Shea family and our management have made a series of changes to the business and operating structure of the Shea Family Owned Companies so that, currently:

 

 
 

the Shea family homebuilding business is owned and operated primarily through SHLP, SHI and their respective subsidiaries;

 

 
 

the Shea family heavy construction business is owned and operated primarily through JFSCI; and

 

 
 

the Shea family commercial development and management operation is owned and operated primarily through Shea Properties LLC and Shea Properties II, LLC (collectively, “Shea Properties”).

In the future, JFSCI will continue to provide management and certain administrative support, including cash management and treasury services, to SHLP, SHI and the Shea family’s heavy construction and commercial property businesses. See “Certain Relationships and Related Party Transactions.” However, we intend that SHLP, SHI and their respective subsidiaries will not receive new financial or credit support from, and will not provide new financial or credit support to, the other Shea family businesses. See “Risk Factors—We have a significant number of affiliated entities, with whom we have entered into many transactions. Our relationship with these entities could adversely affect us.”

 

 

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The chart below illustrates our ownership structure within the Shea Family Owned Companies. This chart is provided for illustrative purposes only and does not purport to represent all legal entities owned or controlled by the Shea family or the Issuers.

 

LOGO

 

 

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THE EXCHANGE OFFER

The summary below describes the principal terms and conditions of the exchange offer. Certain of these terms and conditions are subject to important limitations and exceptions. The section of this prospectus entitled “Description of the Notes” contains a more detailed description of the terms and conditions.

 

The Exchange Offer

Up to $750 million aggregate principal amount of exchange notes registered under the Securities Act are being offered in exchange for the same principal amount of outstanding notes. Terms of the exchange notes and the outstanding notes are substantially identical, except that the transfer restrictions, registration rights and rights to increased interest in addition to the stated interest rate on the outstanding notes (“Additional Interest”) provisions applicable to the outstanding notes will not apply to the exchange notes. You may tender outstanding notes for exchange in whole or in part in any integral multiple of $1,000, subject to a minimum exchange of $2,000. We are undertaking the exchange offer to satisfy our obligations under the registration rights agreement relating to the outstanding notes. For a description of the procedures for tendering the outstanding notes. See “The Exchange Offer—How to Tender Outstanding Notes for Exchange.”

 

 
To exchange your outstanding notes for exchange notes, you must properly tender them before the expiration of the exchange offer. Upon expiration of the exchange offer, your rights under the registration rights agreement pertaining to the outstanding notes will terminate, except under limited circumstances.

 

Expiration Time

The exchange offer expires at midnight, New York City time on May 3, 2012, unless the exchange offer is extended. See “The Exchange Offer—Terms of the Exchange Offer; Expiration Time.”

 

Interest on Outstanding Notes Exchanged in the Exchange Offer

Holders whose outstanding notes are exchanged for exchange notes will not receive a payment in respect of interest accrued but unpaid on such outstanding notes from the most recent interest payment date up to but excluding the settlement date. Instead, interest on the exchange notes received in exchange for such outstanding notes will (i) accrue from the last date on which interest was paid on such outstanding notes and (ii) accrue at the same rate as and be payable on the same dates as interest was payable on such outstanding notes. However, if any interest payment occurs prior to the settlement date on any outstanding notes already tendered for exchange in the exchange offer, the holder of such outstanding notes will be entitled to receive such interest payment.

 

Conditions to the Exchange Offer

The exchange offer is subject to customary conditions (see “The Exchange Offer—Conditions to the Exchange Offer”), some of which we may waive in our sole discretion. The exchange offer is not conditioned upon any minimum principal amount of outstanding notes being tendered for exchange.

 

 

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How to Tender Outstanding Notes for Exchange

You must tender your outstanding notes through book-entry transfer in accordance with The Depository Trust Company’s Automated Tender Offer Program, known as ATOP. If you wish to accept the exchange offer, you must arrange for The Depository Trust Company to transmit to the exchange agent certain required information, including an agent’s message forming part of a book-entry transfer in which you agree to be bound by the terms of the letter of transmittal, and transfer the outstanding notes being tendered into the exchange agent’s account at The Depository Trust Company.

 

Special Procedures for Beneficial Owners

If you beneficially own outstanding notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your outstanding notes in the exchange offer, you should contact the registered holder promptly and instruct it to tender on your behalf. See “The Exchange Offer—How to Tender Outstanding Notes for Exchange.”

 

Withdrawal of Tenders

You may withdraw your tender of outstanding notes at any time prior to the expiration time by delivering a notice of withdrawal to the exchange agent in conformity with the procedures discussed under “The Exchange Offer—Withdrawal Rights.”

 

Acceptance of Outstanding Notes and Delivery of Exchange Notes

Upon consummation of the exchange offer, we will accept any and all outstanding notes that are properly tendered in the exchange offer and not withdrawn prior to the expiration time. The exchange notes issued pursuant to the exchange offer will be delivered promptly following the expiration time. See “The Exchange Offer—Terms of the Exchange Offer; Expiration Time.”

 

Registration Rights Agreement

We are making the exchange offer pursuant to the registration rights agreement that we entered into on May 10, 2011 with the initial purchaser of the outstanding notes. As a result of making and consummating this exchange offer, we will have fulfilled our obligations under the registration rights agreement with respect to the registration of securities, subject to certain limited exceptions. If you do not tender your outstanding notes in the exchange offer, you will not have any further registration rights under the registration rights agreement or otherwise unless you were not eligible to participate in the exchange offer or do not receive freely tradable exchange notes in the exchange offer.

 

 

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Resales of Exchange Notes

We believe the exchange notes issued in the exchange offer may be offered for resale, resold or otherwise transferred by you without compliance with the registration and prospectus delivery requirements of the Securities Act, provided that:

 

 
 

you are not an “affiliate” of ours;

 

 
 

the exchange notes you receive pursuant to the exchange offer are being acquired in the ordinary course of your business;

 

 
 

you have no arrangement or understanding with any person to participate in the distribution of the exchange notes issued to you in the exchange offer;

 

 
 

if you are not a broker-dealer, you are not engaged in, and do not intend to engage in, a distribution of the exchange notes issued in the exchange offer; and

 

 
 

if you are a broker-dealer, you will receive the exchange notes for your own account, the outstanding notes were acquired by you as a result of market-making or other trading activities, and you will deliver a prospectus when you resell or transfer any exchange notes issued in the exchange offer. See “Plan of Distribution” for a description of the prospectus delivery obligations of broker dealers in the exchange offer.

 

 
If you do not meet these requirements, your resale of the exchange notes must comply with the registration and prospectus delivery requirements of the Securities Act.

 

 
Our belief is based on interpretations by the Commission staff, as set forth in no-action letters issued to third parties. The Commission staff has not considered this exchange offer in the context of a no-action letter, and we cannot assure you that the Commission staff would make a similar determination with respect to this exchange offer.

 

 
If our belief is not accurate and you transfer an exchange note without delivering a prospectus meeting the requirements of the federal securities laws or without an exemption from these laws, you may incur liability under the federal securities laws. We do not and will not assume, or indemnify you against, this liability.

 

 
See “The Exchange Offer—Consequences of Exchanging Outstanding Notes.”

 

Consequences of Failure to Exchange Your Outstanding Notes

If you do not exchange your outstanding notes for exchange notes in the exchange offer, your outstanding notes will continue to be subject to the restrictions on transfer provided in the legend on the outstanding notes and in the indenture governing the notes. In general, the outstanding notes may not be offered or sold unless

 

 

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registered or sold in a transaction exempt from registration under the Securities Act and applicable state securities laws. Accordingly, the trading market for your untendered outstanding notes could be adversely affected.

 

Exchange Agent

The exchange agent for the exchange offer is Wells Fargo Bank, National Association. For additional information, see “The Exchange Offer—The Exchange Agent” and the accompanying letter of transmittal.

 

Certain Federal Income Tax Considerations

The exchange of your outstanding notes for exchange notes will not be a taxable exchange for United States federal income tax purposes. You should consult your own tax advisor as to the tax consequences to you of the exchange offer, as well as tax consequences of the ownership and disposition of the exchange notes. For additional information, see “Certain Material U.S. Federal Income Tax Considerations.”

 

 

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Summary of the Terms of the Exchange Notes

The terms of the exchange notes are substantially identical to the outstanding notes, except the transfer restrictions, registration rights and Additional Interest provisions applicable to the outstanding notes will not apply to the exchange notes. The following is a summary of the principal terms of the exchange notes. A more detailed description is contained in the section “Description of the Notes” in this prospectus.

 

Issuer

Shea Homes Limited Partnership

 

Co-Issuer

Shea Homes Funding Corp.

 

Notes Offered

$750,000,000 aggregate principal amount of 8.625% Senior Secured Notes due 2019.

 

Maturity Date

The exchange notes mature May 15, 2019.

 

Interest

Interest on the exchange notes will accrue at a rate of 8.625% per annum and is payable semi-annually in cash in arrears on May 15 and November 15 each year.

 

 
Holders whose outstanding notes are exchanged for exchange notes will not receive a payment in respect of interest accrued but unpaid on such outstanding notes from the most recent interest payment date up to but excluding the settlement date. Instead, interest on the exchange notes received in exchange for such outstanding notes will (i) accrue from the last date on which interest was paid on such outstanding notes and (ii) accrue at the same rate as and be payable on the same dates as interest was payable on such outstanding notes. However, if any interest payment occurs prior to the settlement date on any outstanding notes already tendered for exchange in the exchange offer, the holder of such outstanding notes will be entitled to receive such interest payment.

 

Optional Redemption

We may redeem some or all of the exchange notes at any time on or after May 15, 2015, at the redemption prices specified under the section “Description of the Notes—Optional Redemption” plus accrued and unpaid interest, if any, to the redemption date.

 

 
At any time prior to May 15, 2015, we may also redeem the exchange notes, in whole or in part, at a redemption price of 100% of the principal amount of the exchange notes, plus a “make-whole” premium and accrued and unpaid interest, if any, to the redemption date.

 

 
At any time prior to May 15, 2014, we may also redeem up to 35% of the original aggregate principal amount of the exchange notes with the proceeds of certain equity offerings, in each case, at a redemption price equal to 108.625% of the aggregate principal amount of the exchange notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date.

 

 

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Change of Control

Upon a Change of Control as described in the section “Description of the Notes—Certain Covenants—Change of Control,” we will be required to make an offer to repurchase all or part of the exchange notes at 101% of the principal amount, plus accrued and unpaid interest, if any, to the date of repurchase.

 

Guarantees

The exchange notes will be guaranteed by the Guarantors. If the Issuers cannot make payments under the notes when they are due, the Guarantors must make such payments instead. PIC will not be a Guarantor and will be treated as an unrestricted subsidiary under the indenture governing the notes.

 

 
The exchange notes will not be guaranteed by any joint venture with respect to which we do not own 100% of the economic interest, including certain of our joint ventures that are consolidated for financial reporting purposes.

 

Ranking

The exchange notes and the guarantees will be the Issuers’ and the Guarantors’ general senior secured obligations and will:

 

 
 

be effectively senior to all existing and future unsecured indebtedness of the Issuers to the extent of the value of the collateral securing the notes and the guarantees;

 

 
 

rank equally in right of payment with all of the Issuers’ and the Guarantors’ existing and future senior indebtedness;

 

 
 

rank senior in right of payment to the Issuers’ and the Guarantors’ future subordinated indebtedness, if any;

 

 
 

rank equally with the indebtedness outstanding under our letter of credit facility, but the lenders under the letter of credit facility will have the right to be repaid before the notes from the proceeds of any enforcement action taken against the collateral;

 

 
 

be effectively subordinated to any existing and future indebtedness of either of the Issuers and the Guarantors that is secured by assets that do not constitute collateral, to the extent of the value of such assets; and

 

 
 

be effectively subordinated to any existing and future indebtedness of subsidiaries or joint ventures of either of the Issuers that are not Guarantors.

 

Collateral

The exchange notes and the guarantees will be secured by a lien on substantially all assets owned by the Issuers and Guarantors on the issue date of the exchange notes or thereafter acquired, subject to permitted liens and certain exceptions.

 

 
The collateral will also secure on a Pari-Passu basis our obligations with respect to our letter of credit facility, but lenders under our letter of credit facility will have the right to be repaid before the exchange notes from the proceeds of any enforcement action taken against the collateral.

 

 

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The collateral will not include:

 

 
 

except to secure our letter of credit facility, the pledge of stock of subsidiaries of SHLP to the extent such pledge would result in separate financial statements of such subsidiary being required in SEC filings;

 

 
 

personal property where the cost of obtaining a security interest or perfection thereof exceeds its benefits;

 

 
 

real property subject to alien securing indebtedness incurred for the purpose of financing the acquisition thereof (to the extent creation of additional security interests in such property is prohibited by contract);

 

 
 

assets, with respect to which any applicable law or contract (including certain profit and price participation arrangements) prohibits creation or perfection of security interests therein, or that otherwise results in a default, waiver or termination of rights or privileges arising under such law or contract;

 

 
 

all trademarks, trade names and other intellectual property bearing the name “Shea” or a variant thereof (provided noteholders shall have a non-exclusive license to use such intellectual property in connection with the exercise of default remedies);

 

 
 

cash collateral supporting (1) deductible, retention and other obligations to insurance carriers, (2) reimbursement claims in respect of letters of credit and surety providers, (3) contingent claims arising in respect of community facility district, metrodistrict, Mello-Roos, subdivision improvement bonds and similar obligations arising in the ordinary course of business of a homebuilder and (4) cash management services;

 

 
 

equity interests in joint ventures where the joint venture agreement prohibits creation of such security interests;

 

 
 

any leasehold interests in real property;

 

 
 

any real property in a community under development with an investment at the end of the most recent quarter (as determined in accordance with GAAP) of less than $2.0 million or with less than 10 lots remaining unsold (to the extent the Issuers do not create a lien in such property);

 

 
 

deposit accounts and securities accounts with aggregate balance for all such excluded accounts not to exceed $2.0 million in aggregate amount, or established solely for purposes of funding payroll, trust and other compensation benefits to employees; and

 

 
 

all vehicles covered by a certificate of title.

 

 

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Certain Covenants

The indenture governing the exchange notes contains covenants that limit, among other things, the Issuer and Guarantors’ 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 notes, including PIC;

 

 
 

sell certain assets;

 

 
 

incur liens;

 

 
 

merge with or into other companies;

 

 
 

expand into unrelated businesses; and

 

 
 

enter into certain transactions with our affiliates.

 

 
These covenants will be subject to a number of important exceptions and qualifications. See “Description of the Notes—Certain Covenants.”

 

Use of Proceeds

We will not receive any cash proceeds from issuance of the exchange notes offered by this prospectus.

 

Risk Factors

Investment in the notes involves certain risks. You should carefully consider the information under “Risk Factors” and all other information included in this prospectus before investing in the notes.

 

 

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RISK FACTORS

An investment in the exchange notes involves risks. You should carefully consider the risks described below as well as the other information contained in this prospectus prior to making an investment decision. If any of the following risks occurs, our business, financial condition and results of operations could be materially adversely affected. In such case, you may lose all or part of your original investment. As used below, the term “notes” refers to both the outstanding notes and the exchange notes.

Risks Relating to Us and Our Business

The homebuilding industry, which is very cyclical and affected by a variety of factors, is in a significant downturn, and its duration and ultimate severity are uncertain. A continuation or further deterioration in industry conditions or in broader economic conditions could have additional material adverse effects on our business, financial condition and results of operations.

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

 

 
 

employment and wage levels;

 

 
 

availability of financing for homebuyers;

 

 
 

interest rates;

 

 
 

a lack of consumer confidence that results in a lack of urgency to buy;

 

 
 

levels of new and existing homes for sale;

 

 
 

demographic trends;

 

 
 

housing demand; and

 

 
 

government.

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

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

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

The current downturn in the homebuilding industry is in its sixth year and has become one of the most severe housing downturns in U.S. history. The significant decline in demand for new homes, significant oversupply of homes on the market and significant reductions in the availability of financing for homebuyers that have marked this downturn are continuing and may continue for some time. We have experienced material reductions in our home sales and homebuilding revenues, and we have incurred material inventory impairments and losses from our joint venture interests and other write-offs. It is not clear when or if these trends will reverse or when we may return to profitability. The continuation or worsening of this downturn would have a further material adverse effect on our business, financial condition and results of operations.

 

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Our ability to respond to the downturn is limited. Numerous home mortgage foreclosures have increased supply and driven down prices, making the purchase of a foreclosed home an attractive alternative to purchasing a new home. Homebuilders have responded to declining sales and increased cancellation rates with significant concessions, further adding to the price declines. With the decline in the values of homes and the inability of many homeowners to make their mortgage payments, the credit markets have been significantly disrupted, putting strains on many households and businesses. In the face of these conditions, the overall economy has weakened significantly, with high unemployment levels and substantially reduced consumer spending and confidence. As a result, demand for new homes remains at historically low levels.

We cannot predict the duration or ultimate severity of the current economic downturn. Nor can we provide assurance that our responses to the homebuilding downturn or the government’s attempts to address the troubles in the overall economy will be successful. Additionally, we cannot predict the timing or effect of the winding down or possible withdrawal of government intervention or support.

The reduction in availability of mortgage financing has adversely affected our business, and the duration and ultimate severity of the effects are uncertain.

During the last four years the mortgage lending industry has experienced significant instability, beginning with increased defaults on subprime loans and other nonconforming loans and compounded by expectations of increasing interest payment requirements and further defaults. This in turn resulted in a decline in the market value of many mortgage loans and related securities. Lenders, regulators and others questioned the adequacy of lending standards and other credit requirements for several loan products and programs offered in recent years. Credit requirements have tightened, and investor demand for mortgage loans and mortgage-backed securities has declined. The deterioration in credit quality has caused most lenders to stop offering subprime mortgages and most other loan products that are not eligible for sale to Fannie Mae or Freddie Mac or loans that do not meet Federal Housing Administration (“FHA”) and Veterans Administration (“VA”) requirements. Fewer loan products, changes in conforming loan limits, tighter loan qualifications and a reduced willingness of lenders to provide loans make it more difficult for many buyers to finance the purchase of our homes. These factors have served to reduce the pool of qualified homebuyers and made it more difficult to sell to first-time and move-up buyers who historically made up a substantial part of our customers. These reductions in demand have adversely affected our business, financial condition and results of operations, and the duration and severity of their effects are uncertain.

The liquidity provided by Fannie Mae and Freddie Mac to the mortgage industry has been very important to the housing market. These entities have required substantial injections of capital from the federal government and may require additional government support in the future. The federal government has proposed changing the nature of the relationship between Fannie Mae and Freddie Mac and the federal government and even eliminating these entities. If Fannie Mae and Freddie Mac were dissolved or if the federal government determined to stop providing liquidity support to the mortgage market, there would be a reduction in available financing from these institutions. Any such reduction would likely have an adverse effect on interest rates, mortgage availability and new home sales.

The FHA insures mortgage loans that generally have lower down payments and, as a result, it continues to be a particularly important support for financing home purchases. In the last two years, more restrictive guidelines were placed on FHA insured loans, such as increasing minimum down payment requirements. In the near future, further restrictions are expected on FHA insured loans including, but not limited to, limitations on seller-paid closing costs and concessions. These or any other restrictions may negatively affect the availability or affordability of FHA financing, which could adversely affect our ability to sell homes.

