Surety wants cash collateral behind a 125 percent improvement bond

Improvement guarantee requirements are set by local ordinance and vary widely, so the percentage, the acceptable instruments, and the warranty period all come out of that specific code rather than a national standard. Read the subdivision ordinance section on security yourself before the next meeting, because staff sometimes quotes the strictest reading of it out of habit.

Phasing is usually the biggest available win. If the ordinance allows phased final plats, you bond only the improvements in the phase you're recording, which on a project your size can cut the outstanding instrument by more than half at any one time. The trade is that you record and pay for two rounds of plat work, and any offsite or trunk improvement serving all phases typically has to be bonded in phase one anyway. Confirm in writing which improvements the city considers phase-independent, because that determination sets the actual number.

On instrument type, a cash escrow releases the fastest and costs you the most in dead capital. A letter of credit occupies borrowing capacity at your bank, and banks generally count it against the same line you want for construction draws. A surety bond leaves the balance sheet alone in principle, which is why the surety is asking for collateral against a thin entity. Premiums on subdivision bonds commonly run in the range of one to three percent of face annually depending on credit, and that is a real line in your budget.

The reduction mechanics matter more than the starting percentage. Ask whether the city reduces the security as improvements are inspected and accepted, or holds the full amount until final acceptance of everything. A code that allows stepped reduction at 50 and 90 percent completion changes your average outstanding balance far more than arguing 125 down to 115.

Second the phasing point hard. On the build side the other thing to check is what the city counts as complete for the purpose of releasing security. Some want top course of asphalt in before acceptance, and if you're waiting on builders to finish houses before you pave final lift, your bond sits there for an extra season with nothing you can do about it. That single sequencing question has held guarantees open for two years past substantial completion where I've worked.

$4.25M held for two years past acceptance. That's a bigger number than my entire portfolio and it isn't even the project.

The maintenance bond period is the one that bites us. Pond side slopes erode, sidewalk panels crack from builder traffic, and the city punch list at the end of the warranty is written by an inspector who has been driving past the site for two years. Whoever owns that punch list ought to be named in your contract with the site contractor, with retainage held long enough to cover it.

@bramble put a number on it before you negotiate anything. Bond premium at say 2 percent on $4.25M is $85k a year, plus whatever return you're giving up on the collateral. If phasing halves the average outstanding you save meaningful money, and that's the case you make to the city, though they don't care about your economics. Where they do respond is completion risk, so bring a contractor with local acceptance history and offer a faster construction schedule in exchange for phased security.

I've seen 125 percent written into ordinances all over and I've never once seen a council amend it for an individual applicant. What does move is the development agreement, which is negotiated document by document. Phasing, reduction milestones, what counts as an offsite, whether the city accepts partial acceptance of a street segment. All of that lives there. Spend your effort on the agreement, not on the percentage.

Dumb clarifying question, is the maintenance bond a separate instrument you buy after the performance bond releases, or does the same bond just convert?

@pike separate instrument in most places I've read about, smaller face amount, usually a percentage of the accepted improvement value for a fixed warranty term. Which means two premiums, not one.

The thing I take from this thread is that the guarantee is basically a second capital stack sitting parallel to the real one, and nobody's pro forma template has a row for it. @bramble did your lender count the LC against your construction line, or did they treat it separately?