A subdivision bond guarantees that builders, developers, and individual landowners complete improvements made to a subdivision property. This bond, required by local authorities, usually guarantees that the improvements will be made at the expense of the developer and principal of the bond.
Mandatory public improvements that builders, developers, and individual landowners make to their property. The local authorities require a guarantee that the landowner completes the improvements; the developer's bond guarantees it. A subdivision bond obligates the principal and the surety to complete subdivision improvements.
Current Market: The subdivision bond market is a volatile for developers regardless of size. While larger developers have been able to secure subdivision bonds with ease due to political influence and deep pockets, these days the bond market is more selective. These days the surety bond market is far more selective meaning a leaner marketplace for small developers.
Also referred to as site improvement, plat, completion, or simply performance bonds, subdivision/improvement bonds help cover the owner/developer. The key difference between subdivision bonds from regular contract performance bonds is that the owner/developer (the principal) has to pay the cost of building the bonded improvements rather than the public agency (the obligee). While not all sureties write subdivision bonds, for those that do, the underwriter will require information such as the scope of the improvements, a cost estimate, and where the money is coming from.
Many political jurisdictions have statutes that require an owner or developer of real property to post financial security to guarantee the completion of designated improvements as a precondition to granting a construction permit or to allow the recordation of a final parcel map. The guarantee posted by the owner/developer assures that they: 1) will have the financial resources to pay for all the improvements; 2) the improvements will be built as required within a specified period of time; and 3) they will maintain said improvements for a minimum of 1 year against defective workmanship and/or materials.
When an owner/developer applies for surety credit, the surety underwriter will begin by developing the usual background and financial information to make a general assessment of the owner/developer’s capacity/experience, their credit/financial and their character. They should be prepared to provide three fiscal year end financial reports on their operations, concurrent personal financial statement on all owners, resumes on key people, list of completed projects, information on banking relationships, business continuity plans, and copies of any trust, partnership, or operating agreements. Most surety companies will also have their own application form, which may ask other specific information. Once the bond underwriter is comfortable with the account in general, they will then underwrite each subdivision bond request.
Specific Bond Underwriting
The underwriter will require information such as the scope of the improvements to be made, an estimate of the cost to complete the work, and information about where the money to pay for the work is going to come from.
Scope of Work. The subdivision/improvement bond guarantees the completion of specified improvements such as grading, storm drains, utilities, curbs and gutters, streets, sidewalks. Therefore, the underwriter will want details on the work or scope of the improvements to be installed. This information will normally be spelled out in the subdivision/improvement agreement that the owner/developer signs with the public agency. When will the work start and be completed? What is the estimated cost of the improvements and the amount of the bonds? Usually engineer worksheets are available that outline the cost estimates including how the amount of the bond(s) was established. The public body will generally include some cushion or “fudge” factor to allow for possible escalation in the cost to complete the work. This increase factor is not entirely unreasonable because experience has shown that sometimes the improvements are not completed within the original time frame and the ultimate cost months or years later could be greater.
Cost of Work. The underwriter will also want some confirmation of the owner/developer’s estimate of cost to complete. The preferred method is for the developer to have firm bids or signed contracts from trade contractors to complete the work. Depending on the value of the work and/or time to complete, the surety may want the owner to secure performance and payment bonds from the trade contractor(s) to assure satisfactory performance. At first blush this may seem like double bonding but the bonds from the trade contractors run in favor of the owner/developer and not the public agency. Since the owner is obligated to complete the improvements, it is really in the owner’s interest to have this guarantee or they may find that they have to hire someone else to complete the work for more money.
Funding Source. Because the owner/developer is responsible for paying the cost of all the bonded improvements, a major underwriting concern/question is where is the money to pay for the work? The necessary funds should be set aside under an arrangement whereby they can only be used to pay for the improvements as work progresses. This can be accomplished under an escrow agreement with a lender or title company. Most often, however, the owner/developer will have secured a development loan for the overall project. The surety will then want to obtain a set-aside letter from the lender whereby an amount sufficient to cover the cost of the bonded improvements will be irrevocably set aside and held in trust for the benefit of the surety. It effectively carves out a portion of the development loan to pay for the bonded improvements. The surety will most likely have their own set-aside form.