While use of down payment assistance programs by our homebuyers has decreased significantly, some customers still utilize 100% financing through programs offered by the VA and United States Department of Agriculture. There can be no assurance these or other programs will continue to be available or will be as attractive to our customers as programs currently offered, which could adversely affect our home sales.

 

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

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

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

Notwithstanding our sales strategies, we experienced elevated rates of sales order cancellations in 2006 through 2008. Since 2008, our sales order cancellation rate has improved, and it is currently below our historical average for the period from 1997 to 2010. We believe the elevated cancellation rate in 2007 and 2008 was largely a result of reduced homebuyer confidence, due principally to continued price declines, growth in foreclosures and continued high unemployment. A more restrictive mortgage lending environment and the inability of some buyers to sell their existing homes have also impacted cancellations. Many of these factors are beyond our control, and it is uncertain whether they will cause cancellation rates to rise in the future.

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

Our operations are concentrated in regions that are among the most severely affected by the current economic downturn. We conduct our homebuilding business in California, Arizona, Colorado, Washington, Nevada and Florida. Home prices and sales in these states have declined significantly since the end of 2006. These states, particularly California, continue to experience economic difficulties, including elevated levels of unemployment and precarious budget situations in state and local governments, which may materially adversely affect the market for our homes in those areas. Declines in home prices and sales in these states also adversely affect our financial condition and results of operations.

Inflation could adversely affect our business, financial condition and results of operations, particularly in a period of oversupply of homes.

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

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

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

 

 
 

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

 

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shortages of qualified labor;

 

 
 

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

 

 
 

shortages of materials; and

 

 
 

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

While competitive bidding helps control labor and building material costs, the downward trend of these costs has stopped. Material manufacturers are less inclined to reduce prices, and TradePartners
®
labor costs are at a point where further reductions are unlikely, in fact, costs could increase and adversely affect our financial condition and results of operations.

In several of our markets in 2011 through 2013, we need to replenish our inventory of lots for construction. If the housing market recovers, the price of improved or finished lots for construction in these markets could increase, and adversely affect our financial condition and results of operations.

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

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

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

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

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

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

 

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Historically, builders have recovered a significant portion of the construction and product defect liabilities and defense costs from their subcontractors and insurance carriers. We try to minimize our liability exposure by providing a master insurance policy and requiring TradePartners
®
to enroll in a “rolling wrap-up” insurance policy. Insurance coverage available to us and our TradePartners
®
for construction and product defects is expensive and the scope of coverage is restricted. If we cannot effectively recover from our carriers, we may suffer greater losses, which could adversely affect our financial condition and results of operations.

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

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

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

 

 
 

lower sales;

 

 
 

lower selling prices;

 

 
 

increased selling incentives;

 

 
 

lower profit margins;

 

 
 

impairments in the value of inventory and other assets;

 

 
 

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

 

 
 

delays in home construction.

These competitive conditions affect our business, financial condition and results of operations. During the current downturn in the homebuilding industry, the reactions of our competitors may have reduced the effectiveness of our efforts to achieve pricing stability and reduce inventory levels.

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

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

 

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Poor relations with the residents of our communities could adversely impact sales, which could cause revenues or results of operations to decline.

Residents of communities we develop rely on us to resolve issues or disputes that may arise in connection with development or operation of their communities. Efforts to resolve these issues or disputes could be unsatisfactory to the affected residents and subsequent actions by these residents could adversely affect our reputation or sales. In addition, we could be required to incur costs to settle these issues or disputes or to modify our community development plans, which could adversely affect our financial condition and results of operations.

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

Before a community generates revenues, time and capital are required to acquire land, obtain development approvals and construct project infrastructure, amenities, model homes and sales facilities. Our inability to successfully develop and market our communities and to generate cash flow from these operations in a timely manner could have a material adverse effect on our business, financial condition and results of operations.

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

Our quarterly operating results generally fluctuate by season. We typically achieve our highest new home sales orders in the spring and summer, although new homes sales order activity is also highly dependent on the number of active selling communities and the timing of new community openings. Because it typically takes us three to eight months to construct a new home, we deliver a greater number of homes in the second half of the calendar year as sales orders convert to home deliveries. As a result, our revenues from homebuilding operations are higher in the second half of the year, particularly in the fourth quarter, and we generally experience higher capital demands in the first half of the year when we incur construction costs. If, due to construction delays or other causes, we cannot close our expected number of homes in the second half of the year, our financial condition and full year results of operations may be adversely affected.

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

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

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

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

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

 

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The IRS has disallowed certain income recognition methodologies. If we are unsuccessful in appealing this decision, we could become subject to a substantial tax liability from previous years.

Since 2002, SHI and SHLP have used the “completed contract method” of accounting (the “CCM”) to recognize taxable income or loss with respect to the majority of their respective homebuilding operations. The CCM allows SHI and SHLP to defer taxable income/loss recognition from their homebuilding operations until projects are substantially complete, rather than annually based on the sale of individual homes to buyers of those homes. The Internal Revenue Service (the “IRS”) has assessed a tax deficiency against SHLP and SHI contending they did not accurately and appropriately apply the relevant U.S. Treasury Regulations in calculating their respective homebuilding projects’ income/loss pursuant to the CCM for years 2004 through 2008, and years 2003 through 2008, respectively. SHI and SHLP believe their use of the CCM complies with the relevant regulations and have filed a petition with the United States Tax Court to challenge the IRS position. If, contrary to our expectations, the IRS should prevail in this matter, SHI and SHLP would be required to recognize income for prior years that would otherwise be deferred until future years. With respect to SHI, this earlier recognition of income could result in a tax liability of up to $59 million (federal and state income taxes inclusive of interest). With respect to SHLP, the earlier recognition of income could result in the owners of SHLP incurring an additional tax liability of up to $102 million (federal and state income taxes inclusive of interest) for the years at issue, and SHLP would be required to make a distribution to its owners to pay a portion of such tax liability. See “Certain Relationships and Related Party Transactions—Tax Distribution Agreement.” The indenture governing the notes restricts SHLP’s ability to make such distributions in excess of a specified amount determined by a formula, unless SHLP receives a cash equity contribution from JFSCI in the amount of such excess. See “Description of the Notes—Limitations on Restricted Payments.” Such potential additional taxes imposed on SHI and tax distributions by SHLP may have a material adverse effect on the financial condition and results of operations of SHI and SHLP, respectively, which could compromise our ability to service our debt, including the notes.

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

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

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

Our ability to make payments on the notes and to fund land acquisition, development and construction costs depends on our ability to generate sufficient cash flow, which is subject to general economic, financial, competitive, legislative and regulatory factors and other factors beyond our control. We cannot assure we will generate sufficient cash flow from operations to pay principal and interest on the notes or fund operations. As a

 

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result, we may need to refinance all or a portion of our debt, including the notes, on or before the maturity thereof, or incur additional debt. We cannot assure we will be able to do so on favorable terms, if at all. If we are unable to timely refinance our debt, we may need to dispose of certain assets, minimize capital expenditures or take other steps that could be detrimental to our business and could reduce the value of the collateral. There is no assurance these alternatives will be available, if at all, on satisfactory terms or on terms that will not require us to breach the terms and conditions of our existing or future debt agreements. Any inability to generate sufficient cash flow, refinance debt or incur additional debt on favorable terms could have a material adverse effect on our financial condition and results of operations, and could compromise our ability to service our debt, including the notes.

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

We have a significant number of contingent liabilities, and if any are satisfied by us, could have a material adverse effect on our financial condition and results of operations.

At December 31, 2011, contingent liabilities included:

 

 
 

$11.2 million of potential liabilities pursuant to guarantees by SHLP of outstanding debt of AGS Home Builder I, LP, an Unconsolidated Joint Venture in which SHLP has an effective 9.1% ownership interest, of which SHLP’s joint venture partners, certain investment funds managed by Angelo Gordon, are contractually obligated to reimburse SHLP for approximately 90% of any amounts required to be paid under such guarantees;

 

 
 

$25.4 million of potential liabilities pursuant to certain guarantees of outstanding debt of Shea/Baker Ranch Associates, LLC, a joint venture 50% owned by a Shea Family Owned Company in which SHLP has no ownership interest;

 

 
 

$34.1 million of potential liabilities pursuant to guarantees in respect of certain permanent financings of stabilized projects of other Shea Family Owned Companies in which SHLP and its subsidiaries have no ownership interest, which guarantees could be triggered by certain “bad boy” acts of the affiliated borrower, such as voluntary bankruptcy, fraud or material misrepresentation;

 

 
 

$29.3 million of remaining exposure with respect to $69.0 million of surety bond indemnifications related to Unconsolidated Joint Ventures and $3.1 million of remaining exposure with respect to $6.9 million of surety bond indemnifications related to other Shea Family Owned Companies;

 

 
 

$71.0 million of remaining exposure in connection with $178.4 million of surety bonds issued in respect of projects of SHLP and its subsidiaries; and

 

 
 

other commitments to fund certain of our joint ventures pursuant to the agreements and organizational documents governing such joint ventures.

See “Description of Other Indebtedness” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations, Commercial Commitments and Off-Balance Sheet Agreements.” The amounts above do not include obligations with respect to letters of credit issued under our existing letter of credit facility as credit support for certain liabilities of our joint ventures.

Certain of our homebuilding projects utilize, and may continue to utilize, community facility district, metro-district and other local government bond financing programs to fund construction or acquisition of infrastructure improvements. Interest and principal on these bonds are typically paid from taxes and assessments levied on homeowners following the sale of new homes within the project. From time to time we enter into credit support

 

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arrangements where we are required to make interest and principal payments on these bonds if the taxes and assessments levied on homeowners are insufficient to cover such obligations. Furthermore, reimbursement of these payments to us is dependent on the district or local government’s ability to generate sufficient tax and assessment revenues from the sale of new homes. If the downturn in the homebuilding industry continues and results in further declines in new home sales, taxes and assessments levied on homeowners may be insufficient to cover interest and principal obligations on these bonds and we may be required to fund these shortfalls, possibly without reimbursement, and/or accrue liabilities in connection with these credit support arrangements.

If we must satisfy any of these contingent liabilities, it could have a material adverse effect on our financial condition and results of operations.

The indenture governing the notes and our letter of credit facility contain, and any future indebtedness may contain, financial and operating restrictions that may affect our ability to operate our business.

The indenture governing the notes and our letter of credit facility do, and any future indebtedness may, contain various covenants that, among other things, limit our ability to grant certain liens to support indebtedness, invest in joint venture transactions, merge or sell assets. In addition, the indenture governing the notes and our letter of credit facility do, and any future indebtedness may, contain restrictions on our ability to incur indebtedness, enter into certain affiliate transactions and make certain distributions. These covenants could adversely affect our ability to finance our operations or capital needs or engage in, expand or pursue our business activities and prevent us from engaging in certain transactions that might otherwise be considered beneficial. In particular, restrictions on our ability to enter into joint venture transactions may limit our ability to undertake new large scale master-planned development opportunities, including developments of our homes under the Trilogy brand, and may thereby adversely affect our growth and results of operations. In addition, these covenants may restrict our ability to meet capital commitments under our joint venture agreements, which may result in our ownership interests in the corresponding joint ventures being reduced or eliminated.

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

The risks inherent in controlling or purchasing, holding and developing land for new home construction are substantial and increase as consumer demand for housing decreases. The value of undeveloped land, building lots and housing inventories can fluctuate significantly from changing market conditions. If the fair market value of the land, lots and inventories we hold decreases, we may be required to reduce their carrying value and take significant impairment charges. We may have acquired options on or bought and developed land at a cost we will not be able to recover fully or on which we cannot build and sell homes profitably. In addition, our deposits for land controlled under option or similar contracts may be put at risk. In certain circumstances, a grant of entitlements or development agreement with respect to particular land may include restrictions on the transfer of such entitlements to a buyer which may increase our exposure to decreases in the price of such entitled land by restricting our ability to sell it for its full entitled value. In addition, inventory carrying costs can be significant and result in reduced margins or losses in a poorly performing community or market. In the present weak market, we have recorded significant inventory impairment charges and sold homes and land for lower margins, and such conditions may persist.

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

 

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cash inflows attributable to land sales may decline. Our flexibility in responding to changes in market conditions, including our ability to respond to further declines in the housing market or to benefit from a return to growth, has been reduced as the amount of our land controlled by option and similar contracts has declined.

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

In certain consolidated homebuilding projects, we have contractual obligations to purchase and receive water system connection rights which, at December 31, 2011, were $36.7 million. These water system connection rights are held and then transferred to homebuyers upon closing of their home or transferred upon the sale of land to the respective buyer. These water system connection rights can also be sold or leased but generally only within the local jurisdiction. The risks inherent in purchasing, controlling or holding these water system connection rights are substantial and increase as consumer demand for housing decreases. The value of these water system connection rights and their marketability can also fluctuate from changing market conditions. If the fair market value of these water system connection rights decreases, we may be required to reduce their carrying value which could adversely affect our financial condition and results of operations.

In certain consolidated homebuilding projects, we make infrastructure improvements on behalf of community facility districts and metro-districts or advance them funds for such improvements, both reimbursable to us from tax proceeds, assessments or bond financing and dependent on the district’s ability to secure capital from these sources. If the downturn in the homebuilding industry continues and results in further declines in new home sales, then taxes and assessments levied on homeowners may be insufficient to reimburse us. Furthermore, if bond financing is unavailable, these districts may be unable to reimburse us. In either case, we may be required to recognize a charge for uncollectible accounts which could adversely affect our financial condition and results of operations.

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

We currently operate through a number of unconsolidated homebuilding and land development joint ventures with independent and affiliated parties in which we do not have a controlling interest (the “Unconsolidated Joint Ventures”). At December 31, 2011, we had an investment of $16.9 million in these Unconsolidated Joint Ventures and guaranteed, on a joint and several basis, $11.2 million of outstanding liabilities for projects under development by these Unconsolidated Joint Ventures. See “Description of Other Indebtedness.” In addition, we issue and may continue to issue letters of credit under our letter of credit facility as credit support for liabilities of our Unconsolidated Joint Ventures.

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

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

We are part of the Shea Family Owned Companies, which are operated in three major groups: homebuilding, heavy construction and commercial property development and management. See “Prospectus Summary—The

 

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Shea Family Owned Companies.” Though our business forms the core of the homebuilding group, we have historically entered into many transactions with other Shea Family Owned Companies which are not part of the homebuilding group. See “Certain Relationships and Related Party Transactions.” These transactions range from management and administrative related matters to joint ventures, transfers of assets and financial guarantees and other credit support arrangements. We are currently party to many such affiliate transactions, not all of which are memorialized in formal written agreements. In the future, we will continue to be party to many of the affiliate transactions currently in existence, and it is likely we will enter into new affiliate transactions.

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

Until August 2011, one of our affiliates, JFSCI, provided us with centralized cash management services. See “Certain Relationships and Related Party Transactions—Cash Management Services Provided by JFSCI.” As part of this function, we engaged in related party transactions and monetary transfers to settle amounts owed. The resultant accounts receivables and payables from these transfers are paid monthly. In August 2011, we ceased our participation in the centralized cash management service and performed the function independently. In addition, SHI has an unsecured term note receivable from JFSCI (the “Intercompany Debt Balance”), which bears interest at 4%, is payable in equal quarterly installments and due May 15, 2019, and has an outstanding balance, including accrued interest, at December 31, 2011 of $25.4 million. Quarterly, we evaluate collectability of the Intercompany Debt Balance, which includes consideration of JFSCI’s payment history, operating performance and future payment requirements under the note. Based on this criteria, and as JFSCI applied prepayments under the note to defer future installments until February 2014, we do not presently anticipate collection risks on the Intercompany Debt Balance. However, JFSCI’s inability to honor its obligation with respect to the Intercompany Debt Balance could have a material adverse effect on our financial condition, results of operations and capital resources.

Although the Indenture prohibits us from entering into certain affiliate transactions in the future unless they are on arm’s-length terms, this prohibition is subject to many exceptions and limitations. See “Description of the Notes—Limitations on Transactions with Affiliates.” In particular, with respect to transactions involving the transfer of real property, we will only be required to obtain third-party independent estimates of the value of such real property when the transaction involves consideration exceeding $10.0 million. With respect to all other affiliate transactions, we will only be required to obtain an independent third-party fairness opinion in connection with transactions involving consideration exceeding $5.0 million.

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

 

 
 

any outstanding guarantee by us of indebtedness or other obligations of such Shea Family Owned Company could be called, which could adversely affect our financial condition and results of operations;

 

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our receivable from JFSCI and the Intercompany Debt Balance could become uncollectible, which could have a material adverse effect on our financial condition and results of operations;

 

 
 

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

 

 
 

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

 

 
 

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

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

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

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

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

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

We believe our senior management’s experience in the homebuilding industry and tenure with our company are competitive strengths, and our success depends upon our ability to retain these executives. In addition, we believe our ability to attract, train, assimilate and retain new skilled personnel is important to our success. If we are unable to retain senior management and certain key employees, particularly lead personnel in our markets, as well as our senior corporate officers, or attract, train, assimilate or retain other skilled personnel, it could hinder the execution of our business strategy. Competition for qualified personnel in our markets is intense, and it could

 

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be difficult to find experienced personnel to replace our employees, many of whom have significant homebuilding experience. Furthermore, a significant increase in our active communities would necessitate hiring a significant number of field and sales personnel, who are in short supply in our markets.

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

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

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

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

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

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

We are subject to local, state and federal statutes, ordinances, rules and regulations concerning land use and the protection of health and the environment; including those governing discharge of pollutants to water and air, handling of hazardous materials and cleanup of contaminated sites. The particular impact and requirements of environmental laws that apply to any given community vary greatly according to the community site, the site’s environmental conditions and the present and former use of the site. We expect that increasingly stringent requirements will be imposed on homebuilders. Environmental laws may result in delays, cause us to implement time consuming and expensive compliance programs and prohibit or severely restrict development in certain environmentally sensitive regions or areas. Environmental regulations can also have an adverse impact on the availability and price of certain raw materials, such as lumber. Furthermore, we could incur substantial costs, including cleanup costs, fines, penalties and other sanctions and damages from third-party claims for property damage or personal injury, as a result of our failure to comply with, or liabilities under, applicable environmental laws and regulations. In addition, we are subject to third-party challenges under environmental laws and regulations to the permits and other approvals required for our projects and operations.

 

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

We assist customers with finding homeowners’ insurance through Shea Insurance Services, Inc., a wholly-owned subsidiary of SHLP. Through Shea Mortgage, a related entity within the Shea Family Owned Companies but not a subsidiary of SHLP or consolidated in its financial statements, we are also able to arrange mortgage origination options for our customers, helping us to ensure they secure financing for their home purchases.

These financial services operations are subject to federal, state and local laws and regulations. There have been numerous proposed changes in these regulations as a result of the housing downturn. For example, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R.4173) was signed into law which will significantly impact regulation of the financial services industry, including creating new standards related to regulatory oversight of systematically important financial companies, derivatives transactions, asset-backed securitization, mortgage underwriting and consumer financial protection. Among other things, this legislation provides for a number of new requirements relating to residential mortgage lending practices, many of which are to be developed further by implementing rules. These include, among others, minimum standards for mortgages and lender practices in making mortgages, limitations on certain fees, retention of credit risk, prohibition of certain tying arrangements and remedies for borrowers in foreclosure proceedings. The effect of such provisions on our financial services business will depend on the rules that are ultimately enacted. In addition, we cannot predict what similar changes to, or new enactments of, statutes and regulations pertinent to our financial services operations will occur. Any such changes or new enactments could have a material adverse effect on our financial condition and results of operations.

