Colorado Subdivision Improvement Bonds
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What Are They?
A developer that enters into a subdivision agreement with a municipal authority gains the right to create or upgrade a residential housing development or commercial subdivision (such as an industrial park). In exchange, the developer takes responsibility for making certain improvements by installing or upgrading roads, curbs, sidewalks, streetlights, sewers, power lines, and the like. A Colorado subdivision improvement bond ensures that those improvements are made in accordance with the subdivision agreement.
Much as a performance bond does, a subdivision improvement bond requires compliance with state construction regulations and local building codes, as well as project outcomes that meet the municipality’s quality standards. The bond also allows the municipality to recoup monetary damages resulting from the contractor’s noncompliance. It may also guarantee the contractor’s payment of contractors, workers, and suppliers.
Who Needs Them?
The municipality will require a Colorado subdivision improvement bond from any developer as a condition for establishing a subdivision agreement, whether residential or commercial.
How Do They Work?
A Colorado subdivision improvement bond is a legally binding agreement among three parties known in the jargon of surety bonds as the obligee, principal, and surety.
- The obligee is the municipal planning board or other municipal entity requiring the bond,
- The principal is the developer purchasing the bond, and
- The surety is the bond’s guarantor.
While the principal is legally obligated to pay valid claims against the bond, the surety guarantees that claims will be paid. Although the surety is indemnified against any legal liability for claims, the surety agrees to extend credit to the principal to ensure that valid claims are paid.
In fact, after ensuring the validity of a claim, the surety typically will go ahead and pay it and then will wait to be repaid by the principal. The surety’s initial payment of a valid claim creates a debt the principal now owes to the surety and is legally obligated to pay. Not repaying the debt in accordance with the surety’s terms can result in the surety suing the principal to recover the claim amount.
What Do They Cost?
Colorado subdivision improvement bonds are sold for a premium calculated by multiplying two factors: the required bond amount established by the obligee and the premium rate set for the principal by the surety through an underwriting process.
The primary underwriting consideration is the principal’s creditworthiness, as measured by the principal’s personal credit score. The risk of a creditworthy principal not repaying the surety for claims paid on behalf of the principal is low. A principal with a low credit score, however, can pose a significant risk of non-repayment. Consequently, a principal with a high credit score will pay a lower premium than one with a low credit score.
A well-qualified principal typically will be assigned a premium rate in the range of 0.5 to 3 percent.
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