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What is a Subdivision Bond?

Subdivision Bond Definition - a subdivision bond is an obligation that the regulating authority in a State places upon contractors or developers of a project. This is to help the project owner from suffering undue losses on their project that are caused as a result of 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.

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 guarantee 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 surety 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.

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 agreement 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:

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.

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 bond 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 surety bond 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.

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