Subdivision Bond: Site Development Bonds

What is a Subdivision Bond?

Subdivision Bond Definition - a subdivision bond, also known as a subdivision surety bond, is a specific type of off-site insurance that ensures essential construction elements in a new subdivision are completed according to contractual agreements. This obligation is placed by the regulating authority in a State upon contractors or developers of a project to help the project owner avoid undue losses caused by the contractor’s malfeasance. This is also known as plat bonds, completion bonds, site improvement bonds, or just performance bonds. Subdivision bonds provide aid for the developer or the owner if something goes wrong.

Purpose and Requirements

A subdivision bond serves as a financial guarantee that ensures compliance with local regulations and ordinances. Its primary purpose is to protect the public interest and ensure that subdivision development is done in accordance with local laws. This bond is typically required by local governments to ensure that subdivision developers meet specific requirements, such as completing public improvements, adhering to zoning regulations, and meeting building codes.

To obtain a subdivision bond, developers must meet certain requirements, including:

• Providing a completed subdivision bond application form

• Submitting proof of identity and business registration

• Offering financial statements and tax returns

• Presenting a detailed project plan and timeline

• Meeting the bond amount and premium requirements

These steps help ensure that the developer is financially capable and committed to completing the project as agreed, thereby safeguarding the interests of the public and the local government.

Subdivision Bond vs Performance Bond?

On the other hand, a performance bond, though mandated by law, is between two parties; the project owner and the developer. With a performance bond, a contractor will purchase a bond and it is the project owner who will receive the bond, not the regulating authority of the state.

Why Would You Need A Site Improvement Bond?

A site improvement bond is required for any project that a contractor wishes to undertake. The site improvement bond is used as a that the project will be completed within the indicated time frame. If the contractor fails to do so, then the Obligee will be able to file a claim with the for payment due to the inconveniences caused by the contractor. In case of a dispute, the surety will work towards solving the problem. They will not just give out the full amount of the bond.

Types of Surety Bonds for Subdivision Development

There are several types of surety bonds that can be used for subdivision development, each serving a specific purpose:

• Subdivision Bonds: These bonds guarantee the completion of public improvements, such as roads, sidewalks, and utilities, ensuring that the development meets local standards.

• Site Improvement Bonds: These bonds cover improvements to existing structures, such as sidewalks, curbs, and gutters, ensuring that the enhancements are completed as planned.

• Plat Bonds: These bonds ensure that the developer will complete the subdivision project according to the approved plat, adhering to the detailed layout and design.

• Performance Bonds: These bonds guarantee that the developer will complete the project according to the contract terms, providing assurance that the work will meet the agreed-upon standards.

• Completion Bonds: These bonds ensure that the developer will complete the project within a specified timeframe, protecting against delays that could impact the community.

• Improvement Bonds: These bonds cover the cost of improvements, such as landscaping and amenities, ensuring that the additional features are completed as promised.

It’s essential to note that the type of surety bond required may vary depending on the specific project and local regulations. Developers should consult with a surety bond provider to determine the best option for their subdivision project, ensuring that all legal and financial requirements are met.

Subdivision Bond Fees?

A Subdivision Bond's cost varies from state to state.  However, there are several factors that will be considered before you part with any cash. Your credit history, the cost of the project, the contractor's work record, credit score among other things will be used to determine how much you will be required to pay. With a good underwriter, the amount required of you will be significantly reduced. This is because you are not required to pay the full bond amount, the aforementioned factors will determine how much you pay as a premium. A good underwriter will help you get the best deals. 

What makes the Site Improvement Bond different from other bonds in construction?

When it comes to subdivision development, the onus of initiation of the land development is not on the project owner or the regulating authority, it is on the developer. The developer must be in line with the laws of the regulating authority in the state they want to operate in. They will then have to assent to a subdivision before the project is authorized by either the project owner or the regulating authority.

What Is the Process of Obtaining A Subdivision Bond?

The surety underwriter will normally ask for your credit, financial history, and financial strength. In addition to the basic information, they will also normally ask for:

Bond guarantees ensure that the developer will fulfill financial obligations for public improvements and protect the public against potential losses if the developer defaults or fails to adhere to approved permits and building codes.

Subdivision****Bond qualification depends on a variety of factors from the size of the project, experience, financial qualifications and even more. Now, when you’re requesting a bond under $100,000 dollars, those can be handled with just the finished application for consideration. When it comes to larger requests, there are many more items that need to be taken care of in order to start. These are the items:

• Developer’s / Subdivision Questionnaire: This is a basic form that provides basic information of the company, including details on the owners and other key personnel. This also includes information on: suppliers, insurance providers, history of projects completed, the type of project, banking institutions and the hired contractors who will be doing the work.

• Copy of the Subdivision Agreement and Required Bond Forms: Thes necessary forms and the subdivision agreement are provided by the obligee (the public entity). The subdivision agreement outlines the terms of agreement with whomever they have entered with the public entity. This details the work expected from the public entity for the developers/builders to successfully finish during the specified time frame.

• A Copy of the Engineer’s Estimate: This document provides a standard assessment of what the public entity’s estimate the work will cost. Typically, the bond amount is based off the estimate.

• Documentation of Ownership Structure: As part of the process of indemnification, bond companies want to confirm how the company is structured. For example, if the company is a corporation, you will need to provide a copy of the articles of incorporation. If the company is an LLC, they’ll need a copy of the LLC agreement, or if it is a partnership, a copy of the partnership agreement.

• Proof of Funding: Bonding companies will need to verify that the individual, developer, or the builder(s) has the correct amount of money set aside to complete the work on the subdivision. The proof of such funding normally consists of a letter from a reputable bank that shows the developer has arranged for a set amount of money to be tied to said project.

