Subdivision Bonds 101 – The Basics

Similar to grading permit surety bonds, (click here for a refresher on the 3 parties of a surety bond, along with Grading Bonds 101), subdivision improvement bonds are a type of performance bond. They are required by municipalities to guaranty that public improvements associated with the development are completed such as street improvements, sidewalks, lights, curbs, gutters, drainage, etc.  While these bonds sometimes have different names such as subdivision performance and payment bonds, offsite improvement bonds, or street improvement bonds, these bonds are generally the same in that they guaranty the terms and conditions of the subdivision agreement – the contract between the municipality and the developer (principal).

The amount of the bond is set by the obligee which is based on an engineer’s cost estimate of the subdivision improvements being bonded.  When is there a claim?  A claim on a subdivision bond can be filed against the surety if the developer (even if it’s the contractor fault) fails to complete the work according to the subdivision agreement.  There is usually a labor & materials bond that accompanies these subdivision improvement bonds to protect subs and suppliers on the job.

Underwriting considerations:

•  In general, the following criteria are most important.
• Does the principal have good credit?
• Does the principal have financial resources to complete the work? Rule of thumb is that an underwriter would like to see liquid assets at least 1.5 times the amount of the bond. Example $40,000 bond would require at least $60,000 cash.
• If the principal is financing the development, does he have a construction loan in place?  And if so, will the bank provide a set aside letter?  A set aside letter is a bank’s guaranty to the surety company that it will “set aside” sufficient funds to complete the improvements that the surety company is agreeing to bond.  This ensures that if the developer is over budget, the funds are not depleted on the construction of the development, rather than the improvements.
•  Has the principal hired a reputable contractor to perform the work?
• Are the bond forms and agreement acceptable.  If there is onerous language that puts the principal, and thus the surety, in a difficult position such as long warranty periods, or soil remediation clauses, the surety will ask the principal to try and get the language amended.

For small projects such as a condo conversion or small multi-housing development, the required performance bonds are usually smaller and the surety needs less information.  For larger developments that have bond requirements in excess of $50,000, the developer should be prepared to provide business and personal financials, a questionnaire highlighted his/her experience, along with the items and underwriting considerations listed above.

Contact us at [email protected]  for more information or to apply for a subdivision bond.