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

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

Risk Factors Related to the Exchange Offer

We cannot assure you that an active trading market for the exchange notes will exist if you desire to sell the exchange notes.

There is no existing public market for the outstanding notes or the exchange notes. We do not intend to have the exchange notes listed on a national securities exchange or to arrange for quotation on any automated dealer quotation systems. Therefore, we cannot assure you as to the development or liquidity of any trading market for the exchange notes. The liquidity of any market for the exchange notes will depend on various factors, including:

 

 
 

the number of holders of exchange notes;

 

 
 

our financial condition and results of operations;

 

 
 

the market for similar securities;

 

 
 

the interest of securities dealers in making a market in the exchange notes; and

 

 
 

prevailing interest rates.

Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the exchange notes. The market, if any, for the exchange notes may face similar disruptions that may adversely affect the prices at which you could sell your exchange notes. Therefore, you may not be able to sell your exchange notes at a particular time and the price you receive when you sell may not be favorable.

 

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You may have difficulty selling any outstanding notes that you do not exchange.

If you do not exchange your outstanding notes for exchange notes in the exchange offer, you will continue to hold outstanding notes subject to restrictions on their transfer. Those transfer restrictions are described in the indenture governing the outstanding notes and in the legend contained on the outstanding notes, and arose because we originally issued the outstanding notes under an exemption from the registration requirements of the Securities Act.

In general, you may offer or sell your outstanding notes only if they are registered under the Securities Act and applicable state securities laws, or if they are offered and sold under an exemption from those requirements. We do not currently intend to register the outstanding notes under the Securities Act or any state securities laws. If a substantial amount of the outstanding notes is exchanged for a like amount of the exchange notes issued in the exchange offer, the liquidity of your outstanding notes could be adversely affected. See “The Exchange Offer—Consequences of Failure to Exchange Outstanding Notes” for a discussion of additional consequences of failing to exchange your outstanding notes.

Risks Relating to the Notes and the Guarantees

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

We have a significant amount of debt. At December 31, 2011, the total principal amount of our debt was $752.1 million. In addition, we have a substantial amount of contingent liabilities which could affect our business. See “—Risks Relating to Us and Our Business—We have a significant number of contingent liabilities, and if any are required to be satisfied by us, could have a material adverse effect on our financial condition and results of operations.”

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

 

 
 

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

 

 
 

increasing our vulnerability to adverse economic or industry conditions;

 

 
 

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

 

 
 

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

 

 
 

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

 

 
 

placing us at a competitive disadvantage to less leveraged competitors.

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

Despite our indebtedness, we and our subsidiaries may be able to incur significant additional indebtedness, including secured indebtedness, in the future, including under our letter of credit facility, which is secured on a Pari-Passu basis with the notes but will have the benefit of payment priority upon enforcement against the collateral. Although the indenture governing the notes contains restrictions on our and our subsidiaries’ ability to incur additional indebtedness, these restrictions are subject to qualifications and exceptions, and, under certain circumstances, the indebtedness incurred in compliance with such restrictions could be substantial and certain of this indebtedness may be secured by the same collateral securing the notes, and the respective guarantees thereof. If new indebtedness is added to our and our subsidiaries’ debt levels, the related risks that we and the Guarantors

 

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face would be increased, and we may not be able to meet all our debt obligations, including repayment of the notes, in whole or in part. If we incur any additional debt that is secured on an equal and ratable basis with the notes or the guarantees, the holders of that debt will be entitled to share ratably with the holders of the notes in any proceeds distributed in connection with any enforcement against the collateral or an insolvency, liquidation, reorganization, dissolution or other winding-up of the applicable Issuer or Guarantor. This may have the effect of reducing the amount of proceeds paid to holders of the notes.

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

The indenture governing the notes and our letter of credit facility contain covenants that restrict certain activities. These covenants restrict, among other things, our ability to:

 

 
 

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

 

 
 

incur additional debt or issue certain equity interests;

 

 
 

incur liens on assets;

 

 
 

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

 

 
 

enter into transactions with affiliates;

 

 
 

make certain investments;

 

 
 

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

 

 
 

guarantee certain debt; and

 

 
 

enter into sale and lease-back transactions.

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

We may be unable to purchase the notes upon a change of control.

We may be unable to raise the funds necessary to fulfill our obligations under the notes following a “change of control” as defined in the indenture governing the notes. Under the indenture, upon the occurrence of a defined change of control, we will be required to offer to repurchase all outstanding notes at 101% of the principal amount thereof plus, without duplication, accrued and unpaid interest and special interest, if any, to the date of repurchase. However, we may not have sufficient funds at the time of the change of control to make the required repurchase of the notes. Our failure to make or complete a change of control offer would place us in default under the indenture governing the notes.

In addition, the definition of change of control in the indenture governing the notes includes the sale of “all or substantially all” of our assets. There is no precise established definition of the phrase “substantially all” under New York law, the law which governs the indenture. Accordingly, upon a sale of less than all of our assets, the ability of a holder of notes to require us to repurchase such notes may be uncertain.

We could enter into significant transactions that would not constitute a change of control requiring us to repurchase the notes, but that could adversely affect our risk profile.

We could, in the future, enter into certain transactions, including certain recapitalizations, that would not result in a change of control, but would increase the amount of indebtedness outstanding at such time or otherwise affect our capital structure or credit ratings. Restrictions on our ability to incur additional indebtedness

 

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are contained in the covenants described under “Description of the Notes—Certain Covenants—Limitations on Indebtedness” and “Description of the Notes—Certain Covenants—Limitations on Liens.” Such restrictions in the indenture governing the notes can be waived with consent of the holders of a majority in principal amount of the notes then outstanding. Except for limitations contained in such covenants, however, the indenture does not contain any covenants or provisions that may afford holders of the notes protection in the event of a highly leveraged transaction.

The guarantees and security interests provided by the Guarantors may not be enforceable and, under specific circumstances, federal and state courts may void the guarantees and security interests and require noteholders to return payments received from the Guarantors.

Although the notes will be guaranteed by the Guarantors and secured by collateral provided by each Guarantor, a court could void or subordinate any Guarantor’s guarantee, or the security interest provided by any Guarantor, under federal or state fraudulent conveyance laws if existing or future creditors of any such Guarantor were successful in establishing that:

 

 
 

such guarantee or security interest was incurred with fraudulent intent; or

 

 
 

such Guarantor did not receive fair consideration or reasonably equivalent value for issuing its guarantee or providing collateral; and either:

 

 
 

such Guarantor was insolvent at the time of the guarantee or creation of the security interest;

 

 
 

such Guarantor was rendered insolvent by reason of such guarantee or the creation of such security interest;

 

 
 

such Guarantor was engaged in a business or transaction or about to engage in such business or transaction for which its assets constituted unreasonably small capital to carry on its business; or

 

 
 

such Guarantor intended to incur, or believed that it would incur, debt beyond its ability to pay such debt as it matured (as all of the foregoing terms may be defined in or interpreted under the relevant fraudulent transfer or conveyance statutes).

In such event, any payment by a Guarantor pursuant to its guarantee or security interest could be voided and required to be returned to the Guarantor, or to a fund for the benefit of the Guarantor’s creditors. Measures of insolvency for purposes of determining whether a fraudulent conveyance occurred would vary depending upon laws of the relevant jurisdiction and upon valuation assumptions and methodology applied by the court. Generally, however, a company would be considered insolvent for purposes of the foregoing if:

 

 
 

the sum of the company’s debts, including contingent, unliquidated and unmatured liabilities, is greater than such company’s property at fair valuation;

 

 
 

the present fair saleable value of the company’s assets is less than the amount that will be required to pay the probable liability on its existing debts, including contingent liabilities, as they become absolute and matured; or

 

 
 

the company could not pay its debts or contingent liabilities as they become due.

We have no assurance as to what standard a court would use to determine whether or not a Guarantor would be solvent at the relevant time, or regardless of the standard used, that the guarantees or security interests would not be voided or subordinated to any Guarantor’s other liabilities. If such a case were to occur, the applicable guarantee or security interest could be subject to the claim that, since such guarantee or security interest was incurred for the benefit of the Issuers and only indirectly for the benefit of the Guarantor, the obligations of such Guarantor were incurred for less than fair consideration.

Any guarantee of the notes will contain a provision designed to limit the Guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a

 

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fraudulent transfer. However, there is some doubt as to whether this provision is effective to protect such guarantee, or a security interest provided by such Guarantor, from being voided under fraudulent transfer law. In a recent Florida bankruptcy case, a similar provision was found to be ineffective to protect the guarantors.

If a Guarantor’s guarantee or security interest is voided as a fraudulent conveyance or found to be unenforceable for any other reason, holders of the notes will not have a claim against such Guarantor and will only be a creditor of the Issuers and the remaining Guarantors, if any, to the extent the guarantee and security interest of those Guarantors are not set aside or found to be unenforceable. The notes then would in effect be structurally subordinated to all liabilities of the Guarantor whose guarantee or security interest was avoided.

Because each Guarantor’s liability under its guarantee may be reduced to zero, avoided or released under certain circumstances, you may not receive any payments from some or all of the Guarantors.

You will have the benefit of the guarantees of the Guarantors. However, the guarantee by each Guarantor is limited to the maximum amount that such Guarantor is permitted to guarantee under applicable law. As a result, a Guarantor’s liability under its guarantee could be reduced to zero, depending upon the amount of other obligations of such Guarantor. Further, under the circumstances discussed more fully above, a court under federal or state fraudulent conveyance and transfer statutes could avoid the obligations under a guarantee or further subordinate it to all other obligations of the Guarantor. In addition, you will lose the benefit of a particular guarantee if it is released under the circumstances described under “Description of the Notes—The Guarantees.”

The notes are joint and several obligations of a California limited partnership and a Delaware corporation, the latter of which has no independent operations or subsidiaries and generates no cashflow to service the notes.

Shea Homes Funding Corp. is a finance company with no operations of its own and no material assets. As a result of the foregoing, Shea Homes Funding Corp. has no cash flows and will provide no credit support for the notes.

Your right to receive payments under the notes is junior to the existing and future indebtedness and other liabilities of our subsidiaries that are not Guarantors and of our joint ventures.

The notes will not be guaranteed by all of our subsidiaries or any of our joint ventures (other than Vistancia Construction, LLC and Vistancia Marketing, LLC), and under certain circumstances, subsidiaries and joint ventures guaranteeing the notes may be released from their guarantees and the security interests securing those guarantees without the consent of holders of the notes. See “Description of the Notes—The Guarantees.” In the event of a bankruptcy, liquidation or reorganization of any of our non-guarantor subsidiaries or joint ventures, creditors of such subsidiaries or joint ventures, including any trade creditors, joint venture partners, debt holders or any preferred equity holders, will be entitled to payment of their claims from the assets of those subsidiaries or joint ventures before any such assets are made available for distribution to us, except to the extent that we may also have a claim as a creditor. Thus, the notes will be effectively junior to the claims of creditors of our non-guarantor consolidated subsidiaries and of our joint ventures. Our non-guarantor subsidiaries are permitted to incur substantial additional liabilities in the future under the terms of the indenture and our joint ventures will not be restricted by the covenants contained in the indenture.

Your right to receive payments under the notes is junior to our and the Guarantors’ existing and future secured indebtedness and other secured obligations to the extent that the assets that secure such indebtedness and other obligations do not secure the notes.

The notes and the guarantees will be effectively subordinated to any existing and future obligations of either of the Issuers or any Guarantor that is secured with assets that do not constitute collateral to the extent of the value of such assets securing such indebtedness. If we file for bankruptcy, liquidate or dissolve, our assets that

 

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secure indebtedness other than the notes or that secure any other obligation would be available to pay amounts owing with respect to the notes and the guarantees only after we pay all amounts owed to such other secured indebtedness or other obligation. Accordingly, we may not have sufficient assets remaining to make any or all payments in respect of the notes.

The collateral may not be valuable enough to satisfy all the obligations secured by such collateral and, in certain circumstances, can be released without the consent of holders of the notes.

The notes and guarantees are secured by substantially all the assets of the Issuers and the Guarantors, including stock of certain of their subsidiaries (subject to certain limitations), but specifically excluding certain types of assets. See “Description of the Notes—Security.” The indenture governing the notes allows us to incur additional secured debt or other secured liabilities, including under certain circumstances debt or other liabilities that share in the collateral securing the notes and the guarantees, including debt under our letter of credit facility, which are secured on a Pari-Passu basis with the notes but will have the benefit of payment priority upon enforcement against the collateral. See “Description of the Notes—Certain Covenants—Limitations on Liens.”

There is no assurance that the fair market value of the collateral is equal to our obligations with respect to the notes. In addition, the fair market value of the collateral is subject to fluctuations based on factors that include, among others, general economic conditions and similar factors. The amount to be received upon a sale of the collateral would be dependent on numerous factors, including, but not limited to, the actual fair market value of the collateral at such time, the timing and the manner of the sale and the availability of buyers. Most of the collateral is illiquid and may have no readily ascertainable market value. Likewise, we cannot assure holders of the notes that the collateral will be saleable or, if saleable, that there will not be substantial delays in its liquidation. Accordingly, in the event of a foreclosure, liquidation, bankruptcy or similar proceeding, the collateral may not be sold in a timely or orderly manner, and the proceeds from any sale or liquidation of the collateral may not be sufficient to satisfy the Issuers’ and the Guarantors’ obligations under the notes, the guarantees, our letter of credit facility and any future debt or other liabilities that is secured by the collateral.

If the value of the collateral, or the proceeds of any sale of the collateral, are not sufficient to repay all amounts due on the notes, the holders of the notes (to the extent not repaid from the proceeds of the sale of the collateral) would have only a senior unsecured, unsubordinated claim against the Issuers’ and the Guarantors’ remaining assets. In addition, as described under “Description of the Notes—Release of Liens,” the security interests can be released without the consent of holders of the notes in certain circumstances.

Also, certain permitted liens on the collateral securing the notes may allow the holder of such lien to exercise rights and remedies with respect to the collateral subject to such lien that could adversely affect the value of such collateral and the ability of the trustee to realize or foreclose upon such collateral. See “Description of the Notes—Certain Covenants—Limitations on Liens.”

In addition, some of the real property pledged as collateral for the notes is currently unentitled. The future value of this real property will depend on our ability to obtain entitlements in relation to it. To the extent we are unable to obtain such entitlements, the value of such real property may be adversely affected. Also, in some of our markets, land sellers require that we enter into agreements to make future payments to such sellers after a specified period of time following such acquisition or at the time of the subsequent sale of the subject real property, which future payments (1) are based on one or more of the subsequent sale price of the subject real property, the allocated costs of developing the subject real property and an amount specified at the time of such acquisition and (2) may include fixed minimum amounts in respect of such arrangements and true-up payments. Our obligations to make these supplemental payments are secured by a first priority lien on the purchased land that will remain senior to any lien granted to secure the notes.

Certain of our housing developments are controlled by joint ventures and non-wholly owned subsidiaries in which we are a member. The properties within these housing developments may or may not be secured by separate loan facilities. We generally hold a minority interest in these joint ventures and are unable to pledge

 

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these properties as collateral. Therefore, the homebuilding and land development assets within these joint ventures are not pledged as collateral for the notes.

Other claimants may have security interests in the collateral that have priority to the security interests for the benefit of the noteholders.

Although the notes and the guarantees are secured by all the assets of the Issuers and the Guarantors other than the excluded assets described under “Description of the Notes—Security—General,” the security interest in the collateral for the benefit of the noteholders are subject to certain priority claims, including the following:

 

 
 

pursuant to the Intercreditor Agreement entered into in connection with our letter of credit facility, any proceeds realized upon enforcement by the collateral agent of its rights under the various security documents and available to pay claims of the parties subject to the Intercreditor Agreement will be applied first to discharge obligations with respect to our letter of credit facility (or any replacement facility) before such proceeds will be applied to pay the claims of noteholders (or any other Pari-Passu debt holders);

 

 
 

although the indenture governing the notes contains a covenant limiting our ability to create additional liens with respect to the collateral securing the notes, this covenant has a number of exceptions and permits certain liens, some of which will have a priority claim to some of the collateral either as a matter of law or as a matter of contract, see “Description of the Notes—Definitions of certain terms used in the Indenture—Permitted Liens;” and

 

 
 

included in the type of liens permitted by the indenture are Permitted Priority Liens (as defined in the indenture) which require the collateral agent, pursuant to the terms of the Intercreditor Agreement, to expressly subordinate the security interest in favor of the noteholders to certain kinds of liens that we grant in the ordinary course of our homebuilding business. See “Description of the Notes—Security— Intercreditor Agreement.”

To the extent any person has a priority interest in the collateral securing the notes and the guarantees, the proceeds realized upon enforcement with respect of such collateral will be available to satisfy our liability to such person before any such proceeds are available to satisfy the claims of the noteholders or any other holder of a Pari-Passu security interest in such collateral.

We will, in most cases, have control over the collateral, and the sale or pledge of particular assets by us could reduce the pool of assets securing the notes and the guarantees.

The security documents related to the notes generally allow us to remain in possession of, retain exclusive control over, freely operate, dispose of and collect, invest and dispose of any income from, the collateral securing the notes and the guarantees thereof. Therefore, the pool of assets securing the notes and the guarantees and any other debt similarly secured will change from time to time, and its fair market value may decrease from its value on the date the notes were originally issued.

The collateral is subject to casualty risk.

Even if we maintain insurance, there are certain losses with respect to the collateral that may be either uninsurable or not economically insurable, in whole or part. Insurance proceeds may not compensate us fully for our losses. If there is a complete or partial loss of any collateral, the insurance proceeds may not be sufficient to satisfy all of our obligations, including the notes and the guarantees.

Rights of holders of the notes in the collateral may be adversely affected by the failure to perfect security interests in the collateral.

Applicable law requires a security interest in certain tangible and intangible assets can only be properly perfected and its priority retained through certain actions undertaken by the secured party. The liens on the

 

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collateral securing the notes and the guarantees may not be perfected with respect to the claims of the notes and the guarantees if the collateral agent is unable to take the actions necessary to perfect any of these liens on or prior to the date of the indenture governing the notes.

The Issuers and the Guarantors have limited obligations to perfect the security interest for the benefit of the holders of the notes in specified collateral. There can be no assurance the trustee or the collateral agent for the notes will monitor, or we will inform such trustee or collateral agent of, the future acquisition of assets and rights that constitute collateral, and necessary action will be taken to properly perfect the security interest in such after-acquired collateral. Neither the trustee nor collateral agent for the notes has an obligation to monitor the acquisition of additional assets or rights that constitute collateral or the perfection of any security interest. Such failure to monitor may result in the loss of the security interest in the collateral or the priority of the security interest in favor of the notes and the guarantees against third parties.

The use of a collateral agent and the existence of other pari-passu indebtedness may diminish the rights that a secured creditor would otherwise have with respect to the collateral. Your right to take enforcement action with respect to the liens securing the notes is limited in certain circumstances.

