In many local jurisdictions, the municipal planning authority or other public agency can require a property owner or developer to furnish a subdivision or site improvement bond before a construction permit will be issued or a final parcel map will be recorded.
Subdivision Site Improvement Bonds
Property developers need subdivision site improvement bonds when required improvements must be completed for local approval. Surety Bonds Agent serves all 50 states with professional surety services. Apply online for a subdivision site improvement bond quote.
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What Are Subdivision/Site Improvement Bonds?
The terms “subdivision bond” and “site improvement bond” refer to essentially the same type of construction surety bond but for work carried out in different settings. Subdivision bonds apply when improvements are being made to new structures, while site improvement bonds guarantee upgrades being made to existing structures.
Subdivision/site improvement bonds serve much the same purposes as performance bonds and payment bonds. They provide financial protection for public agencies so that the sale of properties can begin before all required improvements have been installed. Improvements include roads, sidewalks, streetlights, curbs, gutters, sewers, and so on.
Subdivision/site improvement bonds guarantee property purchasers that all required improvements will be made. They also guarantee that contractors, subcontractors, and suppliers will be paid. More specifically, the builder or developer posting a subdivision or site improvement bond guarantees that they:
- have the financial resources to pay for all required improvements,
- will complete the improvements on schedule
- will correct problems resulting from defective workmanship or materials for a specified period.
Who Needs One?
How Do Subdivision/Site Improvement Bonds Work?
The three parties to a subdivision or site improvement bond are referred to as the obligee, the principal, and the surety:
- The obligee is the municipal planning authority or other agency requiring the bond.
- The principal is the property owner or developer purchasing the bond.
- The surety is the bond’s guarantor.
When a principal violates the terms of a subdivision/site improvement bond, the obligee can file a claim for the funds necessary to rectify the situation, which could require bringing in another company to complete the improvements. The surety investigates to make sure the claim is valid and must be paid. The principal is legally obligated to pay all valid claims.
However, as the bond’s guarantor, the surety establishes a line of credit for the principal at the time the bond is purchased. The surety can draw against that line of credit to pay a valid claim on the principal’s behalf if that becomes necessary.
The surety’s initial payment of a claim does not eliminate the principal’s legal obligation to pay. It merely shifts it to an obligation to repay the credit extended by the surety. (The surety is indemnified against any legal responsibility for claims.) If the principal does not repay the debt to the surety, the surety can take the matter to court to recover the funds.
costs
How Much Does It Cost?
Before agreeing to guarantee a subdivision or site improvement bond, a surety will want to see the details of the work to be done and evidence of the principal’s financial resources. The goal is to determine whether the principal has the capacity and resources to make the required improvements and payments.
If the surety decides to move forward, the premium rate the principal will pay is established through an assessment of the risk of the surety not being repaid for claims paid on the principal’s behalf. That risk assessment is based largely on the principal’s personal credit score.
The assumption is that someone with a track record of financial responsibility and repaying debts in the past will present little risk to the surety. A low-risk level results in a low premium rate, potentially as low as 0.5% and usually no higher than 3%. A person with past credit challenges and a lower credit score is a greater risk, so the premium rate will be higher.
Multiplying the required bond amount by the premium rate yields the annual premium cost of a subdivision or site improvement bond.
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How Do Subdivision/Site Improvement Bonds Work?
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