What is a Subdivision Bond?
You are required to obtain a surety bond for working on subdivisions to protect the public. If you do not make improvements to public property as agreed upon in the developer's agreement, a claim can be made. If you would like to learn the definition of a surety bond and how one works, you can find all the information you need in our FAQ section.
Subdivision bonds are the most effective option for most developers because they have advantages that the other guarantee options do not provide, while not having any of the drawbacks:
- Subdivision bonds are actually a form of credit, which doesn’t tie-up the owners or developer’s working capital.
- The owner/developer is prequalified during the surety underwriting process.
- A quality bond provider should have claims department which will strive to resolve any claims that may arise, rather than paying out claims with little attempt at resolving them.
- The full face value of the bond will be accessible in the event of a developer/owner default.
- Subdivision bonds are usually combined with a performance and payment bond, and a maintenance bond.
How Do You Qualify for Subdivision Bonds?
There are several factors that are taken into consideration when reviewing whether an applicant qualifies for subdivision bonds:
- Industry Experience: Experience in both the construction field and with similar sized projects the bond is needed for is crucial.
- Financial Analysis: Financial analysis is performed on the company, and the personal wealth of the owners to determine how much surety credit they may qualify for.
- Project Type: Some project types take much longer than others, as units are often required to be fully sold before the final work can be considered complete; this is especially true with subdivision projects which seem to be the most risky in that they are long term projects. In a subdivision, it can take two years minimum to sell all lots, build the homes and finally pave roads. Commercial projects, such as where the developer is building class-A offices to sell individually are similar in nature to residential projects, but usually much smaller in scope.
- Financing Methods: Many developers don’t have sufficient assets available to fund projects, so they borrow money from a bank. Obtaining subdivision bonds is near impossible without proving that you have the money available to pay for the work.
Subdivision Bond Specialists
Most bond providers don’t handle subdivision bonds because they are non-cancellable guarantees and are often long term obligations.
Our company is one of the few surety bond providers that handles subdivision bonds, we also specialize in them. Read our guide to learn about the various options you have when guaranteeing a project, why you should choose us for your subdivision bond needs, and more.
Frequently Asked Questions
Yes. The age of your business does not affect whether you can obtain this bond. The most significant factor considered for qualification is approved financing for the job, followed by your experience in the industry, financials and personal credit.
No. Unless you can prove you are self-financed, you will be ineligible for a bond because the surety will view you as a high risk to not complete the work.
If a developer does not make the required additions or improvements per the developers agreement, the obligee will file a claim on the bond. All legitimate claims must be reimbursed by the developer.
You need to get it from the obligee, as there are generally no industry standard bond forms for this bond type. However, New Jersey is an exception as it does have a standard form for Townships, which we have on file.
Obtain a bond, as it is the better option for multiple reasons. The bond only requires an annual premium payment, which is a percentage of the contract amount. The letter of credit requires you to post 100% of the contract amount, tying up your funding, while the bank charges a fee for holding your funds.
No, a subdivision bond guarantees your improvements or additions on public property. A performance bond guarantees your work for a specific job. The state of New Jersey inaccurately calls subdivision bonds performance bonds.
You must contact us immediately, as we have a team of claim specialists here to find a resolution for you. Keep in mind, it is crucial that you work with an expert in the surety industry. Learn more about how to ensure you choose the proper bond company.