The terms of the intercreditor agreement contain provisions restricting the rights of the holders of the notes to take enforcement action with respect to the liens securing such notes in certain circumstances. These provisions will generally provide that the applicable authorized representative (which may be a party other than the trustee for the holders of the notes) and the agent for the lenders under our letter of credit facility must generally engage in certain consultative processes before enforcing the liens securing the notes. In addition, disagreements between the applicable authorized representative and the agent for the lenders under our letter of credit facility could limit or delay the ability of the collateral agent to enforce the liens securing the notes. Furthermore, the collateral agent may fail to act in a timely manner after receiving instructions from the agent for the lenders under our letter of credit facility and the applicable authorized representative. Delays in the enforcement could decrease or eliminate recovery values.

In the event of a disagreement between the agent for the lenders under our letter of credit facility and the applicable authorized representative, the intercreditor agreement provides that the agent for the lenders under our letter of credit facility will ultimately have the ability to direct the collateral agent to act (or refrain from acting) with respect to the collateral. The collateral agent may be instructed to take actions holders of the notes disagree with, or may fail to take actions holders of the notes wish to pursue. Holders of the notes will not have any independent power to enforce, or have recourse to, the intercreditor agreement, or to exercise any rights or powers arising under the intercreditor agreement, except through the trustee for holders of the notes, to the extent the trustee is the applicable authorized representative. By accepting a note, you will be deemed to have agreed to these restrictions. As a result of these restrictions, holders of the notes have limited remedies and recourse against the Issuers and the Guarantors in the event of a default. See “Description of the Notes—Security—Intercreditor Agreement.”

In addition, the collateral agent may be subject to conflicts of interest due to its role as bailee or agent on behalf of competing classes of creditors. Moreover, holders of the notes have limited rights against the collateral agent.

The “one action” rule in California may limit the ability of the collateral agent to foreclose on California real property that has been mortgaged to secure the notes and may provide certain defenses to the enforcement of the guarantees against the Guarantors.

A substantial portion of the collateral securing the notes consists of real property located in California. California law prohibits more than one “action” to enforce a mortgage obligation, and some courts have construed the term “action” broadly to include both judicial and non-judicial actions (i.e., non-judicial foreclosure). California also has anti-deficiency laws, which in combination with “one action” laws, require

 

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creditors with debt secured by real property must first seek to exhaust the secured collateral before the creditor may seek a judgment on the deficiency (if permitted at all under the anti-deficiency statutes). Further, application of the California one-action rule may impair or limit the ability of the collateral agent to enforce its remedies on real property located outside of California prior to enforcing its remedies against the California real property in case such enforcement is perceived as an “action” to enforce the mortgage obligation under California law. If a court determines the collateral agent has taken its “action” to enforce the mortgage obligation, the collateral agent may inadvertently waive its security interest in the property. Also, application of the California one-action rule may result in certain defenses to the enforcement of a guarantee of an obligation if that obligation is secured by real property located in California. As a result, the collateral agent’s ability to foreclose upon any California real property that has been mortgaged to secure the notes may be significantly delayed and otherwise limited by the application of California law.

There are circumstances other than repayment or discharge of the notes under which the collateral securing the notes and the guarantees will be released without the consent of holders of the notes or the consent of the trustee under the indenture governing the notes.

Security interests and liens for the benefit of holders of the notes may, in certain circumstances, be released without consent of such holders or the trustee under the indenture governing the notes. Security documents related to the notes will generally provide for a release of all liens on any asset constituting collateral that is disposed of in compliance with provisions of the indenture governing the notes.

Under the indenture governing the notes and applicable security documents, all or a portion of the collateral securing the notes will be released or holders of the notes will no longer be entitled to the benefit of the lien of the security documents on affected collateral:

 

 
 

upon satisfaction of all conditions set forth under “Description of the Notes—Discharge and Defeasance of Indenture”;

 

 
 

upon a sale, transfer or other disposal of such collateral in a transaction not prohibited under the indenture governing the notes; and

 

 
 

with respect to collateral held by a Guarantor, upon release of such Guarantor from its guarantee in accordance with the terms of the indenture governing the notices.

The indenture governing the notes will also permit the Issuers to designate one or more subsidiaries that are Guarantors as unrestricted subsidiaries. If the Issuers designate a Guarantor as an unrestricted subsidiary, holders of the notes will no longer be entitled to the benefit of the lien of the security documents on any collateral owned by such subsidiary, and the guarantee of such subsidiary will be released. Designation of an unrestricted subsidiary would effectively reduce the aggregate value of the collateral securing the notes and the guarantees to the extent of the value of the assets of the unrestricted subsidiary that constituted collateral securing the notes immediately prior to such designation. In addition, following such designation and release of the guarantee, the creditors of the unrestricted subsidiary would have structurally senior claims on the assets of such unrestricted subsidiary.

Shares of stock and other equity interests or other securities of any of the Issuers’ subsidiaries that are pledged to secure the exchange notes or the guarantees will no longer constitute collateral for the benefit of the exchange notes and the guarantees if the pledge of such stock and other equity interests or other securities would require the filing with the Commission of separate financial statements for that subsidiary.

The notes and guarantees are secured by a pledge of the stock, or in some circumstances other securities, of certain subsidiaries of the Issuers. Under Rule 3-16 of Regulation S-X under the Securities Act as currently in effect, if the par value, book value as carried by us or market value (whichever is greatest) of the stock or other securities of a subsidiary pledged as part of the collateral is greater than or equal to 20% of the aggregate principal amount of the notes then outstanding, we would be required to provide separate financial statements of

 

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that subsidiary to the Commission if the notes were registered under the Securities Act or the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Upon the effectiveness of the registration statement to be filed with the SEC on Form S-4, of which this prospectus forms a part, the exchange notes will become registered under the Securities Act, and, under the security documents, the stock and other securities of any subsidiary of the Issuers that had been pledged as collateral to secure the exchange notes or the guarantees will be excluded from the collateral securing the exchange notes to the extent liens thereon would trigger the requirement to file separate financial statements of that subsidiary with the Commission under Rule 3-16 of Regulation S-X (as in effect from time to time). See “Description of the Notes—Security.” As a result, holders of the notes could lose a portion of the benefit of the security interest in the stock or other securities of those subsidiaries although other creditors having benefit of the same collateral would continue to benefit from a security interest in that portion of the stock or other securities.

In the event of a bankruptcy of an Issuer or any of the Guarantors, holders of the notes may be deemed to have an unsecured claim to the extent that obligations in respect of the notes exceed the fair market value of the collateral securing the notes.

In any bankruptcy case under Title 11 of the United States Code, as amended (the “Bankruptcy Code”), with respect to either Issuer or any of the Guarantors, it is possible the bankruptcy trustee, the debtor-in-possession or competing creditors will assert the value of the collateral with respect to the notes on the date of such valuation is less than the then-current principal amount of the notes and all other obligations with equal and ratable security interests in the collateral. Upon a finding by the bankruptcy court that the notes are under-collateralized, the claims in the bankruptcy case with respect to the notes would be bifurcated between a secured claim and an unsecured claim, and the unsecured claim would not be entitled to the benefits of security in the collateral. Other consequences of a finding of under-collateralization would be, among other things, a lack of entitlement on the part of the notes to receive post-petition interest and a lack of entitlement on the part of the unsecured portion of the notes to receive “adequate protection” under the Bankruptcy Code. In addition, if any payments of post-petition interest had been made prior to the time of such a finding of under-collateralization, those payments could be recharacterized by the bankruptcy court as a reduction of the principal amount of the secured claim with respect to the notes.

Bankruptcy laws may limit the ability of holders of the notes to realize value from the collateral.

The right of the collateral agent to repossess and dispose of the collateral upon the occurrence of an event of default under the indenture governing the notes is likely to be significantly impaired by applicable bankruptcy law if a bankruptcy case were to be commenced by or against either Issuer or any of the Guarantors before the collateral agent repossessed and disposed of the collateral. For example, under the Bankruptcy Code, pursuant to the automatic stay imposed upon the bankruptcy filing, a secured creditor is prohibited from repossessing its collateral from a debtor in a bankruptcy case, or from disposing of collateral repossessed from such debtor, or taking other actions to levy against a debtor, without bankruptcy court approval after notice and a hearing. Moreover, the Bankruptcy Code permits the debtor to continue to retain and to use collateral even though the debtor is in default under the applicable debt instruments, provided that the secured creditor is given “adequate protection.” The meaning of the term “adequate protection” is undefined in the Bankruptcy Code and may vary according to circumstances (and is within the discretion of the bankruptcy court), but it is intended in general to protect the secured creditor’s interest in the collateral from diminishing in value during the pending of the bankruptcy case and may include periodic payments or the granting of additional security, if and at such times as the court in its discretion determines, for any diminution in the value of the collateral as a result of the automatic stay or any use of the collateral by the debtor during the pendency of the bankruptcy case. A bankruptcy court could conclude the secured creditor’s interest in its collateral is “adequately protected” against any diminution in value during the bankruptcy case without the need of providing any additional adequate protection. Due to imposition of the automatic stay, lack of a precise definition of the term “adequate protection” and broad discretionary powers of a bankruptcy court, it is impossible to predict (i) how long payments under the notes could be delayed, or, if made at all, following commencement of a bankruptcy case, (ii) whether or when the

 

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collateral agent could repossess or dispose of the collateral or (iii) whether or to what extent holders of the notes would be compensated for any delay in payment or loss of value of the collateral through the requirement of “adequate protection.”

Any future pledge of collateral or guarantee in favor of the holders of the notes might be voidable in bankruptcy.

Any future pledge of collateral or guarantee in favor of the holders of the notes might be voidable in a bankruptcy case of the pledgor or Guarantor if certain events or circumstances exist or occur, including under the Bankruptcy Code, if the pledgor or Guarantor is insolvent at the time of the pledge or guarantee, the pledge or guarantee enables holders of the notes to receive more than they would if the pledge or guarantee had not been made and the debtor were liquidated under chapter 7 of the Bankruptcy Code, and a bankruptcy case in respect of the pledgor is commenced within 90 days following the pledge (or one year before commencement of a bankruptcy case if the creditor that benefited from the lien or guarantee is an “insider” under the Bankruptcy Code).

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

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

 

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RATIO OF EARNINGS TO FIXED CHARGES

The following table sets forth information regarding our ratio of earnings to fixed charges for the periods shown. In calculating the ratio of earnings to fixed charges, earnings are calculated as (a) income (loss) before income taxes, excluding income (loss) from joint ventures, plus (b) fixed charges, plus (c) capitalized interest included in cost of sales, plus (d) distributed income of equity investees, minus (e) interest capitalized. Fixed charges are comprised of (a) interest incurred and (b) the portion of rental expense deemed to be representative of an interest factor. For the years ended December 31, 2011, 2010, 2009, 2008 and 2007, earnings were insufficient to cover fixed charges for each such year by $50.4 million, $9.6 million, $350.3 million, $553.7 million and $401.4 million, respectively.

 

 
    
Years Ended December 31,
 
 
    
2011
 
    
2010
 
    
2009
 
    
2008
 
    
2007
 

Ratio of earnings
to fixed charges

    
 
  
    
 
  
    
 
  
    
 
  
    
 
  

 

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USE OF PROCEEDS

We will not receive any cash proceeds from the issuance of the exchange notes. In consideration for issuing the exchange notes, we will receive outstanding notes in like original principal amount at maturity. All outstanding notes received in the exchange offer will be cancelled. Because we are exchanging the exchange notes for the outstanding notes, which have substantially identical terms, the issuance of the exchange notes will not result in any increase in indebtedness. The exchange offer is intended to satisfy our obligations under the registration rights agreement executed in connection with the sale of the outstanding notes.

 

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CAPITALIZATION

The following sets forth the Company’s cash and cash equivalents and capitalization at December 31, 2011 and 2010. You should read this table in conjunction with “Selected Historical Consolidated Financial and Other Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements included elsewhere in this prospectus.

 

 
  
December 31,
 
 
  
            2011             
 
 
        2010        
 
 
  
(In millions)
 

Cash and cash equivalents, restricted cash and investments

  
$
314.5
(1)
 
 
$
190.4
(2)
 
  

 

 

   

 

 

 

Debt:

  
 

Senior Secured Notes due May 2019

  
$
750.0
(4)
 
 
$
  

Secured Facilities

  
 
  
 
 
805.4
(3)
 

Other debt

  
 
2.1
  
 
 
2.0
  
  

 

 

   

 

 

 

Total debt

  
 
752.1
(5)
 
 
 
807.4
(5)
 

Total equity

  
 
328.0
  
 
 
432.3
  
  

 

 

   

 

 

 

Total capitalization

  
$
1,080.1
  
 
$
1,239.7
  
  

 

 

   

 

 

 

 

(1)
Includes $15.2 million of cash of our non-guarantor subsidiaries, including PIC and the Consolidated Joint Ventures, that will not guarantee the notes.
(2)
Includes $13.3 million of cash of our non-guarantor subsidiaries, including PIC and the Consolidated Joint Ventures, that will not guarantee the notes.
(3)
On November 16, 2010, the Company and JFSCI, as borrowers, executed loan modifications and extensions to its unsecured revolving bank line of credit, unsecured private placement debt and unsecured term loans, resulting in the effective exchange for senior secured notes payable and senior secured subordinated notes payable (the “Secured Facilities”). The amount presented represents the face value of the Secured Facilities and includes $5.0 million principal amount that was forgiven in connection with the retirement of the Secured Facilities on May 10, 2011.
(4)
On May 10, 2011, the Company issued 8.625% senior secured notes in the aggregate principal amount of $750.0 million (the “Secured Notes”) and repaid the outstanding amounts under the Secured Facilities. Principal and interest paid under the Secured Facilities was $779.6 million and $2.5 million, respectively. In connection with payment of the Secured Facilities, all payable-in-kind interest, $5.0 million of principal and certain fees were waived.

 

    
In addition, of $19.1 million of then outstanding letters of credit, $4.0 million was returned and $15.1 million was paid by the Company, with $14.5 million reimbursed by JFSCI for its share of the letters of credit paid by the Company.

 

    
Concurrent with the payoff of the Secured Facilities, an $88.4 million loss on debt extinguishment was recognized for the $65.0 million write-off of the Secured Facilities discount and the $23.4 million write-off of prepaid professional and loan fees incurred in connection with the Secured Facilities.

 

(5)
Total debt does not include outstanding letters of credit.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER INFORMATION

The following table sets forth our selected historical consolidated financial data at and for the years ended December 31, 2011, 2010, 2009, 2008 and 2007. The selected historical consolidated financial data for the years ended December 31, 2011, 2010 and 2009 are derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The selected historical consolidated financial data for the years ended December 31, 2008 and 2007 are derived from our audited consolidated financial statements and related notes not included herein. The following selected historical consolidated financial and other information should be read in conjunction with “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our consolidated financial statements included elsewhere in this prospectus.

 

 
  
Years Ended December 31,
 
 
  
2011
 
 
2010
 
 
2009
 
 
2008
 
 
2007
 

Consolidated Statements of Operations:

  
 
 
 
 

Revenues

  
$
587,770
  
 
$
639,566
  
 
$
611,463
  
 
$
1,078,330
  
 
$
1,919,393
  

Cost of sales

  
 
(515,578
 
 
(609,097
 
 
(986,206
 
 
(1,317,642
 
 
(2,174,158
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

  
 
72,192
  
 
 
30,469
  
 
 
(374,743
 
 
(239,312
 
 
(254,765

Selling expenses

  
 
(45,251
 
 
(46,665
 
 
(48,949
 
 
(98,537
 
 
(152,126

General and administrative expenses

  
 
(37,374
 
 
(32,440
 
 
(29,459
 
 
(64,832
 
 
(79,781

Equity in (loss) income from joint ventures

  
 
(5,134
 
 
8,613
  
 
 
(35,089
 
 
(43,621
 
 
(27,340

Loss from disposition of joint ventures

  
 
  
 
 
  
 
 
  
 
 
(167,805
 
 
  

(Loss) gain on debt extinguishment

  
 
(88,384
 
 
  
 
 
33,104
  
 
 
  
 
 
  

Interest expense

  
 
(16,806
 
 
(8,558
 
 
  
 
 
  
 
 
  

Other income (expense), net

  
 
10,446
  
 
 
(10,201
 
 
(13,142
 
 
(30,421
 
 
10,404
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

  
 
(110,311
 
 
(58,782
 
 
(468,278
 
 
(644,528
 
 
(503,608

Income tax benefit (expense)

  
 
3,069
  
 
 
3,567
  
 
 
45,218
  
 
 
35,011
  
 
 
(52,474
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  
 
(107,242
 
 
(55,215
 
 
(423,060
 
 
(609,517
 
 
(556,082

Less: Net (income) loss attributable to non-controlling interests

  
 
(7,143
 
 
(4,874
 
 
30,717
  
 
 
14,802
  
 
 
8,912
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to SHLP

  
$
(114,385
 
$
(60,089
 
$
(392,343
 
$
(594,715
 
$
(547,170
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Balance Sheet Information (at end of year):

  
 
 
 
 

Cash and cash equivalents, restricted cash, and investments

  
$
314,512
  
 
$
190,391
  
 
$
287,989
  
 
$
266,656
  
 
$
244,297
  

Inventory

  
 
783,810
  
 
 
800,029
  
 
 
903,504
  
 
 
1,584,570
  
 
 
2,020,086
  

Total assets

  
 
1,328,116
  
 
 
1,414,886
  
 
 
1,618,760
  
 
 
2,226,115
  
 
 
2,768,600
  

Total debt

  
 
752,056
  
 
 
730,005
  
 
 
745,017
  
 
 
858,538
  
 
 
685,227
  

Total equity

  
 
328,003
  
 
 
432,113
  
 
 
481,206
  
 
 
884,383
  
 
 
1,490,684
  

Other Consolidated Financial Information:

  
 
 
 
 

Interest incurred(1)

  
$
69,961
  
 
$
62,290
  
 
$
59,512
  
 
$
58,912
  
 
$
79,488
  

Depreciation and amortization

  
 
11,296
  
 
 
11,510
  
 
 
10,367
  
 
 
23,869
  
 
 
20,966
  

Other Consolidated Information:

  
 
 
 
 

Homes sales orders (units)(2)

  
 
1,365
  
 
 
1,316
  
 
 
1,708
  
 
 
2,114
  
 
 
3,275
  

Homes closed (units)(3)

  
 
1,348
  
 
 
1,489
  
 
 
1,446
  
 
 
2,463
  
 
 
3,672
  

Average selling price of homes closed

  
$
423
  
 
$
416
  
 
$
404
  
 
$
431
  
 
$
481
  

Backlog at end of year (units)(4)

  
 
461
  
 
 
406
  
 
 
579
  
 
 
321
  
 
 
665
  

Backlog at end of year (sales value)

  
$
184,730
  
 
$
167,319
  
 
$
241,458
  
 
$
140,917
  
 
$
312,942
  

 

(1)
Interest incurred is interest accrued on debt, whether or not paid and independent of its capitalization treatment. Interest incurred includes debt issuance costs, modification fees and waiver fees when amortized as interest expense or capitalized as interest. Interest incurred is generally capitalized to inventory but is expensed when assets that qualify for interest capitalization do not exceed debt.
(2)
Homes sales orders are contracts executed with homebuyers to purchase homes, net of cancellations.
(3)
A home is closed when all escrow conditions are met, including delivery of the home, title passage and appropriate consideration is received and collection of associated receivables, if any, is reasonably assured. Revenue and cost of sales for a home are recognized at date of closing.
(4)
Backlog represents homes sold under sales contract but not closed.

