Subdivision Bonds & Site Improvement Bonds -
A contractor must purchase a subdivision bond when working on upgrades for a local government's projects. The bond guarantees that workers perform their responsibilities according to the terms mentioned in the bond. These bonds are sometimes referred to as site improvement bonds, completion bonds, or plat bonds.
Learn more about this type of bond below, or contact our experienced surety agents for assistance with any questions you may have.
What Is A Subdivision Bond?
A subdivision bond is a type of construction surety bond. It serves as a developer’s guarantee that public improvements will be completed to an acceptable quality, in accordance with all applicable regulations, and within the required timeframe. The terms of the bond may also guarantee that the suppliers, contractors, subcontractors, and workers employed on the project will be paid by the developer.
When constructing large offices or multiple properties, site developers have building regulations, bylaws, and rulings that they must follow. These guidelines outline what is to be obeyed during the project. If they are not adhered to, and a bond is not in place, the development is likely to suffer infractions and violations, which can cost both time and money.
How Does It Work?
As with all surety bonds, three parties are involved in a subdivision bond:
- The municipal planning authority requiring the bond is the obligee.
- The developer who must purchase the subdivision bond is the principal.
- The company that underwrites and issues the subdivision bond is the surety.
By purchasing the bond, the principal is pledging to make all of the improvements identified in the subdivision agreement. The principal may also be guaranteeing to finish the project and pay the suppliers and workers.
The Claims Process
If the principal defaults on this obligation, the obligee will exercise the right to file a claim against the bond. If the project was left unfinished, the surety will pay the cost to hire another contractor to complete the installation of the utilities and other land improvements.
That doesn’t let the principal off the hook, however. The purpose of a subdivision bond is to protect the financial interests of the municipality, not the developer. After paying the obligee’s claim, the surety will then pursue the principal for reimbursement and has the right to bring a suit to recover the funds.
What Does It Cost?
The major factors the surety takes into account in determining the cost of the subdivision bond are the required amount of the bond, the term of the subdivision agreement, and the creditworthiness of the principle who is applying for the bond. The underwriter will typically consider both the developer’s personal credit history and current financial statements of their business.
For most applicants, the premium rate will generally be about 2.5 – 3%. For high net worth clients/very large developers the rate can get as low as 1.5 – 2%, but we recommend carrying 3% as a rule of thumb (and can work to negotiate it down from there). A 3% rate would mean that the developer will pay 3% of the bond amount as the annual premium. So, for example, a $300,000 bond would cost $9,000.
Developers who have personal credit challenges may still be able to get approved for a subdivision bond if their business financials are strong enough. Note that the premium rate will likely be higher for those with poor credit.
If you’re a developer involved in a subdivision development project, don’t wait until the last minute to find out what you’ll have to pay to obtain a subdivision bond. Use our convenient online form to get a quote today.
How Are Subdivisions Created?
A subdivision begins with an idea and an opportunity. Typically, someone who owns a large tract of land sells it to a developer or partners with a developer to subdivide it into smaller parcels. It’s easier to sell many smaller lots with homes or commercial structures on them than to sell one large piece of undeveloped land. To do that, the developer creates a residential neighborhood or industrial park and then offers the individual homes or commercial buildings for sale.
Public Improvements Necessary
Subdivisions don’t spring into being overnight complete with amenities like paved streets, curbs, streetlights, sewers, power lines, water mains, landscaping and the like. But all of those things have to be in place before a neighborhood exists and the individual properties are ready to move in.
The municipality with jurisdiction over the area also has a stake in the project’s success. All of those amenities and utilities (public improvements) will belong to the town or city once the work is done. Homeowners and businesses don’t own roads and power lines and streetlights—municipalities do. Making such improvements is part of the price the developer pays for the privilege of building on the subdivided land and selling lots or finished homes or commercial buildings for a nice profit.
The Purpose Of Subdivision Bonds
There’s a potential hitch, though. What happens if the developer doesn’t install all of those features properly? What if some of them are left unfinished? What if they don’t work properly or never get installed at all? The last thing the municipality wants is to get stuck with the bill for finishing or redoing the work! That’s where subdivision bonds / site improvement bonds come into play.
What Is A Subdivision Agreement?
The developer submits a subdivision application with the plats to the municipality’s Department of Planning or Planning Board. The application provides enough information for the planning authority to decide whether or not to approve it.
For example, the application will identify the area, and the plats will show the proposed boundary lines between the plots. There will be a description and drawings of the homes or commercial structures to be built and what their average size and price will be. There will also be a description of the amenities and utilities to be installed, and their locations will be indicated on the plats.
The developer may need to refine the application in order to get it approved. They will then negotiate a subdivision agreement, sometimes called a subdivision improvement agreement, with the city planners. The agreement identifies the specific improvements to be made and states that ownership of those improvements will be transferred to the municipality upon completion. If the developer didn’t agree to transfer ownership of the improvements, the subdivision would not be approved by the municipality.
The subdivision agreement also establishes the requirement that the developer purchase a subdivision bond.
Get A Quote
Do you have an upcoming subdivision or site improvement project? Get bonded with an established surety company today.
With over 30 years of experience serving clients nationwide, Surety Bond Professionals is here to help with all of your construction surety needs. To get a quote for a subdivision bond or any other required surety, simply fill out our online quote form: