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What Builders Need to Know About Developer Bonds

November 25, 2021

Developer Bonds are unique and often misunderstood. There was a time when there was a clear distinction between those developing neighborhoods and those building them. Developers did the planning, purchased the land and then sold it or hired contractors to build upon that land. However, those lines have become increasingly blurred as contractors develop their own subdivisions and developers start their own construction companies. 

 

Many builders getting into development do not realize that they may be required to post subdivision bonds and what they are guaranteeing. The COVID-19 pandemic has only increased these requirements as municipalities look to protect themselves from further financial harm. 

 

What are Developer Bonds?

 

Developer bonds go by many names depending on the municipality. They may also be called subdivision bonds, site improvement bonds, plat bonds or even completion bonds. These bonds usually guarantee that improvements will be completed in the development. 

 

These improvements can include things like utilities, streets, curbs, sidewalks, streetlights, drainage, landscaping, public spaces, ect. If the builder/developer does not complete the improvements, the surety bond company must step in and make the improvements or pay the municipality to do so. 

 

Depending on the municipality and bond form, these Developer Bonds may also guarantee that subcontractors performing this work are paid for their work. 

 

Also, these bonds usually guarantee the maintenance of the improvements for some period. The obligations are usually outlined in a signed Subdivision Agreement between the municipality and the builder/developer. 

 

How are Developer Bonds Different?

 

At this point, developer bonds may sound a lot like performance bonds and payment bonds that contractors are familiar with. Developer bonds differ in one very important category however, and that is payment. 

 

With a developer bond, the builder/developer is responsible for completing the improvements regardless of whether they can sell the property or properties and collect payment. That is why they are often referred to as completion bonds. 

 

Surety Bond companies view these bonds as higher risk for this reason. If a builder/developer can not sell the property, they may be forced into bankruptcy, and the surety bond company could be left on the hook for the full amount of the improvements. 

 

What to Expect When Requesting Developer Bonds?

 

In order to get a Developer Bond, contractors should expect to provide financial statements on the company and owners. The Surety bond company will want to make sure that there are enough assets in the company to complete the obligations. 

 

A key consideration will be where the money for the improvements is coming from. Does the builder/developer have it already or will it be conditioned on the sale of the properties? Is there financing involved? If so, will that money be set aside or put into escrow

 

Usually the surety bond company will want to make sure this money is set aside for the bonded obligation and not to be used for other projects or operations. The bond company will also be very interested in the experience of the builder/developer and their capabilities for completing the project. 

 

Alternatives to Developer Bonds

Some municipalities will accept an Irrevocable Letter of Credit (ILOC) in place of a Developer Bond. An ILOC may be easy to obtain for builders and developers. However, they also tie up borrowing ability that could be used for operations or growth. Developer Bonds are considered "unsecured credit" and do not tie up borrowing resources. Additionally, ILOCs are usually tied to interest rates, which can fluctuate significantly. Finally, ILOCs have to be paid on demand. With a Developer Bond, a Surety Bond Claims professional must investigate the claim before paying. You can read more about the differences between surety bonds and ILOCs here.

 

Developer Bonds are Not Insurance

 

Builders/developers often confuse these bonds for insurance as these guarantees are sometimes written through insurance brokers. However, developer bonds more closely resemble credit products. In order to obtain a bond, the builder/developer must sign an indemnity agreement with the Surety bond company. 

 

That means that if a bond company suffers a loss on the developer bond, they can come back and seek reimbursement. The company will always be an indemnitor on the bond and depending on the strength of the case, the owners of the company may be required to personally indemnify as well. 

 

With the continued need for more affordable housing, additional opportunities will exist for builders to take part in development. However, more municipalities are requiring bonds to ensure projects get completed. Builders who are new to the development may find themselves needing these subdivision bonds and prepare themselves for the process of getting one. 

 

Contact Axcess Surety anytime. We are experts on Developer Bonds and have the necessary Surety bond companies to write them.

 

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