 

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THE EXCHANGE OFFER

Purpose of the Exchange Offer

This exchange offer is being made pursuant to the registration rights agreement we entered into with the initial purchasers of the outstanding notes on May 10, 2011. The summary of the registration rights agreement contained herein does not purport to be complete and is qualified in its entirety by reference to the registration rights agreement. A copy of the registration rights agreement is filed as an exhibit to the registration statement of which this prospectus forms a part. Each broker-dealer receiving exchange notes for its own account in exchange for outstanding notes, where such exchange notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge it will deliver a prospectus in connection with any resale of such exchange notes. See “Plan of Distribution.”

Terms of the Exchange Offer; Expiration Time

This prospectus and the accompanying letter of transmittal together constitute the exchange offer. Subject to the terms and conditions in this prospectus and the letter of transmittal, we will accept for exchange outstanding notes that are validly tendered at or before the expiration time and are not validly withdrawn as permitted below. The expiration time for the exchange offer is midnight, New York City time, on May 3, 2012, or such later date and time to which we, in our sole discretion, extend the exchange offer.

We expressly reserve the right, in our sole discretion:

 

 
 

to extend the expiration time;

 

 
 

if any of the conditions set forth below under “—Conditions to the Exchange Offer” has not been satisfied, to terminate the exchange offer and not accept any outstanding notes for exchange; and

 

 
 

to amend the exchange offer in any manner.

We will give written notice of any extension, delay, non-acceptance, termination or amendment as promptly as practicable by a public announcement, and in the case of an extension, no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration time. For a material change in the exchange offer, including the waiver of a material condition, we will extend the offer period if necessary so at least five business days remain in the exchange offer following notice of the material change.

During an extension, all outstanding notes previously tendered will remain subject to the exchange offer and may be accepted for exchange by us, upon expiration of the exchange offer, unless validly withdrawn.

Each broker-dealer receiving exchange notes for its own account in exchange for outstanding notes, where such outstanding notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge it will deliver a prospectus in connection with any resale of such exchange notes. See “Plan of Distribution.”

How to Tender Outstanding Notes for Exchange

Only a record holder of outstanding notes may tender in the exchange offer. When the holder of outstanding notes tenders and we accept outstanding notes for exchange, a binding agreement between us and the tendering holder is created, subject to the terms and conditions in this prospectus and the accompanying letter of transmittal. Except as set forth below, a holder of outstanding notes desiring to tender outstanding notes for exchange must, at or prior to the expiration time cause an agent’s message to be transmitted by The Depository Trust Company (DTC) to the exchange agent at the address set forth below under the heading “—The Exchange Agent,” and the exchange agent must receive, at or prior to the expiration time, a confirmation of the book-entry transfer of the outstanding notes being tendered into the exchange agent’s account at DTC, along with the agent’s message.

 

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The term “agent’s message” means a message that:

 

 
 

is transmitted by DTC;

 

 
 

is received by the exchange agent and forms a part of a book-entry transfer;

 

 
 

states that DTC has received an express acknowledgement that the tendering holder has received and agrees to be bound by, and makes each of the representations and warranties contained in, the letter of transmittal; and

 

 
 

states that we may enforce the letter of transmittal against such holder.

By transmitting an agent’s message, you will not be required to deliver a letter of transmittal to the exchange agent. However, you will be bound by the terms of the letter of transmittal just as if you had signed it.

The method of delivery of the outstanding notes, the agent’s message and all other required documents to the exchange agent is at the election and sole risk of the holder. In all cases, you should allow sufficient time to assure timely delivery. No letters of transmittal or outstanding notes should be sent directly to us.

We will determine in our sole discretion all questions as to the validity, form and eligibility (including time of receipt) of outstanding notes tendered for exchange and all other required documents. We reserve the absolute right to:

 

 
 

reject any and all tenders of any outstanding note not validly tendered;

 

 
 

refuse to accept any outstanding note if, in our judgment or the judgment of our counsel, acceptance of the outstanding note may be deemed unlawful;

 

 
 

waive any defects or irregularities or conditions of the exchange offer; and

 

 
 

determine the eligibility of any holder who seeks to tender outstanding notes in the exchange offer.

Our determinations under, and of the terms and conditions of, the exchange offer, including the letter of transmittal and the instructions to it, or as to any questions with respect to the tender of any outstanding notes, will be final and binding on all parties. To the extent we waive any conditions to the exchange offer, we will waive such conditions as to all outstanding notes. Holders must cure any defects and irregularities in connection with tenders of outstanding notes for exchange within such reasonable period of time as we will determine, unless we waive such defects or irregularities. Neither we, the exchange agent nor any other person will be under any duty to give notification of any defect or irregularity with respect to any tender of outstanding notes for exchange, nor will any of us incur any liability for failure to give such notification.

If you beneficially own outstanding notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your outstanding notes in the exchange offer, you should contact the registered holder promptly and instruct it to tender on your behalf.

Each broker-dealer that receives exchange notes for its own account in exchange for outstanding notes, where such exchange notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. See “Plan of Distribution.”

WE MAKE NO RECOMMENDATION TO THE HOLDERS OF THE OUTSTANDING NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY PORTION OF THEIR OUTSTANDING NOTES IN THE EXCHANGE OFFER. IN ADDITION, WE HAVE NOT AUTHORIZED ANYONE TO MAKE ANY SUCH RECOMMENDATION. HOLDERS OF THE OUTSTANDING NOTES MUST MAKE THEIR OWN DECISION AS TO WHETHER TO TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OUTSTANDING NOTES TO TENDER, AFTER READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND CONSULTING WITH THEIR ADVISERS, IF ANY, BASED ON THEIR FINANCIAL POSITIONS AND REQUIREMENTS.

 

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Book-Entry Transfers

Any financial institution that is a participant in DTC’s system must make book-entry delivery of outstanding notes by causing DTC to transfer the outstanding notes into the exchange agent’s account at DTC in accordance with DTC’s Automated Tender Offer Program, known as ATOP. Such participant should transmit its acceptance to DTC at or prior to the expiration time. DTC will verify such acceptance, execute a book-entry transfer of the tendered outstanding notes into the exchange agent’s account at DTC and then send to the exchange agent confirmation of such book-entry transfer. The confirmation of such book-entry transfer will include an agent’s message. An agent’s message must be transmitted to and received by the exchange agent at the address set forth below under “—The Exchange Agent” at or prior to the expiration time of the exchange offer.

Withdrawal Rights

You may withdraw tenders of your outstanding notes at any time prior to the expiration time.

For a withdrawal to be effective, a written notice of withdrawal, by facsimile or by mail, must be received by the exchange agent, at the address set forth below under “—The Exchange Agent,” prior to the expiration time. Any such notice of withdrawal must:

 

 
 

specify the name of the person having tendered the outstanding notes to be withdrawn;

 

 
 

identify the outstanding notes to be withdrawn, including the principal amount of such outstanding notes; and

 

 
 

specify the name and number of the account at DTC to be credited with the withdrawn outstanding notes and otherwise comply with the procedures of DTC.

We will determine all questions as to the validity, form and eligibility (including time of receipt) of such notices and our determination will be final and binding on all parties. Any tendered outstanding notes validly withdrawn will be deemed not to have been validly tendered for exchange for purposes of the exchange offer. Properly withdrawn notes may be re-tendered by following one of the procedures described under “—How to Tender Outstanding Notes for Exchange” above at any time at or prior to the expiration time.

Acceptance of Outstanding Notes for Exchange; Delivery of Exchange Notes

All of the conditions to the exchange offer must be satisfied or waived at or prior to the expiration of the exchange offer. Promptly following the expiration time we will accept for exchange all outstanding notes validly tendered and not validly withdrawn as of such date. We will promptly issue exchange notes for all validly tendered outstanding notes. For purposes of the exchange offer, we will be deemed to have accepted validly tendered outstanding notes for exchange when, as and if we have given oral or written notice to the exchange agent, with written confirmation of any oral notice to be given promptly thereafter. See “—Conditions to the Exchange Offer” for a discussion of the conditions that must be satisfied before we accept any outstanding notes for exchange.

For each outstanding note accepted for exchange, the holder will receive an exchange note registered under the Securities Act having a principal amount equal to, and in the denomination of, that of the surrendered outstanding note. Holders whose outstanding notes are exchanged for exchange notes will not receive a payment in respect of interest accrued but unpaid on such outstanding notes from the most recent interest payment date up to but excluding the settlement date. Instead, interest on the exchange notes received in exchange for such outstanding notes will (i) accrue from the last date on which interest was paid on such outstanding notes and (ii) accrue at the same rate as and be payable on the same dates as interest was payable on such outstanding notes. Accordingly, registered holders of exchange notes that are outstanding on the relevant record date for the first interest payment date following the consummation of the exchange offer will receive interest accruing from the most recent date through which interest has been paid on the outstanding notes. However, if any interest

 

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payment occurs prior to the settlement date on any outstanding notes already tendered for exchange in the exchange offer, the holder of such outstanding notes will be entitled to receive such interest payment. Outstanding notes that we accept for exchange will cease to accrue interest from and after the date of consummation of the exchange offer.

If we do not accept any tendered outstanding notes, or if a holder submits outstanding notes for a greater principal amount than the holder desires to exchange, we will return such unaccepted or non-exchanged outstanding notes without cost to the tendering holder. Such non-exchanged outstanding notes will be credited to an account maintained with DTC. We will have such non-exchanged outstanding notes credited to DTC promptly after the withdrawal, rejection of tender or termination of the exchange offer, as applicable.

Conditions to the Exchange Offer

The exchange offer is not conditioned upon the tender of any minimum principal amount of outstanding notes. Notwithstanding any other provision of the exchange offer, or any extension of the exchange offer, we will not be required to accept for exchange, or to issue exchange notes in exchange for, any outstanding notes and may terminate or amend the exchange offer, by oral (promptly confirmed in writing) or written notice to the exchange agent or by a timely press release, if at any time before the expiration of the exchange offer, any of the following conditions exist:

 

 
 

any action or proceeding is instituted or threatened in any court or by or before any governmental agency challenging the exchange offer or that we believe might be expected to prohibit or materially impair our ability to proceed with the exchange offer;

 

 
 

any stop order is threatened or in effect with respect to either (1) the registration statement of which this prospectus forms a part or (2) the qualification of the Indenture governing the notes under the Trust Indenture Act of 1939, as amended;

 

 
 

any law, rule or regulation is enacted, adopted, proposed or interpreted that we believe might be expected to prohibit or impair our ability to proceed with the exchange offer or to materially impair the ability of holders generally to receive freely tradable exchange notes in the exchange offer. See “—Consequences of Failure to Exchange Outstanding Notes”;

 

 
 

any change or a development involving a prospective change in our business, properties, assets, liabilities, financial condition, operations or results of operations taken as a whole, that is or may be adverse to us;

 

 
 

any declaration of war, armed hostilities or other similar international calamity directly or indirectly involving the United States, or the worsening of any such condition that existed at the time that we commence the exchange offer; or

 

 
 

we become aware of facts that, in our reasonable judgment, have or may have adverse significance with respect to the value of the outstanding notes or the exchange notes to be issued in the exchange offer.

Accounting Treatment

For accounting purposes, we will not recognize gain or loss upon the issuance of the exchange notes for outstanding notes.

Fees and Expenses

We will not make any payment to brokers, dealers, or others soliciting acceptance of the exchange offer except for reimbursement of mailing expenses. We will pay the cash expenses to be incurred in connection with the exchange offer, including:

 

 
 

SEC registration fees;

 

 
 

fees and expenses of the exchange agent and trustee;

 

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our accounting and legal fees;

 

 
 

printing fees; and

 

 
 

related fees and expenses.

Transfer Taxes

Holders who tender their outstanding notes for exchange will not be obligated to pay any transfer taxes in connection with the exchange. If, however, exchange notes issued in the exchange offer are to be delivered to, or are to be issued in the name of, any person other than the holder of the outstanding notes tendered, or if a transfer tax is imposed for any reason other than the exchange of outstanding notes in connection with the exchange offer, then the holder must pay these transfer taxes, whether imposed on the registered holder or on any other person. If satisfactory evidence of payment of or exemption from these taxes is not submitted with the letter of transmittal, the amount of these transfer taxes will be billed directly to the tendering holder.

The Exchange Agent

We have appointed Wells Fargo Bank, National Association as our exchange agent for the exchange offer. Questions and requests for assistance respecting the procedures for the exchange offer, requests for additional copies of this prospectus or of the letter of transmittal should be directed to the exchange agent at one of its addresses below:

Deliver to:

Wells Fargo Bank, National Association

By hand delivery or overnight courier at:

Wells Fargo Bank, National Association

Corporate Trust Operations

608 2nd Ave South

Northstar East Building-12th Floor

Minneapolis, MN 55402

or

By registered and certified mail at:

Wells Fargo Bank, National Association

Corporate Trust Operations

MAC N9303-121

P.O. Box 1517

Minneapolis, MN 55480

or

By regular mail or overnight courier at:

Wells Fargo Bank, National Association

Corporate Trust Operations

MAC N9303-121

Sixth & Marquette Avenue

Minneapolis, MN 55479

By facsimile transmission

(for eligible institutions only):

(612) 667-6282

Confirm by telephone:

(800) 344-5128

 

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Consequences of Failure to Exchange Outstanding Notes

Outstanding notes that are not tendered or are tendered but not accepted will, following the consummation of the exchange offer, continue to be subject to the provisions in the Indenture and the legend contained on the outstanding notes regarding the transfer restrictions of the outstanding notes. In general, outstanding notes, unless registered under the Securities Act, may not be offered or sold except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. We do not currently anticipate that we will take any action to register under the Securities Act or under any state securities laws the outstanding notes that are not tendered in the exchange offer or that are tendered in the exchange offer but are not accepted for exchange.

Holders of the exchange notes and any outstanding notes that remain outstanding after consummation of the exchange offer will vote together as a single series for purposes of determining whether holders of the requisite percentage of the series have taken certain actions or exercised certain rights under the indenture governing the notes.

Consequences of Exchanging Outstanding Notes

We have not requested, and do not intend to request, an interpretation by the Commission staff as to whether the exchange notes issued in the exchange offer may be offered for sale, resold or otherwise transferred by any holder without compliance with the registration and prospectus delivery provisions of the Securities Act. However, based on interpretations of the Commission staff, as set forth in a series of no-action letters issued to third parties, we believe that the exchange notes may be offered for resale, resold or otherwise transferred by holders of those exchange notes without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that:

 

 
 

the holder is not an “affiliate” of ours within the meaning of Rule 405 promulgated under the Securities Act;

 

 
 

the exchange notes issued in the exchange offer are acquired in the ordinary course of the holder’s business;

 

 
 

neither the holder, nor, to the actual knowledge of such holder, any other person receiving exchange notes from such holder, has any arrangement or understanding with any person to participate in the distribution of the exchange notes issued in the exchange offer;

 

 
 

if the holder is not a broker-dealer, the holder is not engaged in, and does not intend to engage in, a distribution of the exchange notes;

 

 
 

if such a holder is a broker-dealer, such broker-dealer will receive the exchange notes for its own account in exchange for outstanding notes;

 

 
 

such outstanding notes were acquired by such broker-dealer as a result of market-making or other trading activities; and

 

 
 

it will deliver a prospectus meeting the requirements of the Securities Act in connection with the resale of exchange notes issued in the exchange offer, and will comply with the applicable provisions of the Securities Act with respect to resale of any exchange notes. (In no-action letters issued to third parties, the Commission has taken the position that broker-dealers may fulfill their prospectus delivery requirements with respect to exchange notes (other than a resale of an unsold allotment from the original sale of outstanding notes) by delivery of the prospectus relating to the exchange offer). See “Plan of Distribution” for a discussion of the exchange and resale obligations of broker-dealers in connection with the exchange offer.

Each holder participating in the exchange offer will be required to furnish us with a written representation in the letter of transmittal that they meet each of these conditions and agree to these terms.

 

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However, because the Commission has not considered the exchange offer for our outstanding notes in the context of a no-action letter, we cannot guarantee that the Commission staff would make similar determinations with respect to this exchange offer. If our belief is not accurate and you transfer an exchange note without delivering a prospectus meeting the requirements of the federal securities laws or without an exemption from these laws, you may incur liability under the federal securities laws. We do not and will not assume, or indemnify you against, this liability.

Any holder that is an affiliate of ours or that tenders outstanding notes in the exchange offer for the purpose of participating in a distribution:

 

 
 

may not rely on the applicable interpretation of the SEC staff’s position contained in Exxon Capital Holdings Corp., SEC No-Action Letter (April 13, 1988), Morgan, Stanley & Co., Inc., SEC No-Action Letter (June 5, 1991) and Shearman & Sterling, SEC No-Action Letter (July 2, 1993); and

 

 
 

must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction.

The exchange notes issued in the exchange offer may not be offered or sold in any state unless they have been registered or qualified for sale in such state or an exemption from registration or qualification is available and complied with by the holders selling the exchange notes. We currently do not intend to register or qualify the sale of the exchange notes in any state where we would not otherwise be required to qualify.

Filing of Shelf Registration Statements

Pursuant to the registration rights agreement, we agreed, among other things, that if (1) we are not permitted to consummate the Exchange Offer because the exchange offer is not permitted by applicable law or Commission policy; (2) the exchange offer is not consummated on or prior to the date that is 360 days after the issue date of the outstanding notes; (3) the initial purchaser so requests with respect to outstanding notes not eligible to be exchanged for exchange notes in the exchange offer and held by it following consummation of the exchange offer; or (4) any holder of Transfer Restricted Securities (as defined in the registration rights agreement) notifies us in writing prior to the 20th business day following consummation of the exchange offer that: (a) it is prohibited by law or Commission policy from participating in the exchange offer; or (b) it is a broker-dealer and owns notes acquired directly from the Issuers, then we will under certain circumstances be required to file with the Commission a shelf registration statement to cover resales of notes by the holders thereof.

The Issuers will, in the event of the filing of the shelf registration statement, provide to each holder of outstanding notes copies of the prospectus that is a part of the shelf registration statement, notify each such holder when the shelf registration statement has become effective and take certain other actions as are required to permit unrestricted resales of the outstanding notes. A holder of outstanding notes that sells its notes pursuant to the shelf registration statement generally (1) will be required to be named as a selling security holder in the related prospectus and to deliver a prospectus to purchasers, (2) will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and (3) will be bound by the provisions of the registration rights agreement that are applicable to such a holder (including certain indemnification rights and obligations thereunder). In addition, holders of outstanding notes will be required to deliver information to be used in connection with the shelf registration statement and to provide comments on the shelf registration statement within the time periods set forth in the registration rights agreement to have their outstanding notes included in the shelf registration statement.

Although we intend, if required, to file the shelf registration statement, we cannot assure you that the shelf registration statement will be filed or, if filed, that it will become or remain effective.

