A subdivision application
Business and personal financials
Proof of financing
Developer’s agreement with the obligee
Special bond forms (if any)
Many sureties don’t handle subdivision bonds simply because they are non-cancellable guarantees and are often long term obligations. It’s important to understand that the bond is released once all work is 100% complete. Often times, the work can’t be fully complete until the developer sells 100% of the lots in the subdivision, 100% of the office space in the office complex being built, etc. Normally, these bonds are active for at least two years and, some even longer. Although sureties perform their due diligence when reviewing a developer’s financial strength, experience, character, etc., it’s hard for them to predict whether a developer will succeed or fail over the span of several years.
In order to secure an ILOC, the owner/developer typically ties up a portion of its line of credit for a fee or ties up their own cash reserves with their bank (which are restricted from use). ILOC’s renew every 12 months. If the bank elects not to renew the ILOC, the obligee would have the right to promptly draw down on the full amount of the ILOC. Such a drawdown of the ILOC will create a loan, which the bank could promptly call for immediate repayment.
It’s also important to understand that the governmental entity holding the ILOC has the right to draw on the ILOC any time they believe there is a breach of the developer’s obligations, in which case the developer would have little or no way of stopping. The ILOC is strictly a financial instrument and the bank provides no prequalification services to assure the owner/developer has the capacity or experience to perform the work.
Certificates of Deposit are effectively cash deposits that tie-up the owner/developer’s capital, which normally can be invested more productively. The CD is subject to liquidation by the demand of the obligee. For the obligee accepting the CD as security, it provides no prequalification benefits.
This alternative has many of the same disadvantages as a CD. The public agency would also have to make a determination that the cash deposited was in fact “legitimate” and not subject to potential bankruptcy preference regulations.
Tripartite agreements often involve set-aside letters from a bank, special escrow accounts or fund controls. Tripartite agreements typically place disbursement of the projects funds under the direct control of the governmental agency, and are not utilized very often. The distribution of funds may be delayed by concerns about the value of completed work or the capability of the funds to complete the improvements and perform any required maintenance. Tripartite agreements are not performance guarantees, but control over a fund of monies that may not be satisfactory to pay for the work on the project. This type of guarantee places a substantial added administrative accountability on the public agency, which can lead to liabilities if the funds are not properly administered.
The overview of the guarantee options should demonstrate that bonds are the most advantageous. If you’re ready to partner with a subdivision bond specialist, please request a consultation.