Site Improvement Bonds

With all the new subdivisions and planned communities popping up all over the country, it seems like a good time to discuss site improvement bonds (also called subdivision improvement bonds). While they are a "hidden" aspect of subdivision development, they're also crucial players in the process.

Bonds in general drive the construction industry. These bonds are taken out by the contractor in order to protect their customer (and the customer's investment) from contract default or other problems during the construction process including nonpayment of subcontractors, nonperformance, etc. If the contractor is found to be in breach of contract, the bond takes effect to satisfy the customer's interest in the contract.

A site improvement bond is no exception: these bonds are taken out to ensure that the owner or developer of a property will guarantee completion of improvements. Often, the bonds are taken out as a condition to getting a construction permit or recording a final parcel map with the locality where the property is based.

Site improvement bonds take several forms. The following forms are acceptable types of site bonds:

• Certificates of deposit (CDs)
• Cash, certified cashier's check or money order
• Irrevocable letter of credit issued by a bank, credit union, etc
• Corporate surety bond

The last option, the corporate surety bond is far and away the preferred method for their site improvement bonds, partly due to the potential drawbacks of the other types of guarantee. Letters of credit are susceptible to the bank's immediate seizure of property if they choose not to renew the bond, for example. CDs and cash are problematic because the recipient of the guarantee will have to ensure that it is properly executed and that they are in fact the beneficiaries of the bond. For the contractor, CDs and cash tie up capital that could be more effectively used elsewhere.

On the other hand, the surety bond (purchased through an insurance company or bond company) allows the recipient more security. The contractor is required to go through a preapproval process with these bonds, and the surety's claim department will, in the event of default, work proactively to resolve issues with the bond.

The site improvement bond guarantees completion of improvements specified in the bond. These improvements can include curbs and gutters, sidewalks, utilities, grading, storm drains, and streets. It will spell out the estimate of cost and time of completion as well, and the surety bond company will want to see where the money is coming from. In short, the site improvement bond assures that everyone is on the same page regarding improvements, and that the work will be completed as per the agreement.