The foregoing description is a summary of certain provisions of the registration rights agreement. It does not restate the registration rights agreement in its entirety. We urge you to read the registration rights agreement, which is an exhibit to the registration statement of which this prospectus forms a part and can also be obtained from us. See “Where You Can Find More Information.”

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

OVERVIEW

We are one of the largest private homebuilders in the United States. We design, build and market single-family detached and attached homes across various geographic markets in California, Arizona, Colorado, Washington, Nevada and Florida.

Our homebuilding business, which is responsible for nearly all of our operating results, constructs and sells single-family attached and detached homes designed to appeal to first-time, move-up and active adult 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, Orange, Riverside and San Bernardino Counties;

 

 
 

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

 

 
 

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

 

 
 

Mountain West, comprised of communities in Colorado and Washington;

 

 
 

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

 

 
 

Other, comprised of communities in Florida.

In accordance with ASC 280, Segment Reporting, 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. Results of our insurance brokerage services business are also included in our Corporate segment. Results of our traditional escrow services business, which ceased operations in 2010, are included in the 2010 and 2009 results of our Corporate segment.

KEY FACTORS INFLUENCING OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Market Conditions

Demand for housing in the United States is driven by changes in population, household income, mortgage rates, affordability, consumer confidence and employment levels. The supply of available housing varies based on a number of factors, including housing starts, inventories of existing homes available for sale and activities of speculative investors.

The downturn in the homebuilding industry is in its sixth year and is one of the most severe in U.S. history. Significant declines in new home demand, oversupply of homes and reductions in available homeowner financing continue. It is unclear when or if these trends will reverse.

Notwithstanding, in the fourth quarter of 2009, the housing market experienced some stabilization, albeit at significantly lower levels than before the current downturn, as homebuyers took advantage of declining home

 

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prices, low interest rates and temporary government incentive programs. In 2010 and 2011, job growth and home prices were relatively stable in most of our markets. In the last half of 2011, weekly consolidated homes sales per active selling community equaled or exceeded 2010 results in 23 of the last 30 weeks. Additionally, in the first 10 weeks of 2012, year-to-date consolidated home sales orders exceeded 2011, consolidated home sales orders per active selling community were 51% higher than 2011 and weekly consolidated home sales orders per active selling community exceeded 2011 in 9 of the first 10 weeks.

Operations Restructuring

Beginning in 2007, in response to weak housing market conditions, we restructured our operations to reduce costs and to improve operating efficiencies through consolidation of selected offices, the disposal of related property and equipment and workforce reduction.

In 2011, 2010 and 2009, we incurred $0.3 million, $0.7 million and $1.7 million, respectively, of restructuring costs, primarily employee severance and office vacancy. We believe this restructuring is substantially complete; however, until market conditions stabilize, we may incur additional restructuring costs.

Seasonality

Historically, the homebuilding industry experiences seasonal fluctuations. We typically experience the highest new home sales orders activity in spring and summer, although this activity is also highly dependent on the number of active selling communities, timing of new community openings and other market factors. Since it typically takes three to eight months to construct a new home, we deliver more homes in the second half of the year as spring and summer home sales orders convert to home deliveries. Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest from April to October, and the majority of cash receipts from home closings occur during the second half of the year.

Further, in contrast to this historical seasonal pattern, weakness in homebuilding market conditions during the last six years has distorted our results. Also, in 2010, expiration of the federal homebuyer tax credit impacted the timing of our construction activities and home sales order and closing volumes. Although we may experience our seasonal pattern in the future, given current market conditions, we make no assurances when or whether this pattern will recur.

Inflation

Our homebuilding segment can be adversely impacted by inflation, primarily from higher land, financing, labor, material and construction costs. In addition, inflation can lead to higher mortgage rates, which can significantly affect the affordability of mortgage financing to homebuyers. While we attempt to pass on cost increases to customers through increased prices, when weak housing market conditions exist, we are often unable to offset cost increases with higher selling prices.

Joint Venture Transactions

In April 2011, through our Consolidated Joint Venture, Shea Colorado, LLC, we entered into transactions with the joint venture partner of two Unconsolidated Joint Ventures in Colorado, in which we own a 50% ownership interest in each, SB Meridian Villages, LLC (SBMV) and TCD Bradbury LLC (TCDB). First, we assigned our membership interest in SBMV to the joint venture partner for $4.5 million, resulting in a $0.5 million gain. Second, we contributed $11.5 million cash to TCDB and received $15.4 million of land and a $0.6 million secured promissory note payable, and the joint venture partner received $12.2 million and $6.5 million of land and cash, respectively. TCDB then paid off a bank note payable that was secured by the land distributed to the TCDB partners.

 

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In August 2009, our Consolidated Joint Venture, Vistancia, LLC, located in Peoria, Arizona, contributed substantially all its land to four single member LLCs and sold 90% of its interest in these LLCs to an unrelated third party for $67.5 million, resulting in a $195.7 million pre-tax loss, of which $228.8 million, including $38.3 million of interest expense, was included in cost of sales, offset by a $33.1 million gain on debt extinguishment (the “Vistancia Transaction”). Of the $195.7 million loss, $32.1 million was attributable to non-controlling interests. In December 2011, Vistancia, LLC sold the remaining 10% interest in these single member LLCs to the joint venture partner for $14.0 million, of which $3.0 million was distributed to non-controlling interests. In addition, we realized a $5.2 million gain, of which $5.9 million was included in other income (expense), net and $0.7 million of interest expense previously capitalized on our investment was written off to equity in (loss) income from joint ventures. As a condition of sale, the Company effectively remains an 8.33% guarantor on certain community facility district bond obligations to which the Company must meet a calculated tangible net worth; otherwise, the Company is required to fund collateral to the bond issuer. At December 31, 2011, the Company exceeded the minimum tangible net worth requirement. In addition, as no other assets of Vistancia, LLC economically benefit the non-controlling interest of Vistancia, LLC, the Company accrued the remaining $3.3 million distribution payable to the non-controlling interest.

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 the Consolidated Joint Ventures. Data for our Unconsolidated Joint Ventures is presented separately where indicated. Our ownership interest in the Unconsolidated Joint Ventures varies, but is generally less than or equal to 50%.

Overview

In 2011, net loss attributable to SHLP was $114.4 million compared to $60.1 million in 2010. This increase in loss was primarily attributable to an $88.4 million loss on debt extinguishment in connection with the payoff of previously outstanding indebtedness in May 2011, $13.7 million of lower income from joint ventures (including a $2.4 million and $1.3 million impairment in 2011 and 2010, respectively), and $8.2 million of higher interest expense, partially offset by $41.7 million of higher gross margins (including a $30.6 million and $72.6 million inventory impairment in 2011 and 2010, respectively) and a $25.7 million loan modification fee write-off in 2010.

In 2010, net loss attributable to SHLP was $60.1 million compared to $392.3 million in 2009. This decrease in loss was primarily attributable to $405.2 million higher gross margin (including a $72.6 million and $219.8 million inventory impairment in 2010 and 2009, respectively, and a $228.8 million loss from the Vistancia Transaction in 2009) and $43.7 million of higher income from joint ventures (including a $1.3 million and $30.5 million impairment in 2010 and 2009, respectively), partially offset by $41.7 million of lower income tax benefit, $33.1 million gain on debt extinguishment from the Vistancia Transaction in 2009, and a $25.7 million loan modification fee write-off in 2010.

 

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Years Ended December 31,
 
 
  
2011
 
 
2010
 
 
2009
 
 
%
Change

2010-2011
 
 
%
Change

2009-2010
 
 
  
(Dollars in thousands)
 

Revenues

  
$
587,770
  
 
$
639,566
  
 
$
611,463
  
 
 
(8
)% 
 
 
5

Cost of sales

  
 
(515,578
 
 
(609,097
 
 
(986,206
 
 
(15
 
 
(38
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

  
 
72,192
  
 
 
30,469
  
 
 
(374,743
 
 
137
  
 
 
108
  

Selling expenses

  
 
(45,251
 
 
(46,665
 
 
(48,949
 
 
(3
 
 
(5

General and administrative expenses

  
 
(37,374
 
 
(32,440
 
 
(29,459
 
 
15
  
 
 
10
  

Equity in (loss) income from joint ventures

  
 
(5,134
 
 
8,613
  
 
 
(35,089
 
 
(160
 
 
125
  

(Loss) gain on debt extinguishment

  
 
(88,384
 
 
  
 
 
33,104
  
 
 
(100
 
 
(100

Interest expense

  
 
(16,806
 
 
(8,558
 
 
  
 
 
(96
 
 
(100

Other income (expense), net

  
 
10,446
  
 
 
(10,201
 
 
(13,142
 
 
202
  
 
 
22
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

  
 
(110,311
 
 
(58,782
 
 
(468,278
 
 
(88
 
 
87
  

Income tax benefit

  
 
3,069
  
 
 
3,567
  
 
 
45,218
  
 
 
(14
 
 
(92
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  
 
(107,242
 
 
(55,215
 
 
(423,060
 
 
(94
 
 
87
  

Less: Net (income) loss attributable to non-controlling interests

  
 
(7,143
 
 
(4,874
 
 
30,717
  
 
 
(47
 
 
(116
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to SHLP

  
$
(114,385
 
$
(60,089
 
$
(392,343
 
 
(90
)% 
 
 
85
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues

Revenues are derived primarily from homes closed and land sales. House and land revenues are recorded at closing. Management fees from homebuilding ventures and projects are in other homebuilding revenues. Revenues generated from financial services, corporate and PIC are in other revenues.

 

 
  
Years Ended December 31,
 
 
  
2011
 
  
2010
 
  
2009
 
  
%

Change

2010-2011
 
 
%

Change

2009-2010
 
 
  
(Dollars in thousands)
 

Revenues:

  
  
  
  
 

House revenues

  
$
570,267
  
  
$
620,683
  
  
$
587,504
  
  
 
(8
)% 
 
 
6

Land revenues

  
 
11,261
  
  
 
13,116
  
  
 
20,873
  
  
 
(14
 
 
(37

Other homebuilding revenues

  
 
4,857
  
  
 
4,640
  
  
 
2,134
  
  
 
5
  
 
 
117
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total homebuilding revenues

  
 
586,385
  
  
 
638,439
  
  
 
610,511
  
  
 
(8
 
 
5
  

Other revenues

  
 
1,385
  
  
 
1,127
  
  
 
952
  
  
 
23
  
 
 
18
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

  
$
587,770
  
  
$
639,566
  
  
$
611,463
  
  
 
(8
)% 
 
 
5
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

In 2011, total revenues were $587.8 million compared to $639.6 million in 2010. This decrease was primarily attributable to a 9% decrease in homes closed and a decrease in land revenues, partially offset by a 2% increase in the average selling price (“ASP”) of homes closed.

In 2010, total revenues were $639.6 million compared to $611.5 million in 2009. This increase was primarily attributable to a 3% increase in homes closed and a 3% increase in the ASP of homes closed, partially offset by a decrease in land revenues.

 

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Table of Contents

For the years ended December 31, 2011, 2010 and 2009, homebuilding revenues by segment were as follows:

 

 
  
Years Ended December 31,
 
 
  
2011
 
  
2010
 
  
2009
 
  
%

Change

2010-2011
 
 
%

Change

2009-2010
 
 
  
(Dollars in thousands)
 

Southern California:

  
  
  
  
 

House revenues

  
$
167,245
  
  
$
157,112
  
  
$
141,612
  
  
 
6
 
 
11

Land revenues

  
 
151
  
  
 
  
  
 
8,455
  
  
 
100
  
 
 
(100

Other homebuilding revenues

  
 
21
  
  
 
44
  
  
 
58
  
  
 
(52
 
 
(24
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total homebuilding revenues

  
$
167,417
  
  
$
157,156
  
  
$
150,125
  
  
 
7
 
 
5
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

San Diego:

  
  
  
  
 

House revenues

  
$
86,778
  
  
$
113,482
  
  
$
104,480
  
  
 
(24
)% 
 
 
9

Land revenues

  
 
66
  
  
 
112
  
  
 
  
  
 
(41
 
 
100
  

Other homebuilding revenues

  
 
12
  
  
 
  
  
 
  
  
 
100
  
 
 
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total homebuilding revenues

  
$
86,856
  
  
$
113,594
  
  
$
104,480
  
  
 
(24
)% 
 
 
9
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Northern California:

  
  
  
  
 

House revenues

  
$
107,786
  
  
$
118,872
  
  
$
100,681
  
  
 
(9
)% 
 
 
18

Land revenues

  
 
210
  
  
 
2,275
  
  
 
100
  
  
 
(91
 
 
  

Other homebuilding revenues

  
 
792
  
  
 
803
  
  
 
263
  
  
 
(1
 
 
205
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total homebuilding revenues

  
$
108,788
  
  
$
121,950
  
  
$
101,044
  
  
 
(11
)% 
 
 
21
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Mountain West:

  
  
  
  
 

House revenues

  
$
90,159
  
  
$
86,856
  
  
$
91,615
  
  
 
4
 
 
(5
)% 

Land revenues

  
 
10,564
  
  
 
10,729
  
  
 
12,318
  
  
 
(2
 
 
(13

Other homebuilding revenues

  
 
2,147
  
  
 
1,911
  
  
 
163
  
  
 
12
  
 
 
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total homebuilding revenues

  
$
102,870
  
  
$
99,496
  
  
$
104,096
  
  
 
3
 
 
(4
)% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

South West:

  
  
  
  
 

House revenues

  
$
112,254
  
  
$
136,841
  
  
$
140,824
  
  
 
(18
)% 
 
 
(3
)% 

Land revenues

  
 
270
  
  
 
  
  
 
  
  
 
100
  
 
 
  

Other homebuilding revenues

  
 
1,885
  
  
 
1,882
  
  
 
1,650
  
  
 
  
 
 
14
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total homebuilding revenues

  
$
114,409
  
  
$
138,723
  
  
$
142,474
  
  
 
(18
)% 
 
 
(3
)% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other:

  
  
  
  
 

House revenues

  
$
6,045
  
  
$
7,520
  
  
$
8,292
  
  
 
(20
)% 
 
 
(9
)% 

Land revenues

  
 
  
  
 
  
  
 
  
  
 
  
 
 
  

Other homebuilding revenues

  
 
  
  
 
  
  
 
  
  
 
  
 
 
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total homebuilding revenues

  
$
6,045
  
  
$
7,520
  
  
$
8,292
  
  
 
(20
)% 
 
 
(9
)% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

In 2011, total homebuilding revenues were $586.4 million compared to $638.4 million in 2010. This decrease was primarily attributable to a 9% decrease in homes closed, partially offset by a 2% increase in the ASP of homes closed. The net decrease in homes closed was primarily attributable to a 7% decrease in the number of average active selling communities and the federal homebuyer tax credit which stimulated higher sales orders and homes closed in 2010. The net increase in the ASP of homes closed was primarily attributable to product mix weighted toward higher-priced homes, partially offset by use of targeted price reductions and incentives to sell homes.

In the Southern California segment, homes closed and ASP of homes closed increased 3%. In the San Diego segment, homes closed and the ASP of homes closed decreased 22% and 2%, respectively. In the Northern California segment, homes closed decreased 10% and the ASP of homes closed remained unchanged. In the

 

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Mountain West segment, homes closed increased 21%, and the ASP of homes closed decreased by 14%, primarily attributable to the introduction of our SPACES product in one community in Colorado which had a lower ASP than other communities in this segment. SPACES, our newest brand, targets 25-40 year-old buyers with contemporary, practical homes that have flexible floor plans and stylish, energy efficient features at an affordable price point. In the South West segment, homes closed decreased 22%, and the ASP of homes closed increased 5%. In the Other segment, homes closed and the ASP of homes closed decreased 13% and 8%, respectively.

In 2010, total homebuilding revenues were $638.4 million compared to $610.5 million in 2009. This increase was primarily attributable to a 3% increase in homes closed and a 3% increase in the ASP of homes closed. The net increase in homes closed was primarily attributable to the federal homebuyer tax credit which stimulated higher sales orders and homes closed in 2010. The net increase in the ASP of homes closed was primarily attributable to product mix weighted toward higher-priced homes, partially offset by use of targeted price reductions and incentives to sell homes.

In the Southern California and Northern California segments, homes closed increased 4% and 9%, respectively, and the ASP of homes closed increased 8% and 10%, respectively. In the San Diego and Mountain West segments, homes closed increased 14% and 2%, respectively, and the ASP of homes closed decreased 5% and 8%, respectively. In the South West segment, homes closed decreased 3%, and the ASP of homes closed remained unchanged. In the Other segment, homes closed and ASP of homes closed decreased 3% and 6%, respectively.

For the years ended December 31, 2011, 2010 and 2009, total homes closed by segment were as follows:

 

 
  
Years Ended December 31,
 
 
  
2011
 
  
2010
 
  
2009
 
  
%

Change

2010-2011
 
 
%

Change

2009-2010
 

Homes closed:

  
  
  
  
 

Southern California

  
 
313
  
  
 
303
  
  
 
292
  
  
 
3
 
 
4

San Diego

  
 
172
  
  
 
220
  
  
 
193
  
  
 
(22
 
 
14
  

Northern California

  
 
215
  
  
 
238
  
  
 
219
  
  
 
(10
 
 
9
  

Mountain West

  
 
215
  
  
 
177
  
  
 
174
  
  
 
21
  
 
 
2
  

South West

  
 
406
  
  
 
520
  
  
 
536
  
  
 
(22
 
 
(3

Other

  
 
27
  
  
 
31
  
  
 
32
  
  
 
(13
 
 
(3
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total consolidated

  
 
1,348
  
  
 
1,489
  
  
 
1,446
  
  
 
(9
 
 
3
  

Unconsolidated Joint Ventures

  
 
107
  
  
 
166
  
  
 
276
  
  
 
(36
 
 
(40
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total homes closed

  
 
1,455
  
  
 
1,655
  
  
 
1,722
  
  
 
(12
)% 
 
 
(4
)% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

For the years ended December 31, 2011, 2010 and 2009, ASP of homes closed by segment was as follows:

 

 
  
Years Ended December 31,
 
 
  
2011
 
  
2010
 
  
2009
 
  
%

Change

2010-2011
 
 
%

Change

2009-2010
 

ASP of homes closed:

  
  
  
  
 

Southern California

  
$
534,329
  
  
$
516,816
  
  
$
478,419
  
  
 
3
 
 
8

San Diego

  
 
504,523
  
  
 
515,827
  
  
 
541,347
  
  
 
(2
 
 
(5

Northern California

  
 
501,330
  
  
 
499,462
  
  
 
453,518
  
  
 
  
 
 
10
  

Mountain West

  
 
419,343
  
  
 
485,229
  
  
 
526,523
  
  
 
(14
 
 
(8

South West

  
 
276,487
  
  
 
263,156
  
  
 
262,731
  
  
 
5
  
 
 
  

Other

  
 
223,889
  
  
 
242,581
  
  
 
259,125
  
  
 
(8
 
 
(6
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total consolidated

  
 
423,046
  
  
 
416,007
  
  
 
404,339
  
  
 
2
  
 
 
3
  

Unconsolidated Joint Ventures

  
 
306,626
  
  
 
308,575
  
  
 
317,331
  
  
 
(1
 
 
(3
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total ASP of homes closed

  
$
414,485
  
  
$
405,251
  
  
$
390,449
  
  
 
2
 
 
4
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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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 years ended December 31, 2011, 2010 and 2009 was as follows:

 

 
 
Years Ended December 31,
 
 
 
2011
 
 
Gross

  Margin  %  
 
 
2010
 
 
Gross

  Margin  %  
 
 
2009
 
 
Gross

  Margin  %  
 
 
 
(Dollars in thousands)
 

Gross margin

 
$
72,192
  
 
 
12.3
 
$
30,469
  
 
 
4.8
 
$
(374,743
 
 
(61.3
)% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In 2011, gross margin was $72.2 million compared to $30.5 million in 2010. This increase was primarily attributable to a $42.0 million decrease in inventory impairment. In 2011, inventory impairment was $30.6 million compared to $72.6 million in 2010. The increase in gross margin was also attributable to a 2% increase in ASP of homes closed, cost reductions and a product mix weighted to higher margin homes, partially offset by a 9% decrease in homes closed.

