Keeping an eye on your Bond Exposure

Part of the mapping and development process in conjunction with the Public Report filing process may involve bonding for various items along the way.  There may be as many as ten or more bonds required throughout the site development phase, and compliance with the DRE process can only add to that.  For these reasons, it is advantageous of Subdividers to get acquainted with the approach that can reduce or even avoid this exposure when possible.

Governing Agency bonding:

  • Performance bonding for construction of off-site improvements
  • Maintenance Bonds for the maintenance of completed off-site improvements (should extinguish within a set period of time)
  • Financial securities for the costs of public improvements
  • Financial and performance bonds for common areas when the agency classifies the improvements due to “public health and safety”

Department of Real Estate (DRE) Bonding:

  • Completion of common areas – Completion of common area must be assured before the DRE will issue a Final Public Report. Check the list of improvements secured with the governing agency; it is possible to reduce the completion bond filed as a part of the DRE filing if the improvements are secured with the city/county.
  • Delayed Completion of Common Areas – DRE’s “621 Procedure” allows for the Subdivider to delay filing the completion bond until 45 days prior to the first escrow closing. When the initial closing is projected at several months out, the amount of the completion bond can be reduced substantially – or potentially avoided altogether.  We have helped our clients save hundreds and thousands of dollars by utilizing this delayed bonding procedure.  It is important, though, to address the requirements for this process up front.
  • Assessment Guarantee – secures the Subdivider’s payment of assessment dues to the HOA. The bond can be released when 80% of the lots or units are sold.  In a phased development, the bonds are filed phase-by-phase and should be released accordingly.  Keeping an eye on when each phase reaches the 80% close point is important to releasing these bonds.
  • Subsidy Guarantee – If the Subdivider opts to offer a subsidy, it must be financially guaranteed to protect the HOA. The amount of the bond is calculated as follows:

 dollar amount of the Subsidy     x     the number of lots     x     the term of the subsidy.

It is a worthwhile exercise to examine the cost of the Subsidy arrangement versus delayed annexation of a common amenity to the HOA.  Our office can help you with this evaluation when we assist with your Budget.

  • Reserve Bond: If the common area is retained by the Subdivider and deeded to the HOA in a later phase, the Subdivider must pay the reserves for the amenities/improvements from completion until transfer to the HOA.  The reserves can be pre-funded or bonded for.  Often, the costs associated with a Reserve Bond are less than the costs of carrying the increased HOA dues associated with bringing an amenity into the development earlier. 
  • Completion bond for delayed Common Area Improvements: To avoid the Reserve Bond above, consider maintaining the common area until the final phase and then deeding it to the HOA in “as-new” condition.  This may work out with less expense in the long run than bonding for the reserves.  One example of an approach to avoid the Reserve Bond would be to delay installation of the final lift on the asphalt streets until the street parcel is conveyed to the HOA. 

Call our offices for free consultation reguarding your Subdivision and DRE bonding requirements to see if we can help!

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