Developer Surety Bonds, Explained

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.


What Is Developer Surety?

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.

Top Four Things you Need to Know About Developer Surety

Aside from the basics, there are four things you should know before we introduce you to the specific types of developer surety:

  1. The market is booming — The developer surety market isn’t slowing down. The Greater Toronto Area has an incredibly strong demand for condominiums. This presents a unique marketplace for you to negotiate increasingly better rates.
  2. Choose a bond over a letter of credit — Using a bond instead of a letter of credit allows you to gain access to additional bank financing. Ultimately, it means you can grow your business and enhance its liquidity.
  3. Developer surety bonds free up money — Bonds remove the need for filing a letter of credit or cash. It ensures you have the money to fund your project.
  4. Understand prequalification rules — To get a bond, you need to prove you have the monetary means to finish the development project. Plus, you must demonstrate you have the resources, operational controls, and expertise to ensure a successful end.


The Types of Developer Surety Bonds

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.


Tarion Marketing and Warranty Bonds

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:

  • The marketing stage — Before you start selling the condominium units, you must provide security to Tarion. In this instance, you’re supplying a Tarion marketing bond, but a letter of credit (LC) or cash are also options.
  • The construction stage — The bond remains in place while you build the condominium.
  • The warranty stage — Tarion holds the $20,000 per unit amount for one to two years (i.e., the warranty period) after your condominium is registered.


Deposit Financing Insurance Coverage

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.


The Deposit Financing Timeline

Similar to Tarion marketing and warranty bonds, condominium deposit financing works differently at the various stages of the construction project:

  • Deposit financing insurance terms — The terms are put together alongside the terms outlined in your Tarion marketing and warranty bond before you start selling the condominium units.
  • Before construction — Depending on your specific deposit financing insurance terms, you might be able to release a portion of your buyers’ deposits before the construction begins to cover soft costs.
  • During construction — At this stage, your buyers’ deposits are released in line with your monthly construction financing.


Why Is Condominium Deposit Insurance a Good Idea?

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.


Site Agreement and Subdivision Bonds

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.


Why Is a Subdivision Bond a Good Idea?

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.


Where Are Subdivision Bonds Accepted in Place of Letters of Credit?

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:

  • City of Calgary
  • City of Surrey
  • City of Edmonton
  • City of Grande Prairie
  • City of St. Thomas
  • City of Pickering
  • City of London
  • Town of Innisfil
  • Municipality of Chatham-Kent

As more areas are starting to accept subdivision bonds, it’s worth checking with one of our advisors for information on your specific municipality.


How Much Do Developer Surety Bonds Cost?

Each type of developer surety comes with a price tag that is affected by certain factors of you and your project.


The Cost of Tarion Marketing and Warranty Bonds

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:

  • Your team — Bond providers consider the credentials and qualifications of your team, including cost consultants, lenders, builders, and lawyers.
  • Your experience — As you know, you’ll pay more if you’re a newer or less-experienced condominium developer.
  • Your financial security — Your credit score and bank statements are taken into account when surety companies consider your risk level. You may be given higher Tarion bond rates if you aren’t financially secure.
  • Your project’s viability — Tarion surety bond issuers won’t supply bonds to projects that don’t have a high likelihood of success (i.e., they’re not viable).
  • Your project’s size — Smaller projects with less-experienced developers tend to come with costlier rates.


The Cost of Deposit Financing Insurance Coverage

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:

  • The viability of the project
  • The size of the project
  • Your team


The Cost of Site Agreement and Subdivision Bonds

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:

  • Subdivision agreement terms — Surety companies consider the terms found inside your subdivision agreement to ensure your project is viable. They won’t issue a bond if they believe the project is at risk of standing incomplete.
  • Your development company’s financial history — If you have a solid economic base, you’ll likely receive attractive rates from the surety company.
  • Your personal credit rating — A poor credit score can bump the rate up to 3%, meaning you could pay a maximum of $15,000 in the previous example scenario. However, that won’t typically be the case if you can prove strong financial history in other areas.


How Do You Get Developer Surety Bonds?

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.


For Tarion Bonds and Condominium Deposit Financing, You Will Need:

  • Your development company’s most recent financial statements
  • Standard form condominium documents, including:
    • Standard purchase and sale agreement
    • Tarion statement of critical dates
    • Disclosure statement
  • The project’s budget detailing soft and hard costs
  • The construction financing agreement or letter of intent
  • Land title details and appraisals if applicable
  • Tarion terms and conditions of registration (often referred to as the Tarion risk assessment letter)
  • Developer surety application
  • Environmental audits and geotechnical reports
  • Personal net worth statement for each project shareholder


For Subdivision Bonds, You Will Need:

  • Your development company’s most recent financial statements
  • The project’s budget including soft and hard costs
  • The construction financing agreement or letter of intent
  • The site plan or subdivision agreement
  • Land title details and appraisals if applicable
  • All applicable environmental audits and geotechnical reports
  • Your developer surety application
  • A personal net worth statement for each of the subdivision project shareholders

We can connect you to a highly acclaimed developer surety brokerage that will work alongside you to ensure you supply all the necessary documents.