In 2010, gross margin was $30.5 million compared to $(374.7) million in 2009. This increase was primarily attributable to a $228.8 million loss from the Vistancia Transaction in 2009 and $147.2 million decrease in inventory impairment. In 2010, inventory impairment was $72.6 million compared to $219.8 million in 2009. In addition, the increase in gross margin was attributable to a 3% increase in homes closed and ASP of homes closed, cost reductions and a product mix weighted to higher margin homes.

Gross margin by segment for the years ended December 31, 2011, 2010 and 2009 was as follows:

 

 
  
Years Ended December 31,
 
 
  
2011
 
  
Gross

  Margin  %  
 
 
2010
 
 
Gross

  Margin  %  
 
 
2009
 
 
Gross

  Margin  %  
 
 
  
(Dollars in thousands)
 

Gross margin:

  
  
 
 
 
 

Southern California

  
$
25,072
  
  
 
15.0
 
$
(31,725
 
 
(20.2
)% 
 
$
(87,017
 
 
(58.0
)% 

San Diego

  
 
6,389
  
  
 
7.4
  
 
 
23,191
  
 
 
20.4
  
 
 
(3,882
 
 
(3.7

Northern California

  
 
5,990
  
  
 
5.5
  
 
 
18,286
  
 
 
15.0
  
 
 
(38,662
 
 
(38.3

Mountain West

  
 
17,254
  
  
 
16.8
  
 
 
2,060
  
 
 
2.1
  
 
 
(16,174
 
 
(15.5

South West

  
 
15,900
  
  
 
13.9
  
 
 
17,392
  
 
 
12.5
  
 
 
(218,800
 
 
(153.6

Other

  
 
202
  
  
 
3.3
  
 
 
138
  
 
 
1.8
  
 
 
(9,082
 
 
(109.5

Corporate

  
 
1,385
  
  
 
  
 
 
1,127
  
 
 
  
 
 
(1,126
 
 
  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross margin

  
$
72,192
  
  
 
12.3
 
$
30,469
  
 
 
4.8
 
$
(374,743
 
 
(61.3
)% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Impairments were primarily attributable to lower home prices driven by increased incentives and price reductions required in response to weak demand and economic conditions, including record foreclosures, high unemployment, lower consumer confidence and tighter mortgage credit standards. Since the fourth quarter of 2009, as the housing market experienced some stabilization, albeit at significantly lower levels than before the current downturn, impairments have significantly diminished. Impairment by segment and type for the years ended December 31, 2011, 2010 and 2009 were as follows:

 

 
  
Years Ended December 31,
 
 
  
2011
 
  
2010
 
  
2009
 
  
%

Change

 2010-2011 
 
 
%

Change

 2009-2010 
 
 
  
(Dollars in thousands)
 

Impairment by segment:

  
  
  
  
 

Southern California

  
$
7,189
  
  
$
51,099
  
  
$
102,618
  
  
 
(86
)% 
 
 
(50
)% 

San Diego

  
 
9,684
  
  
 
  
  
 
21,281
  
  
 
100
  
 
 
(100

Northern California

  
 
13,875
  
  
 
81
  
  
 
71,481
  
  
 
  
 
 
  

Mountain West

  
 
  
  
 
17,366
  
  
 
30,786
  
  
 
(100
 
 
(44

South West

  
 
2,227
  
  
 
5,345
  
  
 
14,874
  
  
 
(58
 
 
(64

Other

  
 
  
  
 
  
  
 
9,266
  
  
 
  
 
 
(100
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total impairment

  
$
32,975
  
  
$
73,891
  
  
$
250,306
  
  
 
(55
)% 
 
 
(70
)% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Impairment by type:

  
  
  
  
 

Inventory

  
$
30,600
  
  
$
72,629
  
  
$
219,846
  
  
 
(58
)% 
 
 
(67
)% 

Joint venture

  
 
2,375
  
  
 
1,262
  
  
 
30,460
  
  
 
88
  
 
 
(96
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total impairment

  
$
32,975
  
  
$
73,891
  
  
$
250,306
  
  
 
(55
)% 
 
 
(70
)% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Selling, General and Administrative Expense

Selling, general and administrative expense for the years ended December 31, 2011, 2010 and 2009 was as follows:

 

 
  
Years Ended December 31,
 
 
  
2011
 
 
2010
 
 
2009
 
 
%

Change

 2010-2011 
 
 
%

Change

 2009-2010 
 
 
  
(Dollars in thousands)
 

Total homebuilding revenues

  
$
586,385
  
 
$
638,439
  
 
$
610,511
  
 
 
(8
)% 
 
 
5
  
 
 
 
 

Selling expense

  
$
45,251
  
 
$
46,665
  
 
$
48,949
  
 
 
(3
)% 
 
 
(5
)% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total homebuilding revenues

  
 
7.7
 
 
7.3
 
 
8.0
 
 
6
 
 
(9
)% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expense

  
$
37,374
  
 
$
32,440
  
 
$
29,459
  
 
 
15
 
 
10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total homebuilding revenues

  
 
6.4
 
 
5.1
 
 
4.8
 
 
25
 
 
6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total selling, general and administrative expense

  
$
82,625
  
 
$
79,105
  
 
$
78,408
  
 
 
4
 
 
1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total homebuilding revenues

  
 
14.1
 
 
12.4
 
 
12.8
 
 
14
 
 
(3
)% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling Expense

In 2011, selling expense was $45.3 million compared to $46.7 million in 2010. This decrease was primarily attributable to an 8% decrease in homebuilding revenues and a corresponding decrease in direct selling costs.

In 2010, selling expense was $46.7 million compared to $48.9 million in 2009. This decrease was primarily attributable to continued workforce and selling and marketing expense reductions to better align our operations

 

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Table of Contents

with the weak housing market conditions, partially offset by a 5% increase in homebuilding revenues and a corresponding increase in direct selling costs.

General and Administrative Expense

In 2011, general and administrative expense was $37.4 million compared to $32.4 million in 2010. This increase was primarily attributable to tax consulting and tax legal fees incurred in 2011, partially offset by continued workforce and general and administrative expense reductions to better align our operations with the weak housing market conditions .

In 2010, general and administrative expense was $32.4 million compared to $29.5 million in 2009. This increase was primarily attributable to an increase in compensation costs, partially offset by continued workforce and general and administrative expense reductions to better align our operations with the weak housing market conditions.

Equity in Income (Loss) from Joint Ventures

Equity in income (loss) from joint ventures represents our share of income (loss) from Unconsolidated Joint Ventures accounted for under the equity method. Our Unconsolidated Joint Ventures are generally involved in real property development.

In 2011, equity in income (loss) from joint ventures was $(5.1) million compared to $ 8.6 million in 2010. This decrease was primarily attributable to a $2.4 million reversal of a prior accrual related to one joint venture due to the release of obligations in 2010 and $6.7 million of income related to the reallocation of income among partners in a joint venture in 2010. In 2011, these results included a $2.4 million charge for our share of Unconsolidated Joint Venture impairments compared to $1.3 million in 2010.

In 2010, equity in income (loss) from joint ventures was $8.6 million compared to $(35.1) million in 2009. This increase was primarily attributable to a $2.4 million reversal of a prior accrual related to one joint venture due to the release of obligations and $6.7 million of income related to the reallocation of income among partners in a joint venture. In 2010, these results included a $1.3 million charge for our share of Unconsolidated Joint Venture impairments compared to $30.5 million in 2009.

(Loss) Gain on Debt Extinguishment

Concurrent with the payoff of the Secured Facilities on May 10, 2011, an $88.4 million loss on debt extinguishment was recognized for the $65.0 million write-off of the Secured Facilities discount, which increased the Secured Facilities principal to its face value, $779.6 million, and the $23.4 million write-off of prepaid professional and loan fees incurred in connection with the Secured Facilities.

In 2009, a $33.1 million gain on debt extinguishment was recognized from the Vistancia Transaction.

Interest Expense

Interest expense is interest incurred and not capitalized. In 2011 and 2010, most interest incurred was capitalized to inventory and some expensed. In 2009, all interest incurred was capitalized to inventory.

In 2011, interest expense was $16.8 million compared to $8.6 million in 2010. This increase was primarily attributable to higher interest incurred and fewer assets qualifying for interest capitalization. The increase in interest incurred was a result of a higher effective interest rate on our long-term notes payable and increased amortization of loan modification fees.

In 2010, interest expense was $8.6 million compared to none in 2009. This increase was primarily attributable to higher interest incurred and fewer assets qualifying for interest capitalization. The increase in interest incurred was a result of a higher effective interest rate on our long-term notes payable and increased amortization of loan modification fees.

 

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Table of Contents

Other Income (Expense), Net

Other income (expense), net is comprised of interest income, loan modification fee write-offs, gains (losses) on investments and other income (expense). Interest income is primarily from related party notes receivables.

For the years ended December 31, 2011, 2010 and 2009, interest and other income (expense), net was as follows:

 

 
  
Years Ended December 31,
 
 
  
2011
 
  
2010
 
 
2009
 
 
%

Change

 2010-2011 
 
 
%

Change

 2009-2010 
 
 
  
(Dollars in thousands)
 

Other income (expense), net:

  
  
 
 
 

Interest income

  
$
3,550
  
  
$
4,699
  
 
$
11,289
  
 
 
(25
)% 
 
 
(58
)% 

Loan modification fee recovery (write-off)

  
 
645
  
  
 
(25,747
 
 
  
 
 
103
  
 
 
(100

Gain on sale of investments

  
 
566
  
  
 
4,664
  
 
 
2,839
  
 
 
(88
 
 
64
  

Other income (expense)

  
 
5,685
  
  
 
6,183
  
 
 
(27,270
 
 
(8
 
 
123
  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

  
$
10,446
  
  
$
(10,201
 
$
(13,142
 
 
202
 
 
22
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

In 2011, other income (expense), net was $10.4 million compared to $(10.2) million in 2010. This increase in income was primarily attributable to a $25.7 million write-off in 2010 of professional fees in connection with the modification and extension of our Secured Facilities and a $5.9 million gain on the sale of Vistancia LLC’s 10% interest in an unconsolidated joint venture, partially offset by a $4.1 million decrease in gain on sale of investments.

In 2010, other income (expense), net was $(10.2) million compared to $(13.1) million in 2009. This increase in income was primarily attributable to a $25.7 million write-off in 2010 of professional fees in connection with the modification and extension of our Secured Facilities and $6.6 million of lower interest income from maintaining lower cash balances in interest bearing accounts, partially offset by an $18.4 million write-off of accounts receivable and other costs in 2009 and $15.1 million of income from the deferred gain amortization related to the PIC Transaction in 2010.

Income Tax Benefit

At December 31, 2011 and 2010, net deferred tax assets were $38.2 million and $48.8 million, respectively, which primarily related to available loss carryforwards, inventory and marketable securities impairments, housing and land inventory basis differences and income recognition timing differences from our investment in joint ventures. The $10.6 million decrease in the deferred tax asset from December 31, 2010 primarily related to a $9.5 million write-off of deferred tax assets that cannot be utilized. At December 31, 2011 and 2010, deferred tax asset valuation fully reserved the net deferred tax asset due to the inherent uncertainty of future income. To the extent eligible taxable income exists, which allows tax benefits of these deferred tax assets to be utilized, the effective tax rate may be reduced, subject to certain limitations under Internal Revenue Code Section 382, by reducing the valuation allowance and offsetting a portion of taxable income. However, it is unlikely all net deferred tax assets will be realized.

In 2011, income tax benefit was $3.1 million compared to $3.6 million in 2010. This decrease was primarily attributable to decreased losses of SHI and its subsidiaries compared to prior year and the reduction of certain deferred tax assets previously reserved.

In 2010, income tax benefit was $3.6 million compared to $45.2 million in 2009. This decrease was primarily attributable to decreased losses of SHI and its subsidiaries compared to prior year and the reduction of certain deferred tax assets previously reserved.

 

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Net (Income) Loss Attributable to Non-Controlling Interests

We consolidate joint ventures when we have a controlling interest or, absent a controlling interest, can substantially influence its business. Net (income) loss attributable to non-controlling interests represents the share of income attributable to the parties having a non-controlling interest.

In 2011, net (income) loss attributable to non-controlling interests was $(7.1) million compared to $(4.9) million in 2010. In 2011, these results included income allocated to our non-controlling partner in the sale of Vistancia LLC’s interest in an unconsolidated joint venture. In 2010, these results included a $(6.5) million charge related to non-realization of a non-controlling interest’s deficit capital balance, partially offset by $1.9 million of impairment charges attributable to non-controlling interests.

In 2010, net (income) loss attributable to non-controlling interests was $(4.9) million compared to $30.7 million in 2009. In 2010, these results included a $(6.5) million charge related to non-realization of a non-controlling interest’s deficit capital balance, partially offset by $1.9 million of impairment charges attributable to non-controlling interests. In 2009, these results included a $32.1 million charge from the Vistancia Transaction.

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. Therefore, recognition of a home sales order usually represents the beginning of the home’s construction cycle. Accordingly, homebuilding construction expenditures and, ultimately, homebuilding revenues and cash flow, are dependent on the timing and magnitude of home sales orders.

Active selling community is a designation of a sales office that advertises, markets and sells homes for a new home community. Sales offices in communities near the end of their sales cycle are not designated as an active selling community. 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 with a common analytical measurement. The average number of active selling communities for a particular period represents the aggregate number of active selling communities in operation at the end of each month in such period divided by the number of months in such period.

For the years ended December 31, 2011, 2010 and 2009 home sales orders, net of cancellations, were as follows:

 

 
  
Years Ended December 31,
 
 
  
2011
 
  
2010
 
  
2009
 
  
%

Change

2010 -2011
 
 
%

Change

2009-2010
 

Home sales orders, net:

  
  
  
  
 

Southern California

  
 
281
  
  
 
248
  
  
 
383
  
  
 
13
 
 
(35
)% 

San Diego

  
 
169
  
  
 
182
  
  
 
233
  
  
 
(7
 
 
(22

Northern California

  
 
221
  
  
 
211
  
  
 
272
  
  
 
5
  
 
 
(22

Mountain West

  
 
251
  
  
 
200
  
  
 
159
  
  
 
26
  
 
 
26
  

South West

  
 
411
  
  
 
445
  
  
 
642
  
  
 
(8
 
 
(31

Other

  
 
32
  
  
 
30
  
  
 
19
  
  
 
7
  
 
 
58
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total consolidated

  
 
1,365
  
  
 
1,316
  
  
 
1,708
  
  
 
4
  
 
 
(23

Unconsolidated Joint Ventures

  
 
119
  
  
 
143
  
  
 
284
  
  
 
(17
 
 
(50
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total home sales orders, net

  
 
1,484
  
  
 
1,459
  
  
 
1,992
  
  
 
2
 
 
(27
)% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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For the years ended December 31, 2011, 2010 and 2009, average active selling communities were as follows:

 

 
  
Years Ended December 31,
 
 
  
2011
 
  
2010
 
  
2009
 
  
%

Change

2010-2011
 
 
%

Change

2009-2010
 

Average number of active selling communities:

  
  
  
  
 

Southern California

  
 
12
  
  
 
13
  
  
 
17
  
  
 
(8
)% 
 
 
(24
)% 

San Diego

  
 
10
  
  
 
10
  
  
 
13
  
  
 
  
 
 
(23

Northern California

  
 
15
  
  
 
13
  
  
 
17
  
  
 
15
  
 
 
(24

Mountain West

  
 
13
  
  
 
17
  
  
 
16
  
  
 
(24
 
 
6
  

South West

  
 
23
  
  
 
26
  
  
 
28
  
  
 
(12
 
 
(7

Other

  
 
3
  
  
 
3
  
  
 
3
  
  
 
  
 
 
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total consolidated

  
 
76
  
  
 
82
  
  
 
94
  
  
 
(7
 
 
(13

Unconsolidated Joint Ventures

  
 
13
  
  
 
9
  
  
 
10
  
  
 
44
  
 
 
(10
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total average number of active selling communities

  
 
89
  
  
 
91
  
  
 
104
  
  
 
(2
)% 
 
 
(13
)% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

In 2011, consolidated home sales orders were 1,365 compared to 1,316 in 2010, and in 2011, our average number of consolidated active selling communities were 76 compared to 82 in 2010. In 2011, our consolidated home sales order per consolidated active selling community were 18.0 compared to 16.0 in 2010.

In 2010, consolidated home sales orders were 1,316 compared to 1,708 in 2009, and in 2010, our average number of consolidated active selling communities was 82 compared to 94 in 2009. In 2010, our consolidated home sales orders per consolidated active selling community were 16.0 compared to 18.2 in 2009.

Sales Order Backlog and Cancellation Rates

Sales order backlog represents homes sold and under contract to be built, but not closed. Backlog sales value is the revenue anticipated 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 and 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 can be cancelled by the buyer in certain circumstances, not all homes in backlog will result in closings.

