Subdivision Bonds and Their Role in Development
Subdivision bonds are surety bonds required by local governments (cities, counties, public agencies) from property owners or developers during subdivision development. Also known as site improvement bonds, improvement performance bonds, and improvement payment bonds, they guarantee that the developer or property owner (the principal) will finance and complete all public improvements. This protects the municipality from financial liability if the developer fails to complete the work.
When budgeting for your construction project, it’s essential to understand the cost of these bonds.
Key Factors That Impact Subdivision Bond Costs
When clients ask how much subdivision bonds cost, the answer often depends on the following factors.
- Financial Strength of the Developer or Contractor
Sureties assess the principal’s ability to fund the project and complete the required improvements. Those with strong personal and business financials can lead to lower bond premiums.
- Bond Amount and Project Size
Larger bond amounts may qualify for tiered rates in which the premium rate decreases as the bond amount increases, resulting in a lower average rate.
- Credit History and Liquidity
A solid credit score and proof of project funding can improve your chances of approval at a preferred premium rate. If the principal has poor credit or limited liquidity, the surety may require collateral or alternative bonding methods.
- Experience of the Developer or Principal
Sureties evaluate the prior experience of the principal with similar subdivision work. Those with a successful track record of bond work are more likely to receive favorable rates.
How Subdivision Bond Premiums Are Calculated
Premiums for subdivision bonds are typically calculated as a percentage of the total bond amount. The percentage of a subdivision bond premium generally ranges between 2% to 5% for bonds under $500,000 depending on the applicant’s financial strength and project risk.
After the initial term, the bond renews annually until the bond is released mid-term during a renewal. If the bond is released mid-term, a pro-rated return premium may be issued, depending on the surety company’s refund policy.
- Are There Any Hidden Fees or Administrative Charges That Developers Should Be Aware Of?
No, reputable surety companies do not charge hidden fees. The bond premium quoted should not change unless there is a change in the required bond amount. Always review your bond agreement and ask for a detailed breakdown of the rate if needed.
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What Happens When a Subdivision Bond Is Claimed On, Changed, or Released
Several factors can impact a subdivision bond throughout the course of a public improvement project. In this section, we’ll explore the key scenarios where the bond may be triggered, modified, or released.
What Happens if a Subdivision Bond is Claimed On
If a developer fails to complete the required public improvements, the municipality can file a claim on the bond. The surety will then be required to investigate the claim and if the surety determines they have liability under the bond, they will satisfy the claim. The surety has the legal right to go back to the developer (the principal on the bond) for reimbursement on any monies paid out.
What Happens if a Bond is Partially Released
Some municipalities may allow partial releases or bond reductions as the project is completed. If the bond is reduced mid-term during a renewal period, not during the initial term, the premium is recalculated based on the new bond amount, and the future renewals will reflect the adjusted rate. A rider will be issued to reflect the reduction in the penal sum of the bond.
How Subdivision Bonds are Released
Upon the completion of the public improvement project, the surety will require a letter issued by the municipalities that releases the bond. The letter must confirm all work is completed and accepted, and that the bond is exonerated. It should also include the project location, the developer’s name, the bond number, and the surety company name so that the surety can officially close out the bond and stop renewals. If a release letter has not been provided, then the bond renews annually, accumulating additional premiums.
- Since 1984, CSBA has helped hundreds of property owners obtain subdivision surety bonds
Whether you’re a first-time property owner working on improvements or a seasoned developer, CSBA offers transparent pricing and strategic support to help guide you through the bonding process.
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With CSBA, you can take the next step in your subdivision project with confidence. Get a free subdivision bond quote from CSBA today—no obligation, just expert support.
