Subdivision Bond vs. Letter of Credit
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Irrevocable Letter of Credit (ILOC):
The governmental entity holding the Irrevocable Letter of Credit has the right to draw down on the Irrevocable Letter of Credit anytime they feel that there is a breach of the developer's obligations. The developer would have little or no chance to stop the draw down of their own funds. The Irrevocable Letter of Credit is only a financial instrument of the developer's own capital which is quite open and vulnerable. It does not seem logical to post your own funds, and need to pay a fee to the bank for doing so.
Advantages of Subdivision Bonds
Surety bonds have none of the disadvantages, but have the following advantages.
- Surety credit is secured simply with signature and does not reduce or tie-up the owner/developer's source of funding.
- Surety underwriters pre-qualify the developer through surety underwriting process.
- Bonding Companies are required to Investigate Complaints while Letters of credit can simply be drawn down on.
- Bonding Companies can Finance the Contractor when in tight cash flow positions
- Surety bonds typically provide the public agency with a 100 percent performance, 100 percent payment, and 12, 18, or 24 month maintenance bond.
- The full amount of the bond is open for claims in the event a claim should arise, as the obligation is open in full to the public agency until released in writing from the public agency.