At December 31, 2011, 2010 and 2009, sales order backlog was as follows:

 

 
  
Homes
 
  
Sales Value
 
  
ASP
 
 
  
December 31,
 
  
December 31,
 
  
December 31,
 
 
  
2011
 
  
2010
 
  
2009
 
  
2011
 
  
2010
 
  
2009
 
  
2011
 
  
2010
 
  
2009
 
 
  
 
 
  
 
 
  
 
 
  

(In thousands)

 
  

(In thousands)

 

Backlog:

  
  
  
  
  
  
  
  
  

Southern California

  
 
59
  
  
 
76
  
  
 
131
  
  
$
26,714
  
  
$
38,482
  
  
$
67,562
  
  
$
453
  
  
$
506
  
  
$
516
  

San Diego

  
 
39
  
  
 
42
  
  
 
80
  
  
 
18,837
  
  
 
22,692
  
  
 
41,940
  
  
 
483
  
  
 
540
  
  
 
524
  

Northern California

  
 
105
  
  
 
76
  
  
 
103
  
  
 
51,270
  
  
 
35,958
  
  
 
49,441
  
  
 
488
  
  
 
473
  
  
 
480
  

Mountain West

  
 
95
  
  
 
59
  
  
 
36
  
  
 
44,489
  
  
 
29,071
  
  
 
20,895
  
  
 
468
  
  
 
493
  
  
 
580
  

South West

  
 
152
  
  
 
147
  
  
 
222
  
  
 
41,309
  
  
 
39,516
  
  
 
59,669
  
  
 
272
  
  
 
269
  
  
 
269
  

Other

  
 
11
  
  
 
6
  
  
 
7
  
  
 
2,111
  
  
 
1,600
  
  
 
1,951
  
  
 
192
  
  
 
267
  
  
 
279
  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consolidated

  
 
461
  
  
 
406
  
  
 
579
  
  
 
184,730
  
  
 
167,319
  
  
 
241,458
  
  
 
401
  
  
 
412
  
  
 
417
  

Unconsolidated Joint Ventures

  
 
34
  
  
 
22
  
  
 
45
  
  
 
11,933
  
  
 
7,310
  
  
 
13,409
  
  
 
351
  
  
 
332
  
  
 
298
  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total backlog

  
 
495
  
  
 
428
  
  
 
624
  
  
$
196,663
  
  
$
174,629
  
  
$
254,867
  
  
$
397
  
  
$
408
  
  
$
408
  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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For the years ended December 31, 2011, 2010 and 2009, cancellation rates were as follows:

 

 
  
Years Ended December 31,
 
 
  
2011
 
 
2010
 
 
2009
 

Cancellation rates:

  
 
 

Southern California

  
 
21
 
 
26
 
 
21

San Diego

  
 
32
  
 
 
31
  
 
 
28
  

Northern California

  
 
18
  
 
 
15
  
 
 
16
  

Mountain West

  
 
18
  
 
 
18
  
 
 
25
  

South West

  
 
18
  
 
 
12
  
 
 
15
  

Other

  
 
18
  
 
 
12
  
 
 
42
  
  

 

 

   

 

 

   

 

 

 

Total consolidated

  
 
21
  
 
 
19
  
 
 
20
  

Unconsolidated Joint Ventures

  
 
23
  
 
 
21
  
 
 
18
  
  

 

 

   

 

 

   

 

 

 

Total cancellation rates

  
 
21
 
 
19
 
 
20
  

 

 

   

 

 

   

 

 

 

Land and Homes in Inventory

Inventory is comprised of housing projects under development, land under development, land held for future development, 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) those owned, (ii) those controlled (which includes a contractual right to purchase) or (iii) those owned or controlled through Unconsolidated Joint Ventures. The status of each lot is identified by land held for development, land under development, lots available for construction, homes under construction, completed homes and models. Homes under construction and completed homes are also classified as sold or unsold.

At December 31, 2011, 2010 and 2009, total lots owned or controlled were as follows:

 

 
 
December 31,
 
 
 
2011
 
 
2010
 
 
2009
 
 
%

Change

2010-2011
 
 
%

Change

2009-2010
 

Lots owned or controlled by segment:

 
 
 
 
 

Southern California

 
 
1,241
  
 
 
1,413
  
 
 
1,639
  
 
 
(12
)% 
 
 
(14
)% 

San Diego

 
 
774
  
 
 
868
  
 
 
683
  
 
 
(11
 
 
27
  

Northern California

 
 
3,927
  
 
 
3,443
  
 
 
3,746
  
 
 
14
  
 
 
(8

Mountain West

 
 
9,910
  
 
 
9,088
  
 
 
9,513
  
 
 
9
  
 
 
(4

South West

 
 
1,854
  
 
 
1,665
  
 
 
1,387
  
 
 
11
  
 
 
20
  

Other

 
 
56
  
 
 
83
  
 
 
114
  
 
 
(33
 
 
(27
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated

 
 
17,762
  
 
 
16,560
  
 
 
17,082
  
 
 
7
  
 
 
(3

Unconsolidated Joint Ventures

 
 
1,976
  
 
 
7,867
  
 
 
7,191
  
 
 
(75
 
 
9
  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total lots owned or controlled

 
 
19,738
  
 
 
24,427
  
 
 
24,273
  
 
 
(19
)% 
 
 
1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Lots owned or controlled by ownership type:

 
 
 
 
 

Lots owned

 
 
9,722
  
 
 
9,260
  
 
 
10,358
  
 
 
5
 
 
(11
)% 

Lots optioned or subject to contract

 
 
8,040
  
 
 
7,300
  
 
 
6,724
  
 
 
10
  
 
 
9
  

Joint venture lots

 
 
1,976
  
 
 
7,867
  
 
 
7,191
  
 
 
(75
 
 
9
  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total lots owned or controlled

 
 
19,738
  
 
 
24,427
  
 
 
24,273
  
 
 
(19
)% 
 
 
1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

At December 31, 2011, total consolidated lots owned or controlled increased 7% from December 31, 2010 and 4% from December 31, 2009. From December 31, 2010 and December 31, 2009, the increase is partially attributable to the contribution of two communities from JFSCI in May 2011 as partial pay down of the loan receivable from JFSCI. These communities were contributed to the Southern California and Northern California segments. The increase in the Mountain West segment is due to distribution of land in April 2011 from an Unconsolidated Joint Venture.

At December 31, 2011, 2010 and 2009, total homes under construction and completed homes were as follows:

 

 
  
December 31,
 
 
  
2011
 
  
2010
 
  
2009
 
  
%

Change

2010-2011
 
 
%

Change

2009-2010
 

Homes under construction:

  
  
  
  
 

Sold

  
 
225
  
  
 
194
  
  
 
348
  
  
 
16
 
 
(44
)% 

Unsold

  
 
112
  
  
 
89
  
  
 
124
  
  
 
26
  
 
 
(28
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total consolidated

  
 
337
  
  
 
283
  
  
 
472
  
  
 
19
  
 
 
(40

Unconsolidated Joint Ventures

  
 
28
  
  
 
40
  
  
 
392
  
  
 
(30
 
 
(90
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total homes under construction

  
 
365
  
  
 
323
  
  
 
864
  
  
 
13
 
 
(63
)% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Completed homes:
(a)

  
  
  
  
 

Sold
(b)

  
 
51
  
  
 
41
  
  
 
29
  
  
 
24
 
 
41

Unsold

  
 
68
  
  
 
77
  
  
 
58
  
  
 
(12
 
 
33
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total consolidated

  
 
119
  
  
 
118
  
  
 
87
  
  
 
1
  
 
 
36
  

Unconsolidated Joint Ventures

  
 
18
  
  
 
22
  
  
 
6
  
  
 
(18
 
 
267
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total completed homes

  
 
137
  
  
 
140
  
  
 
93
  
  
 
(2
)% 
 
 
51
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

 
(a) 

Excludes model homes.

 
(b) 

Sold but not closed.

Our inventory balance is comprised primarily of residential land that is in varying degrees of development and includes finished lots, land under development and land held for future development. Our business is primarily the sale of finished homes but includes acquisition and sale of lots and land in various stages of development. We frequently revise our business plan in response to market changes and as opportunities for such acquisitions and sales arise. Based on our internal projections, the expected delivery timeframes for our inventory balance at December 31, 2011 were as follows:

 

 
  
Delivery of inventory balance by period
 
 
  
Total
 
  
Less Than
1 Year
 
  
1 – 3

Years
 
  
3 – 5

Years
 
  
5 – 10

Years
 
  
After
10 Years
 
 
  
(In thousands)
 

Southern California

  
$
142,877
  
  
$
32,506
  
  
$
58,415
  
  
$
39,954
  
  
$
10,391
  
  
$
1,611
  

San Diego

  
 
105,595
  
  
 
35,382
  
  
 
55,164
  
  
 
15,049
  
  
 
  
  
 
  

Northern California

  
 
204,901
  
  
 
51,876
  
  
 
64,794
  
  
 
48,610
  
  
 
39,074
  
  
 
547
  

Mountain West

  
 
256,685
  
  
 
61,105
  
  
 
55,250
  
  
 
43,881
  
  
 
59,656
  
  
 
36,793
  

South West

  
 
71,289
  
  
 
41,245
  
  
 
23,841
  
  
 
1,807
  
  
 
1,640
  
  
 
2,756
  

Other

  
 
2,463
  
  
 
1,707
  
  
 
756
  
  
 
  
  
 
  
  
 
  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consolidated inventory

  
$
783,810
  
  
$
223,821
  
  
$
258,220
  
  
$
149,301
  
  
$
110,761
  
  
$
41,707
  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

Operating and other short-term cash liquidity needs are funded from our homebuilding operations primarily through home closings and land sales, net of the underlying expenditures to fund these operations. We do not have a revolving credit facility to fund our short-term cash liquidity needs. At December 31, 2011, cash and cash equivalents were $268.4 million, restricted cash was $13.7 million and total debt was $752.1 million, compared to cash and cash equivalents of $166.9 million, restricted cash of $11.7 million and total debt of $730.0 million at December 31, 2010. Restricted cash includes cash used as collateral for potential obligations paid by the Company’s bank, customer deposits temporarily restricted in accordance with regulatory requirements, and cash used in lieu of bonds.

Based on our financial condition, we believe our cash from operations will be sufficient to provide for our cash requirements in the next twelve months. In evaluating this sufficiency, we considered the expected cash flow to be generated by our homebuilding operations and our current cash position, compared to our anticipated cash requirements for scheduled interest payments on the Secured Notes, land purchase commitments, 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 the quick turn of assets;

 

 
 

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

 

 
 

Pre-qualification of homebuyers, timely commencement of home construction thereon and avoidance 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 that, depending on market conditions, will be available to acquire land and increase our active selling communities.

In 2009, we filed a petition with the United States Tax Court (the “Tax Court”) regarding our use of 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. We expect the Tax Court will schedule a trial for mid-2012. The resolution, either through settlement or adjudication, of this matter may require us to make payments (a) from SHI to the IRS and the applicable state taxing authorities for its income tax liability and interest and (b) from SHLP to its partners pursuant to the Tax Distribution Agreement for their liability attributable to SHLP’s income taxes and interest. We expect that our position will prevail, but in the event of a final adjudication contrary to our position, the total amount of the SHI’s payment to the IRS and applicable state taxing authorities could be up to $59 million and the required distributions to SHLP’s partners pursuant to the Tax Distribution Agreement could be up to $102 million.

The indenture governing the notes 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 in the amount of such excess. The initial Maximum CCM Payment is $70.0 million, which amount will be reduced by the amount of any payments made by SHI in connection with any resolution of our dispute with the IRS regarding our use of CCM and the amount of any payments made by SHLP on certain guarantee obligations described in the indenture. See “Description of the Notes – Limitations on Restricted Payments.” 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 governing the notes.

 

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Table of Contents

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

We are unable to extend our evaluation of the sufficiency of our liquidity beyond twelve months, and we cannot assure you 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.”

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

 

 
  
Years Ended December 31,
 
 
  
2011
 
 
2010
 
 
2009
 
 
  
(In thousands)
 

Cash provided by (used in):

  
 
 

Operating activities

  
$
38,878
  
 
$
(75,048
 
$
60,190
  

Investing activities

  
 
104,977
  
 
 
46,056
  
 
 
16,604
  

Financing activities

  
 
(42,363
 
 
(7,210
 
 
(79,339
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

  
$
101,492
  
 
$
(36,202
 
$
(2,545
  

 

 

   

 

 

   

 

 

 

Cash from Operating Activities

In 2011, cash provided by (used in) operating activities was $38.9 million compared to $(75.0) million in 2010. In 2011, cash provided by operating activities was primarily due to the sale of our inventory, which gross margin was $102.8 million (excluding impairments), and $4.4 million receipt of income tax refunds. This was offset by $71.3 million of selling, general and administrative expenses (excluding depreciation). This compares to 2010 in which cash was primarily used for an $(86.0) million insurance premium payment to JFSCI and third-party insurance carriers pursuant to a series of transactions in December 2009, whereby, through PIC, workers’ compensation, general liability and certain completed operations risks were novated or reinsured. In addition, net cash provided by the sale of our inventory, which gross margin was $103.1 million (excluding inventory impairments), offset by selling, general and administrative costs of $67.6 million (excluding depreciation) and income taxes paid of $6.9 million.

In 2010, cash provided by (used in) operating activities was $(75.0) million compared to $60.2 million in 2009. The decrease was primarily attributable to $(145.6) million of higher land acquisition and construction costs; an $(86.2) million payment of premiums to third-party insurance companies to reinsure general liability and completed operations loss exposure; $(15.3) million of loan fees and deposits in lieu of letters of credit; $(15.6) million of prepaid completed operations insurance premiums; $(10.0) million of lower income tax refunds; $(28.1) million of lower proceeds from accounts receivables, receivables from related parties and deposits; and the absence of $(67.5) million of proceeds from the Vistancia Transaction in 2009, net of a $33.1 million gain on debt extinguishment. These were partially offset by $27.9 million of higher homebuilding revenues, $93.3 million of lower payment of liabilities to related parties; $64.8 million of lower payment of accounts payable and accrued liabilities; and a $20.9 million decrease in restricted cash requirements.

 

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Cash from Investing Activities

In 2011, cash provided by (used in) investing activities was $105.0 million compared to $46.1 million in 2010. In 2011, cash provided by investing activities was primarily attributable to $107.7 million of collections on promissory notes receivables from related parties, primarily JFSCI, whereby in May 2011, concurrent with issuance of the Secured Notes, JFSCI partially paid down these promissory notes. In June and August 2011, JFSCI also made prepayments on its installment loan payable to the Company. In September 2011, we also sold fixed assets in Highlands Ranch, Colorado, comprised of three buildings and related improvements and land, for $14.4 million cash to a related party, of which $1.5 million was recorded as owners’ contributions. See “Cash from Financing Activities”, below. Further, in December 2011, through our Consolidated Joint Venture, Vistancia, LLC, we sold our remaining 10% interest in an Unconsolidated Joint Venture for $14.0 million. These proceeds were offset by $(20.2) million of purchases of available-for-sale securities and $(9.3) million of net cash contributions to Unconsolidated Joint Ventures, which were primarily used by an unconsolidated joint venture to pay off debt. In 2010, cash provided by investing activities was primarily attributable to $53.1 million of proceeds from the sale of marketable securities, which were used to partially fund payment of the insurance premiums described in Cash from Operating Activities above, and $19.3 million of collections on promissory notes from related parties. These proceeds were partially offset by $(14.6) million of net cash contributions to Unconsolidated Joint Ventures, primarily to a joint venture to paydown its debt and release the Company as a guarantor on the debt, and $(11.7) million property and equipment purchases.

In 2010, cash provided by (used in) investing activities was $46.1 million compared to $16.6 million in 2009. The increase was primarily attributable to $57.4 million of higher net proceeds from purchases and sales of marketable securities, partially offset by $(10.6) million from property and equipment purchases; $(4.5) million of net investments in joint ventures; and $(12.6) million of lower proceeds from sales of property and equipment sales.

Cash from Financing Activities

In 2011, cash provided by (used in) financing activities was $(42.4) million compared to $(7.2) million in 2010. In 2011, cash (used in) financing activities was primarily attributable to a $(20.0) million principal prepayment of the Secured Facilities in January 2011 and the $(779.6) million payoff of the Secured Facilities in May 2011, which was primarily funded by $750.0 million of Secured Notes. In addition, the Company recorded a $2.0 million owners’ contribution, of which $1.5 million represented the consideration received in excess of net book value from the sale of fixed assets to a related party and $0.5 million represented the sale of land to a related party. In 2010, cash (used in) financing activities was primarily attributable to $(25.6) million of payments on our borrowings, primarily on our Secured Facilities, offset by $5.4 million of borrowings for letters of credit presented and a $12.5 million owners’ contribution.

In 2010, cash provided by (used in) financing activities was $(7.2) million compared to $(79.3) million in 2009. The increase was primarily attributable to, in 2010, a $(25.0) million principal payment on the Secured Facilities and $5.4 million of borrowings on the revolving line of credit and, in 2009, the $(79.7) million payoff of the promissory note in the Vistancia Transaction. In addition, in 2010, the owners made a $12.5 million contribution.

 

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Notes Payable

At December 31, 2011, 2010 and 2009, notes payable were as follows:

 

 
  
December 31,
 
 
  
2011
 
  
2010
 
  
2009
 
 
  
(In thousands)
 

Notes payable:

  
  
  

Senior secured notes

  
$
750,000
  
  
$
  
  
$
  

Senior secured bank credit facility

  
 
  
  
 
215,650
  
  
 
  

Senior secured term loans

  
 
  
  
 
458,295
  
  
 
  

Senior secured subordinated notes payable

  
 
  
  
 
54,106
  
  
 
  

Other secured promissory notes

  
 
2,056
  
  
 
1,954
  
  
 
17
  

Unsecured revolving bank line of credit

  
 
  
  
 
  
  
 
220,000
  

Unsecured private placement debt

  
 
  
  
 
  
  
 
440,000
  

Unsecured term loans

  
 
  
  
 
  
  
 
85,000
  
  

 

 

    

 

 

    

 

 

 

Total notes payable

  
$
752,056
  
  
$
730,005
  
  
$
745,017
  
  

 

 

    

 

 

    

 

 

 

On November 16, 2010, SHLP and JFSCI, as borrowers, executed loan modifications and extensions to its unsecured revolving bank line of credit, unsecured private placement debt and unsecured term loans, resulting in the effective exchange of such indebtedness for senior secured notes payable and senior secured subordinated notes payable (the “Secured Facilities”). The Secured Facilities included the securitization of the notes by the Company’s assets, the release of J.F. Shea Construction, Inc., a related party, as a guarantor, and issuance of $80.0 million of additional principal.

In accordance with ASC 470, the Secured Facilities were accounted for as a debt modification, which required the $80.0 million of additional principal be recorded as interest expense over the term of the notes and the Secured Facilities be recorded net of related discount or premium. The carrying value of the Secured Facilities was unchanged as a result of the modification. Accordingly, the amortization of the discount or premium increased the effective interest rate of our Secured Facilities, and therefore interest incurred, for the year ended December 31, 2011.

On May 10, 2011, 8.625% senior secured notes were issued in the aggregate principal amount of $750.0 million (the “Secured Notes”) and the outstanding obligations of the Secured Facilities were paid. Principal and interest paid under the Secured Facilities was $779.6 million and $2.5 million, respectively. In connection with payment of the Secured Facilities, all payable-in-kind interest, $5.0 million of principal and certain fees were waived. In addition, of $19.1 million of then outstanding letters of credit, $4.0 million was returned and $15.1 million was paid by the Company, with $14.5 million reimbursed by JFSCI for its share of the letters of credit paid by the Company.

Concurrent with the payoff of the Secured Facilities, an $88.4 million loss on debt extinguishment was recognized for the $65.0 million write-off of the Secured Facilities discount, which increased the Secured Facilities principal to its face value, $779.6 million, and the $23.4 million write-off of prepaid professional and loan fees incurred in connection with the Secured Facilities.

The Secured Notes were issued pursuant to Rule 144A and Regulation S, with registration rights. The Secured Notes 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. At December 31, 2011, accrued interest was $8.1 million.

In May 2011, concurrent with issuance of the Secured Notes, through a $75.0 million cash payment and $41.5 million contribution of assets, the receivable from JFSCI was paid down by JFSCI and converted to a $38.9 million unsecured term note receivable from JFSCI, bearing 4% interest, payable in equal quarterly

 

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installments and maturing May 15, 2019. In June 2011 and August 2011, JFSCI elected to make prepayments, including interest, of $7.7 million and $6.6 million, respectively, and apply these prepayments to future installments such that JFSCI would not be required to make a payment until February 2014.

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

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