Are you taking on a condominium project in Canada? Then you need to acquire developer surety bonds to meet Tarion’s requirements and satisfy your purchasers. Thankfully, you’ve found ConstructionBond — we’ll use our decades of experience to help you acquire the bonds you need at a price you’ll love.
In the subsequent sections, we’ll explore the various developer surety bonds in detail and answer many of your frequently asked questions.
As the name suggests, developer surety includes bond products designed exclusively for residential and commercial developers. They work to satisfy provincial legislation by protecting home buyers’ deposits, offering warranty, and ensuring financial security throughout the various stages of construction.
Aside from the basics, there are four things you should know before we introduce you to the specific types of developer surety:
Tarion marketing and warranty bonds, condominium deposit insurance, and subdivision bonds are all types of developer surety. Let’s take a look at each in more detail.
The Tarion Warranty Corporation (typically known as Tarion) is a not-for-profit organization established in 1976 to enforce the Ontario New Home Warranties Plan Act. It makes sure that you abide by the Act and protects consumers if you fail to perform the obligations outlined in the Act.
You must register with Tarion to build and sell condominiums in Ontario. Plus, you must pose security to protect your buyers’ interests before the sale of units. The amount of security must be at least $20,000 per unit, which covers the purchasers’ deposits and the warranty necessitated by Tarion. Although, newer or less-experienced developers might be required to post more security.
Tarion marketing and warranty bonds stop you from using a letter of credit or cash to post the security. Instead, you acquire the bond, which improves cash flow and has attractive rates.
The Tarion Bond Timeline
You can see how a Tarion marketing and warranty bond works in the various stages of condominium construction below:
Developers in Ontario must retain all buyer deposits for condominium projects in a trust account, as per the Ontario New Home Warranties Plan Act. The money must stay in the account until your condominium is registered unless you purchase condominium deposit insurance (otherwise called CDI, deposit financing insurance, or excess condominium deposit insurance (ECDI)).
The policy allows you to utilize your buyers’ deposits to fund the development project. As soon as your coverage is in place, you can fund both soft and hard costs with the otherwise detained money. Generally speaking, the rates for condominium deposit insurance are much lower than standard financing costs, meaning you receive a far better project ROI.
Similar to Tarion marketing and warranty bonds, condominium deposit financing works differently at the various stages of the construction project:
Thanks to the cheaper rates, most condominium developers prefer to use deposit financing insurance for their projects.
Deposits are usually between 15% and 20% of the purchase price, and the CDI policy has rates between 0.5% and 1.25%, resulting in huge savings.
We’ll look at an example to show you how these savings apply to real-world situations:
You are developing a 100-unit condominium. The units have an average price of $500,000, and you require deposits of 20%, meaning the total project revenue is $50 million ($500,000 multiplied by 100 units).
Out of the total figure, $10 million is made up of deposits. Tarion requires $20,000 per unit, meaning $2 million is covered by the corporation and $8 million requires deposit financing.
Typically, there’s a 3% to 4% difference in interest rate savings when comparing CDI to construction financing. So, you could save at least $240,000 per year on this example project by choosing construction deposit insurance over standard financing.
A subdivision bond is a type of surety bond that is increasingly becoming accepted by municipalities across Canada.
The bond allows developers to meet the security requirements under the site plan or subdivision agreement. Like Tarion marketing bonds for condominium developers, subdivision bonds let developers of subdivisions negate the need for a letter of credit or cash security.
They are highly customizable, so each municipality has its own subdivision bond wording.
Supplying a letter of credit for every subdivision agreement isn’t sustainable. They tie up much-needed money, decrease your borrowing capacity, and can be held by the municipalities for numerous years.
A subdivision bond meets the municipality’s same obligation, but it’s underwritten differently from an LC (letter of credit) to eliminate the downfalls mentioned above.
Subdivision bond companies rely on a typical indemnity agreement for security when they supply the bond. This aspect allows you to keep your cash and access better borrowing options.
Canada’s housing supply crisis continues to grow, so keeping your cash accessible is an ever-growing necessity for subdivision developers like you.