What Are Subdivision Bonds?

Subdivision Bonds differ from the more commonly used contract bonds that are utilized on construction projects. The owner of the project provides the subdivision bonds to the public agency to make sure the development of improvements that will be for the public but paid for by the developer or owner. Another major difference with a subdivision bond is that the owner/developer//the Principal pays for the improvements, such as the sidewalks, lighting, roads, etc, rather than the Obligee.

Subdivision surety bonds are often mandated by local laws before developers can begin subdivision work, ensuring they will fund necessary public improvements and protect the public from financial loss in case of developer default.

Grading Permit Bond: One of these can guarantee that the grading construction that whomever decides to undertake will be successfully finished per the terms of the grading permit bond.

Encroachment Bond: These are required by a local municipality, whether that be city or country, when a contractor works on a private property that could potentially spread onto public property. This bond ensures that the principal’s work on the private property will not change the condition of the public property.

DRE Bonds: The full name of a DRE is the Department of Real Estate bond. However, they can also go by the names of homeowner’s association bonds (HOA bonds.) These are used to guarantee for the HOA that all maintenance work will be completed until 80% of the units are sold. The DRE bond will cover the shortage from the owner’s payment of the HOA fees until the said 80% of units have been sold. When the 80% are sold, the homeowner’s payment cover the dues in the entirety.

Maintance/ Warranty Bonds: These bonds guarantee a public entity where the improvements were performed, that the individual/developer/builder(s) will complete any and all warranty issues during the chosen warranty period. The warranty period typically lasts 1 year from completion on the improvement, although it could be longer depending on the terms of agreement.

Subdivision Tax Bond: This guarantees to the title county/city/company that the taxes associated with the stated land will be paid in the upcoming tax year. The bond is normally a percentage over the actual taxes due for the year.

Subdivision Performance and Materials/Labor Bond: a bond issued to ensure the obligee that the individual/builder/developer(s) will perform all duties and pay all workers/laborers and the suppliers associated with the public improvement as stated in the subdivision agreement.

The developer is the party that becomes the principal when a subdivision is taken. The requirements to obtain a subdivision bond are predicated on the availability of that subdivision agreement. After that, the developer will have to provide several documents which include;

• A completed subdivision bond form.

• A completed application form.

• Financial statements include personal and business, source of funds, balance sheets, bank statements among others.

• Letter of credit.

• Developer information.

• References to previous projects. Contact information as well as job descriptions should be included.

• Copies of business documents such as articles of incorporation, partnership/joint venture agreements among others.

How Are Site Improvement Bonds Different From a Performance Bond?

In a typical performance bond, the Principal on a bond and their Surety are protected from non-payment of the Obligee. If the Obligee does not pay, work can stop without any surety bonds claim--however for Site Improvement Bonds, developers often finance projects themselves to build improvements that must be completed at all costs. This is why these types of bonds are called Completion Bonds. For example let's say that you're building office buildings in an area where land prices have gone down so much it becomes difficult for companies to invest there; if your company doesn't complete construction then they'll lose out on making money off rent or selling property leases as well as other lost revenue. The city doesn't want this, which is why they require the site improvement bond.

What is the Cost for A Site Improvement Bond?

The cost for a Site Improvement Bond can depend on several factors, but usually it starts at 1.5% to 3.5%. For surety bonds like this one that have such an ambiguous outcome, you need someone with experience and expertise who will work hard to make sure your purchase goes through without any hiccups or delays!

What Is Required to Get a Site Improvement Bond?

Swiftbonds has a ton of experience writing developer bonds. In general, they are more difficult to write as they are complicated and require a lot of information for the underwriters. It is our experience that the underwriters will typically request:

• A current personal financial statement on all shareholders owning 10% or more of the company • 3 years of Corporate financial statements (P&Ls and Balance Sheets) • Experience of the Developer • Evidence of financing for the development • A copy of the Subdivision Agreement • A completed application

How Is a Site Improvement Bond Underwritten?

Many developers find themselves in a position where they are highly leveraged, requiring them to have financing for their project. How do underwriters know that the developer has secured funding? Many of these surety bond markets require letters from banks showing proof of loan funds or an A+ rating by Moody's Investors Services. We can help you navigate the minefield of getting these bonds underwritten and approved.

Some Stats about Subdivision Bonds

• In the United States, the total amount of outstanding subdivision bonds is estimated to be $2.1 trillion (as of 2018).

• Subdivision bonds account for nearly 10% of all municipal bonds outstanding in the United States.

• The average coupon rate for subdivision bonds is 4.2%, with a range of 2.5% to 5.5%.

• The average maturity of subdivision bonds is 20.5 years, with a range of 10 to 30 years.

• The average yield to maturity for subdivision bonds is 4.6%, with a range of 3.5% to 5.5%.

• The average rating of subdivision bonds is A+, with a range of A to AA+.

• The average credit spread of subdivision bonds is 0.3%, with a range of 0.1% to 0.5%.

Interesting Facts about Subdivision Bonds

• Subdivision bonds are a type of surety bond that is required by local governments in order to guarantee the completion of a subdivision project.

• The bond is a guarantee that the developer will complete the project in accordance with the approved plans and specifications.

• Subdivision bonds are typically issued by an insurance company or a surety bond provider.

• The bond amount is typically equal to the estimated cost of the project, including any associated fees.

• The bond is held in trust by the local government until the project is completed to their satisfaction.

• If the developer fails to complete the project, the local government can use the bond to cover the costs of completing the project.

• Subdivision bonds are typically valid for a period of one year, but may be extended if necessary.