Today, I would like to discuss what are commonly referred to as Site Improvement bonds. Sites that are being developed by a real estate entity, especially those that need to be hooked up to either the electric grid or the water system of a municipality, or a new project on a site that eventually needs to have water, power, and utilities connected to it. The municipality, county, or the state in which the work is to be done and to which you are applying for permits may require what is called a site improvement bond.
The Site Improvement Bond could also be referred to as a Performance Bond, Surety Bond, or Guarantee of Performance. Regardless of the name used to describe the bond, the requirement is the same.
Whether you have land or you are building a structure, the bond itself is a guarantee that you are actually going to move forward and finish the work to improve the site. The bond also guarantees that you’re going to finish the project and connect the utilities to that project correctly.
The reason for this bond is that the municipality does not want an incomplete or partially built structure becoming an eyesore or a hazardous site. They also want to be assured that the plan for which you are applying is fully developed. Essentially, the bond is going to guarantee that you’re going to finish the project and improve the site where the municipality is allowing you to construct your project. Most of the time, these bonds are required by municipalities and other state and local governments.
I always suggest requesting the bond requirements in writing from the governmental entity to see if they require a specific bond form. This avoids any possible confusion and will help my office better underwrite the matter.
Generally, the owner or developer of the land applies for the bond. This is not always the case but happens for over 90% of the matters. The surety will review the financials of the owner or developer. The surety will also request a construction estimate for the project and inquire about the financing behind the development. The underwriting behind this is to ensure that the developer can address any obstacles that they may encounter by using their balance sheet, ensure there are funds to pay for the project through the financing, and have the construction estimate to see what they are guaranteeing.
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