Site Development Bonds

Site Development Bonds (often called Subdivision Bonds) are a three party guarantee often required by Municipalities when an Owner or Developer wants to improve a piece of property. These improvements usually include items such as streets, curbs, sewers, utilities and landscaping. The Municipality wants to make sure that regardless of if the properties sell or not, the Owner/Developer will still complete these improvements. The surety bond typically guarantees that the Owner/Developer of land will be able to complete the improvements, pay for contractors and material suppliers and warranty the improvements against defects for a certain period of time. This period is often two years or more. These surety bonds can also be called Developer Bonds, Plat Bonds, Completion Bonds or even Performance Bonds depending on the Municipality. The Owner or Developer is the Principal, The Municipality is the Obligee and the Bond Company is the Surety.

How Are These 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 a surety bond claim. However, for Site Improvement Bonds, the Owner/Developer is financing the project and guaranteeing that the improvements will be made. The improvements must be completed regardless of the Owner/Developers’ ability to pay. This is the reason they can be referred to as Completion Bonds. For example, let’s say that a Developer is unable to sell the land plots and collect money to complete the improvements. That does not alleviate the surety bond company from having to perform.

What is The Cost for A Site Improvement Bond?

Because of the completion nature, most surety bond companies view these developer bonds as riskier than regular performance bonds and payment bonds. Therefore, they are typically priced higher than those surety bonds. Often, developer surety bonds are written on a flat rate instead of a sliding scale and can be anywhere from 1.5% – 4% depending on the strength of the Owner/Developer.

What Is Required to Get a Site Improvement Bond

MG Surety Bonds has great experience writing these developer bonds. Because they are more complicated, more underwriting information is typically required to get one. Most surety bond companies will request the following:

• 3 years of Corporate financial statements

• A current personal financial statement on all shareholders owning 15% or more of the Corporate Stock

• Evidence of financing for the development

• Experience of the Owner/Developer

• A completed application

• A copy of the Subdivision Agreement

Underwriting Site Improvement Bonds

Underwriting these developer bonds requires special experience and surety bond markets. Many surety bond companies have had bad loss experience with developer bonds. Additionally, many developers are highly leveraged which presents challenges for some surety bond companies. Underwriters will also want to verify that the financing is in place for the project. Typically, they will want a letter from the bank showing that the loan for the project has been funded. MG Surety Bonds has many surety bond markets that understand the nature of these developer bonds and write them freely for good companies.

Special Considerations

Sometimes Owner/Developers will ask the Contractor performing the work to put up these developer bonds. Contractors should be very careful when looking at doing this as the risk may far outweigh the reward. This is referred to as third party indemnity. The Owner/Developer is still the Principal on the surety bond but the contract is guaranteed by the Contractor. This is like co-signing on a car. If the Developer/Owner cannot finish the project or pay the bills, the Contractor will be liable for the surety bond penalty regardless of what their actual contract is.

Indemnity Required

Surety bonds are written on the principal of indemnity. This means that if the surety bond company suffers a loss, they will seek reimbursement from the indemnitors. Before getting a site improvement bond, the company and often the owners will be asked to sign a General Indemnity Agreement. You should read this agreement carefully before signing it as it spells out the terms and conditions of all indemnitors. This is one major difference between surety bonds and insurance. Contractors can read more about indemnity here.

What to Look for in a Site Development Bond Company

The Subdivision Agreement or Municipality Statute will outline the requirements for the surety bond company writing your developer bond. Many will require that your surety bond company be rated “A-“ or better by the rating agency A.M. Best. You can check that here (registration required). Owners, Developers and Contractors should be very suspicious about using a surety bond company with a lesser rating. Most contracts will also require your surety bond company to be listed on the U.S. Department of Treasury’s Circular 570 which you can check here. This is sometimes shorted as a “T-Listing”. Additionally, all parties involved would be better off to use a surety bond company that likes and understand Developers. This will make getting a developer bond faster and easier.