Why Choose ConstructionBond For Your Canadian Condominium Project?

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.

Let us do the hard surety bond work, so you can concentrate on what you do best. Get started by filling in our quick and easy online request form or calling us on our toll-free number.


We Help The Following Developers Find The Surety Bonds They Need:

  • New developers — Our experts help you meet the security needs with Tarion.
  • Experienced developers — As an experienced developer, you’ve successfully completed at least two condominium projects. We work with the country’s best bond providers to bring you unmatchable rates.
  • Boutique developers — Everybody starts somewhere. So, at ConstructionBond, we connect you to surety bond providers who are well-versed in working with small projects.






Frequently Asked Questions


Who Is Involved In a Surety Bond?

There are three parties involved in a surety bond. These include:

  1. The principal — It’s a person or business that buys the bond and promises to fulfill the specific obligations (i.e., you, in this scenario).
  2. The obligee — It’s the entity protected by the surety bond the principal (you) purchases. Typically, it’s your client or a government agency that requires you to secure a surety bond.
  3. The surety company — It’s the insurance firm or bond issuer that gives you the bond. Essentially, they offer a line of credit to you (the principal) in case you don’t perform as promised. If a claim occurs, the surety company pays the obligee and then seeks full reimbursement from you.


How Often Do You Pay For Surety Bonds?

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:

  • The bond must be cancellable. That way, if you fail to make payments, the surety company can cancel the bond.
  • The bond must be over $1,000 or $1,500, depending on the provider.
  • You must be financially reliable and be prepared to send copies of financial statements to prove it.


What Is The Difference Between a Surety Bond and an Insurance Policy?

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.


Which Bond and Insurance Providers Does ConstructionBond Work With?

We work with the country’s best bond and insurance providers, including the following:

  • ACE Insured
  • Allianz
  • AM Fredericks Underwriting Management Ltd.
  • Aviva
  • Berley Canada
  • BI;I
  • CFC Underwriting
  • Chartis
  • Chesterfield Canada, Inc.
  • Chubb Insurance
  • Cutter Underwriting Services
  • Cowan Insurance Brokers
  • Creechurch
  • Eagle Underwriting Group Inc.
  • Elliott Special Risks Ltd.
  • Encon
  • First Media


When Should You Apply For a Developer Surety Bond?

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.


What Other Surety Bond Types Exist?

Besides developer surety bonds, there are six other primary types of bonds, including:

  • Construction bonds — Otherwise known as contract bonds, construction bonds guarantee that you’ll meet your contractual obligations. Maintenance bonds, payment bonds, performance bonds, and supply bonds are included in this category.
  • Commercial surety bonds — These bonds help you meet specific government and provincial regulations and statutes. They often go hand-in-hand with license and permit bonds. Commercial surety bond types include court bonds and certain types of license bonds.
  • License and permit bonds — License and permit bonds guarantee that you’ll meet the obligations outlined in your license or permit agreement.
  • Court bonds — A court bond ensures you’ll comply with the obligations and terms stated by the court. The category houses appeal bonds, bail bonds, trustee bonds, and probate bonds.
  • Government bonds — Government bonds are essential for many Canadian businesses, including customs brokers, freight brokers, and estate administrators. There are plenty of bonds filed under this category, including estate surety bonds, freight broker bonds, and customs bonds.
  • Miscellaneous bonds — Any bond that doesn’t properly fit a classification is put in the miscellaneous category.


Can ConstructionBond Help You Obtain All Types of Developer Surety Bonds?

Yes! Our experienced team can help you acquire Tarion surety bonds, deposit financing insurance, and subdivision bonds from leading Canadian issuers.


What Is The Tarion Warranty Corporation?

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.


Who Owns Tarion?

The Government of Ontario owns Tarion. The not-for-profit consumer protection organization was established in 1976.


Is a Tarion Bond Mandatory in Canada?

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.


What Are Soft and Hard Costs?

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:

  • Loans and interest rates
  • Land costs
  • Accounting fees
  • Insurance, license, taxes, and permits
  • Off-site costs
  • Moveable furniture
  • Post-construction maintenance charges and upkeep fees
  • Marketing, public relations, and advertising fees
  • Other fees

On the other hand, hard costs refer to items that do directly relate to materials, including but not limited to:

  • Labourers
  • Interior finishes
  • Superstructure
  • Foundations
  • Drainage
  • Equipment
  • And more