Subdivision bonds, a type of surety bond, are currently in demand as housing prices continue to rise and developers look to build homes and housing developments. Builders purchase raw land for the project and depending on which governmental entity — states, counties, and/or other local governments — is requiring them, builders may have to provide subdivision bonds. These bonds can be called by several different names:
- Site Improvement Bonds
- Performance Bonds
- Completion Bonds, or
- Plat Bonds.
The verbiage used can vary from town to town or state to state, and most developers simply call them subdivision bonds. Essentially, regardless of the name, they are all the same thing.
The bond itself is required before construction begins. Once the plans are filed, the land is platted, and the agreement is executed by the governing body, the developer must file the bond. I always suggest that developers start working on the bond before it is required so that they know what will be necessary to obtain it.
The bond covers the installation of infrastructure, within, and often, outside the development, depending on the deal the developer and the governing body agree to. Anything outside of the development that they’re going to touch would be covered. Anything to service the development would be covered. Internally, roads, sewers, anything that’s going to be deeded over to the governing body will have to be covered, and that includes the labor, materials, and basically whatever else it takes.
Sometimes the bond can cover payments for labor, which makes it a little more hazardous because you’re talking about a Payment Bond. Payment bonds guarantee payment to the laborers. This is not very common but is something that you should be aware of since it makes the nature of the bond a little riskier.
Another item to note is that toward the end of the project, the governing body will also require a Maintenance Bond. This bond requires the developer to maintain what they’ve put in, typically for a period of one or two years. Sometimes, the maintenance period is longer than two years.
Given the many moving pieces of these obligations, many surety companies require collateral for the bonds. Since my office has worked on many of them, we have the unique ability to underwrite them. In many cases, we have been able to offer attractive terms for the bond, whether that is a lower annual bond premium or reducing (possibly waiving) the collateral requirement.
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