Subdivision Bonds are a type of Surety Bond that guarantee that improvements will be completed to a property or properties in a given amount of time. Subdivision Bonds are also referred to as Developer Bonds, Site Improvement Bonds, Platt Bonds or even Completion Bonds.
Because Subdivision Bonds are considered a higher risk than Contract Bonds (like bid bonds), they also carry a higher rate. This is because subdivision bonds are a form of completion bond as discussed above. Generally, Subdivision Bonds carry a rate of between 1% - 4% per year until they are released. Unlike Performance Bonds and Payment Bonds, the premium is due each year that the obligation is open so the principal needs to price that accordingly.
Small subdivision bonds can be purchased with just a credit check. The limits for these programs are typically $750,000 and under. Larger Subdivision Bonds require a copy of the Subdivision Agreement or Development Agreement. This agreement will spell out the exact scope of work to be completed and bonded. They also require a financial statement on the principal company and Principal owners. The bond company will also want an experience application on the principal to know that they have successfully completed similar projects in the past.
Understanding how the project is financed is a key part to underwriting Subdivision Bonds. Is the Developer financing the project themselves or going through a lender? Usually a lender is involved, and a copy of the financing agreement will be required. Surety Bond underwriters want to see that the funds are 100% approved by the lender to cover the project and set aside in most cases. Many previous bond claims have taken place when Developers get partial or contingent financing.
When underwriting Subdivision Bonds, it is important for the underwriter to understand how long the obligation will take to complete. The longer the completion time, the more risk the bond carriers. Many subdivisions are built in phases. When possible, surety bond underwriters prefer to issue different contracts and subdivision bonds for each phase. This way, the liability can be closed out with each phase instead of remaining open for very long periods.
Most Subdivision Bonds include a maintenance or warranty period. In general, surety bond companies do not like long term warranties. A lot can change over time and repairing roads, utilities, etc. can be expensive for both the Developer and the Bond Company. As such, most surety bond companies will want to see that the warranty period is 24 months or less.
Because subdivision bonds are considered high risk, many companies do not write them at all. Some bond companies may only write them with 100% collateral to reduce their risk. It's important to pick a surety bond company that understands Subdivision Bonds and has an appetite to write them. This ensures that the Developer will get the best terms for the bonds and that the underwriting process will go smoother.
Subdivision Bonds require Indemnity. That means that if a Bond company pays a valid claim, they will seek reimbursement from the Developer Principal and other indemnitors. Developers often reduce their risk by setting up different LLCs or other entities for each of their developments. Depending on the financial strength of the Development being bonded, the surety bond company may want the indemnity of the related entities. This can be a point of frustration and negotiation for the Developer. These bonds are not insurance and claims should be avoided.
Subdivision Bonds do not need to be complicated. They provide municipalities with a way to guarantee that infrastructure will be completed, and the project will not be abandoned. Without subdivision bonds, municipalities may be stuck with the cost of completing such obligations. Contact the subdivision bond experts as Axcess Surety for all your needs. Land developers can also visit our Surety Bond Guide for more information, including many frequently asked questions.
Axcess Surety is the premier provider of surety bonds nationally. We work individuals and businesses across the country to provide the best surety bond programs at the best price.