Thankfully, subdivision bond acceptance is spreading throughout the country. However, not all municipalities allow such bonds.
Currently, the places that have accepted subdivision bonds include the following:
As more areas are starting to accept subdivision bonds, it’s worth checking with one of our advisors for information on your specific municipality.
Each type of developer surety comes with a price tag that is affected by certain factors of you and your project.
Tarion marketing and warranty bond rates can run as low as 0.5% for well-established developers and up to 1.25% for newer or less-experienced developers. Just keep in mind that there may be a one-time commitment fee between $2,500 and $10,000.
Here’s a real-world example:
You are a new developer working on a 50-unit condominium project with a $20,000 per unit Tarion security. The surety bond amount must be $1 million (i.e., 50 units multiped by $20,000). You’re given the highest rate at 1.25%, meaning it would cost you $12,500 per year plus the potential one-time commitment fee.
There are a few factors that dictate the Tarion bond rate offered by surety companies, including:
Generally speaking, deposit financing insurance rates sit between 0.5% and 1.25% per year. The percentage depends on your experience, like Tarion bonds.
Other factors affect your specific costs, including but certainly not limited to the below:
Subdivision bonds tend to cost between 0.75% and 1.5%. So, if your bond amount is $500,000, you’ll pay between $3,750 and $7,500, based on the rate your surety company awards you.
The bond issuer calculates your rate, depending on the factors found below:
Our experienced ConstructionBond team can help you acquire the developer surety bonds you need. But take a look at the lists below to find out the documents you must send to the surety company:
Please note: Tarion bonds and condominium deposit financing are grouped as we recommend applying for both simultaneously.
We can connect you to a highly acclaimed developer surety brokerage that will work alongside you to ensure you supply all the necessary documents.
At ConstructionBond, we put you first. Acquiring the right developer surety bonds for your construction project can feel intimidating when you go it alone. But with us, you can rest easy knowing you’re in safe hands.
Using our decades of experience, we’ll accurately assess your surety bond needs and connect you to one of Canada’s leading providers. Then, they’ll guide you through the process, saving you both time and money.
There are three parties involved in a surety bond. These include:
You don’t need to pay for surety bunds every month. Usually, you’re quoted a one-time or per-year amount.
The only way to split your bond payment up is to apply for a financing or payment plan. Some bond issuers provide financing plans to spread the cost, but you must meet these requirements:
As you’ve just discovered, surety bonds involve a minimum of three parties — the obligee, principal, and surety company.
They’re part credit and part insurance. The surety company offers the obligee guaranteed payment and collects payment from the principal if a claim is made.
Conversely, insurance is a two-way contract involving you and the insurance provider. Policies give you reimbursement or financial protection against losses or third-party lawsuits. You can purchase insurance coverage for a wide variety of eventualities by paying the premiums monthly, quarterly, or yearly.
We work with the country’s best bond and insurance providers, including the following:
When working on condominium projects, developer surety bonding runs in tandem with Tarion registration and bank financing. So, it’s never too early in your project to get your hands on bonds!
When working on subdivision developments, the subdivision bond is issued while the municipality considers the subdivision or site agreement. Acquiring these bonds is typically a longer process than Tarion bonds. Plus, you may need to put in some extra work when registering agreements with your lawyers.
Besides developer surety bonds, there are six other primary types of bonds, including:
Yes! Our experienced team can help you acquire Tarion surety bonds, deposit financing insurance, and subdivision bonds from leading Canadian issuers.
The Tarion Warranty Corporation is a non-profit company established to ensure builders abide by the Ontario New Home Warranties Plan Act. Any individual or company developing a residential condo in Ontario must be registered with the Tarion corporation.
The Government of Ontario owns Tarion. The not-for-profit consumer protection organization was established in 1976.
No, Tarion marketing and warranty bonds are not mandatory. However, it is beneficial to acquire one since it removes the necessity to post cash or a letter of credit as security with the company.
Both soft and hard costs can be financed with your buyers’ deposits once you acquire condominium deposit insurance.
Soft costs include anything that doesn’t directly relate to materials or labour, such as:
On the other hand, hard costs refer to items that do directly relate to materials, including but not limited to: