The lure of subdividing lands into separate titles holds many benefits for developers and owners, from improved marketability to increased profit potential. But, if you’ve ever subdivided before, you know the various concerns and issues that can arise throughout the subdivision process. As the old saying goes, “The best-laid plans of mice and men oft go awry.” Well, mice and men aside, we’re going to look at subdivision bonds and address some questions you may have on this topic.
What is subdivision bond?
Subdivision bonds are a contract performance bond that guarantees that improvements will be made within a subdivision. Subdivision bonds are placed on contractors by local authorities to protect owners from undue losses resulting from a contractor’s malfeasance.
One important note is that a subdivision bond is sometimes referred to as plat bond, developer bond, performance bond, or completion bond.
How do subdivision bonds work?
This type of surety bond involves three parties: the principal, obligee, and surety.
- Principal: The project’s owner or the developer
- Obligee: This term refers to the entity requiring the subdivision bond
- Surety: The insurer that is underwriting the developer bond
When a developer (principal) purchases this surety bond type, they pledge the work outlined in the subdivision agreement. Depending on the terms of the agreement, this may also guarantee that the developer compensates vendors, suppliers, and contractors involved in the subdivision project.
Subdivision bonds are indemnified. This means that the principal is required to repay the surety should they fail to meet the obligations set forth in the contract.
Why do developers need subdivision bonds?
From a land development perspective, subdivision bonds allow developers to sell lots within a new subdivision before the public improvements are completed. This allows land developers to increase their cash flow while the construction work is underway.
Let’s say, for example, that a developer wants to subdivide a piece of land into residential lots. A civil engineer would draw a site plan for the project, including public improvements like a water main, streets, and fire hydrants.
After the site plan’s approval, developers and city or state government staff sign an agreement and require a subdivision bond. Subdivision bonds assure local government and home buyers that public improvements will be done. These improvements include public infrastructure items like streetlights, flood control, sidewalk, gutter, and street signs.
How are subdivision bonds different from site improvement bonds?
Although subdivision bonds are sometimes referred to as site improvement bonds or land improvement bonds, this is incorrect. A subdivision bond is designated for new structures while a site improvement bond is for existing structures.
This type of surety bond holds the principal (developer) responsible for the work or improvements. This is unlike other types of surety bonds, where the obligee is responsible for the work.
Underwriting requirements for subdivision bonds
Most surety companies have stringent requirements for subdivision bonds. The broad time-horizon and historical loss results of subdivision bonds make them a high-risk item for insurance companies. Often, these historical losses are due to economic recession and oversupply.
As a result, surety bond underwriters will assess the following factors when issuing subdivision bonds.
- Personal credit history of the developer
- The land developer’s experience with similar projects
- The developer’s financial footing and project funding level
- Ownership structure of the development company (most are LLCs)
- Scope of improvements proposed for the project
What is the cost of subdivision bonds?
Typically, subdivision bonds cost roughly 3 percent of the total bond amount. But, several factors can impact this cost, such as:
- Terms and size of the contract
- Work history of the developer
- Credit score of the developer
In any case, the bond is determined as a percentage of the total cost of the construction project.
How do you obtain subdivision bonds?
To buy a surety bond for your subdivision project, you’ll first need to speak with a licensed surety bond agency. Then, you’ll provide them with the required documents while they determine the best surety bond price for your project.
What documents are required when applying for a surety bond?
Applying for a surety bond for your subdivision requires you to provide many different forms of documentation.
- A completed application for the bond
- A copy of the subdivision agreement drafted by the obligee
- Letter of credit
- Project references and contact information
- Sealed estimates from project engineers
- A letter of intent
- Market analysis of the subdivision project
- Bid amount and other developer information
- Business entity documents like articles of incorporation, joint venture agreements
- Financial statements such as balance sheets, income documents, funding documents, and bank statements
Contact California Builder Services for subdivision public reports!
Our professionals help developers and owners in California file and obtain the DRE public reports they need for their subdivision project. Year after year, we proudly help owners ensure their subdivision public report is expertly handled and managed, from start to finish. As you start your subdivision property project, contact us today for a free consultation and learn more about our services!