Subdivision Bonds, also known as ‘site improvement’ or ‘subdivision improvement’ bonds provide protection to a local government, guaranteeing that the developer will complete improvements which will become part of the public domain.
Examples of these improvements are gutters, sidewalks, curbs, lighting and in some cases water treatment facilities. The key difference between subdivision bonds from regular contract performance bonds is that the developer must pay the cost of building the bonded improvements rather than the public agency.
Why have I been told Subdivision security has to be a letter of credit?
Subdivision Bonds are used widely throughout the United States and are just starting to be accepted by municipalities here in Canada. At this stage there are many municipalities that do accept bonds, however not all municipalities are on board. Some discussion needs to take place to educate them on the product as well as their advantages.
The decision to accept a bond over a letter of credit normally takes place at the subdivision agreement stage. Municipalities in Canada are starting to see the benefits that bonds can provide both to the developer and to the municipality. A competent broker and surety company are essential to help explain to the municipality why a bond is a logical choice as a form of security.
Benefits for Developers
- Off-balance Sheet Security – Subdivision bonds are considered “off-balance sheet security”, meaning they do not encumber a developer’s balance sheet.
- Access to Unproductive Cash – Since a subdivision bond allows the developer to access the substantial amounts of idle cash that usually secures the letter of credit, the developer is much better positioned to satisfy the cash-flow requirements of the development project.
- Greater Credit Availability – By using a subdivision bond instead of a letter of credit, the developer gains access to additional bank financing that can be used to grow the company’s business and improve its liquidity.
- Choice – The developer can choose which form of security to provide the municipality – a subdivision bond or a letter of credit.
Benefits for Municipalities
- Liquid – A subdivision bond is comparable to a letter of credit, representing a very liquid instrument that provides the municipality with the funds required to correct a default by the developer.
- Responsive – The municipality is not bound to take any action or proceedings, or to exhaust its recourse against the developer or any other security, before turning to the subdivision bond for payment.
- Customized Solution – The specific terms of the subdivision bond can be tailored for each municipality, providing financial protection in line with its specific form of development agreement.
- Prequalification – To obtain a subdivision bond, a developer must demonstrate not only the financial means to complete the development project, but also the expertise, resources and operational controls to bring it to a successful conclusion.
- Performance – Should a claim be filed against the bond, the developer is required to repay the surety all amounts paid under the subdivision bond. The bond keeps the developer responsible, accountable and motivated to fully perform all of its obligations to the municipality.
- Promotes Growth – Accepting an alternate form of security that is of benefit to developers sends a clear message to the development industry that a municipality is innovative, responsive to the needs of developers and growth-oriented. Attracting development opportunities – at no additional risk to the municipality – helps ensure the continued growth of its underlying communities and economy.