Florida Subdivision Improvement Bonds
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What Are They?
Subdivision improvement bonds serve much the same purpose as the performance bonds required for most larger construction projects. They ensure that the improvements the municipality requires in order to enter into a subdivision agreement with a developer are completed and meet the municipality’s quality standards. Such improvements include roads, streetlights, curbs, sewers, sidewalks, power lines, and so on.
A Florida subdivision improvement bond helps ensure that the developer complies with local building codes and other regulations and provides a way for the municipality to be compensated for monetary damages resulting from the developer’s noncompliance. Subdivision improvement bonds may also guarantee payment of contractors, subcontractors, workers, and suppliers.
Who Needs Them?
Any developer entering into a subdivision agreement with a municipality is required to purchase a subdivision improvement bond. This is true whether the subdivision is residential or commercial.
How Do They Work?
The three parties to a Florida subdivision improvement bond are the:
- Obligee (the municipal entity requiring the bond, typically a planning board),
- Principal (the developer purchasing the bond), and the
- Surety (the company guaranteeing the bond).
The surety’s guarantee is in the form of an agreement to extend credit to the principal to ensure payment of valid claims.
The surety investigates every claim against the bond to ensure its legitimacy, and the principal is legally obligated to pay all valid claims. Unless the principal has the funds to pay a claim immediately, the surety will go ahead and pay the claimant directly.
That payment is essentially a loan to the principal, who must subsequently repay the surety within the time agreed upon. It’s an arrangement that expedites payment of the claim while giving the principal some time to come up with the funds to repay the surety. Failing to repay the surety is likely to result in the surety taking legal action against the principal to recover the debt.
What Do They Cost?
Like nearly all construction surety bonds, subdivision improvement bonds are sold for an annual premium that is a small percentage of the required bond amount, that percentage being the premium rate. The premium rate is determined through an underwriting process that assesses the risk to the surety. The primary risk is the possibility of the surety not being repaid for claims paid on the principal’s behalf.
The principal's credit score is the most common measure of the risk to the surety. The risk level is considered to be low when the principal’s credit score is high and vice versa. Low risk results in a low premium rate, while a higher premium rate is warranted to offset higher risk.
A well-qualified principal typically will be assigned a premium rate in the range of one to three percent.
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