Subdivision Surety Bonds
The Best deal
Subdivision bonds are an excellent way of guaranteeing installation of public improvements and have many benefits over traditional products of the banking industry.  

Attractive Pricing
The rate and fee structure associated with a subdivision bond makes this form of guarantee attractive to developers. There are no qualification fees and to a great extent, rates are determined by financial strength and overall experience. Early exoneration and release may reduce the cost of subdivision bonds which are typically billed on an annual or two year pre-paid basis. When the work is completed and accepted, a one-year maintenance period is included in the premium charge.

May Ease Cash and Credit Requirements
Surety credit is separate from the developer’s source of funding. This may enhance financial credit by decreasing the need for project financing and associated interest expense. A subdivision bond may avoid an extended commitment of capital and allow greater efficiency in the subdivision process by permitting the developer to obtain the public agency’s approvals and map recordation as provision is made for construction financing.

Better Than a Letter of Credit
The irrevocable letter of credit (ILOC) is a commonly accepted from of financial guarantee. However, the ILOC is better suited for short-term commercial transactions involving the sale of goods. In the context of a subdivision, the subdivision bond offers several distinct advantages for both the developer and the public agency:

The use of a subdivision bond does not place a long-term encumbrance on the developer’s line of credit. With an ILOC, the developer must frequently borrow twice, once to finance and then again to guarantee the public improvements. Since the subdivision bond is a separate form of credit, the developer is required only to finance the actual construction.

A subdivision bond guarantees performance of the obligation and is not subject to automatic forfeiture in the event of a claim. Should problems occur, the surety’s role is to facilitate a resolution and not merely to forfeit the developer’s security. The public agency receives security conditioned on completion and acceptance of the project, and need not be concerned with expiration or deadlines for the renewal of the security. Should default occur, the ILOC does not provide the assistance and expertise of a qualified surety.

The public agency receives assurance that the developer has been pre-qualified through the underwriting process. Thus reinforcing to the obligee that the developer is capable and experienced above and beyond the financial qualification.

Better Than Tripartite Agreements
Tripartite agreements may involve the use of direct set-aside letters, special escrow accounts or fund controls. A common feature of these agreements is to place disbursement of the construction funds under the direct control of the public agency. With this arrangement, unexpected delays can be encountered due to additional inspections and approvals, which the developer must secure in order to get funds to be released.

A subdivision bond permits the construction funds to be disbursed in a manner acceptable to the developer and the lender. A subdivision bond relieves the public agency of the burden of administering the construction funds, and provides security that is not diminished by a reduction in funds available to complete the improvements.

Better Than CDs / Other Forms of Security
A certificate of deposit is the equivalent to cash as a form of subdivision security. This results in the extended commitment of capital that can be put to better use. As is the case with other cash equivalents used as security, the funds may also be subject to forfeiture upon the unilateral demand of the public agency.
 
Subdivision Surety Bonds
Summary of Benefits

Public Agency

• Surety = Guarantee
• Confidence in Underwriting
• Developer is prequalified beyond financial ability
• Provides third party oversight
• Relieves public agency of administering construction funds

Developer/Architecht

Subdivision Surety Bonds
How to Obtain them
Find an Agency who is appointed with a Subdivision Surety Underwriter
Not all insurance/surety companies underwrite sub-division surety bonds and as such, finding an agent who is appointed with these companies can often be difficult. 

The Process Begins With an Underwriting Review
Advance planning for the developer’s bonding needs is the best way to achieve positive results. The process begins with an underwriting review, from which a guideline for surety credit is determined. For established accounts, a bond application within these underwriting guidelines can typically be processed in 48 hours or less.

Underwriting Validates Financial Strength and Capacity
Underwriting the developer is the critical component of the bond application process. The underwriter evaluates the developer’s experience and success in the field, key people, and financial condition. In addition to a comprehensive assessment of the developer’s business structure and management, this may include interviews with trade and credit references, past lenders and subcontractors.
 
The information in this newsletter is from InscoDico and the Surety Information Office (SIO) and was used with permission.