Subdivision Bonds, Explained

Are you a developer looking to start constructing a subdivision? Then, you need to obtain a subdivision bond to ensure you stick to the subdivision agreement! Fortunately, you’ve stumbled upon ConstructionBond who can help you get the bonds you need.

In the following sections, we’ll talk about the definition of a subdivision bond, its benefits, and a whole lot more.


What Is a Subdivision Bond?

Pay on demand subdivision bonds are a type of construction surety bond becoming increasingly more accepted in municipalities across Canada. They are used to meet the security criteria under the subdivision or site plan agreement instead of a letter of credit.

In other words, the subdivision bond guarantees the obligations currently secured by the letter of credit. It ensures you will abide by and complete the obligations set out in the subdivision agreement.


Why Should You Use a Subdivision Bond Instead of a Letter of Credit?

Attaining a letter of credit for every subdivision agreement isn’t a sustainable security method for developers. Why? Because they hold cash idle and limit your borrowing potential. Not to mention that your municipality can hold letters of credit for multiple years!

On the other hand, subdivision bonds meet the same obligations without the disadvantages mentioned above. They’re underwritten differently than letters of credit because the bond company is more concerned with your overall industry experience and financial wellbeing, as well as the project’s viability.

Typically, surety companies don’t require you to meet complex criteria. Instead, they usually rely on a standard indemnity agreement when issuing the subdivision bond. With this method, you have much better access to credit options and leave with all of your cash in hand.

In today’s world, this is more relevant than ever before. Developers like you need accessible cash to sustain their ability to meet the country’s housing supply crisis.


The Benefits of Subdivision Bonds for Developers and Municipalities

Both developers and municipalities can develop from using and accepting subdivision bonds. Find out more about these benefits in the following sections.

Advantages for Developers

Developers benefit from using subdivision bonds for several reasons, including:

  • Off-balance sheet security — Subdivision bonds are deemed off-balance sheet security. In other words, it means they don’t encumber your (i.e., the developer’s) balance sheet.
  • Choice — You can choose whether to supply the municipality with a letter of credit or a subdivision bond as a form of security.
  • Access to cash — Subdivision bonds let you access a large amount of otherwise idle money that normally secures the letter of credit. Therefore, you are in a much better financial state to meet the cash-flow requirements of the construction project.
  • Better credit available — Using a subdivision bond over a letter of credit lets you access financing that you can utilize to improve your company’s liquidity.


Advantages for Municipalities

Canadian municipalities benefit from accepting subdivision bonds for a number of reasons, including:

  • Responsive — The municipality doesn’t have to exhaust its recourse against the developer before making a claim on the subdivision bond.
  • Customizable — The bond wording is tailorable to the diverse requests and needs of each municipality. Therefore, it provides specific financial protection perfectly aligned with the particular development agreement.
  • Liquid — Subdivision bonds are similar to letters of credit, meaning they are liquid and provide municipalities with the money needed to fund a developer default.
  • Prequalification — A developer must demonstrate expertise and prove they have the resources to successfully complete the project before being granted a subdivision bond. This decreases the risk of unfinished projects within the city.
  • Growth — Accepting this type of security from a developer sends a strong message to the entire development industry. It lets them know the municipality is innovative, ready to grow, and open to changing its ways to meet the developers’ needs. Allowing subdivision bonds as a municipality means attracting further development opportunities.
  • Performance — The subdivision bond holds the developer responsible and provides motivation for them to fulfil their obligations completely.


Where Are Subdivision Bonds Accepted?

Letters of credit are most often utilized. However, many municipalities in Canada are starting to accept subdivision bonds in lieu of the letters.

Currently, the cities open to these surety bonds are as follows:

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

Thanks to the spread of the Surety Association of Canada and the Ontario Home Builder’s Association, municipalities are constantly being added to this list. So, be sure to check your local municipality’s standpoint.


How Do You Apply For a Subdivision Bond?

If you’ve ever applied for construction financing, you should expect a similar process when obtaining a subdivision bond.

You will need the following documents:

  • Your development company’s most recent financial statements
  • A copy of your project budget that lists both hard and soft costs
  • A copy of the construction financing agreement or letter of intent
  • Your completed developer surety application
  • A copy of the subdivision or site plan agreement
  • Any land title details and appraisal, if you have them
  • Any geotechnical reports
  • Any environmental audits
  • Personal net worth statements for all shareholders on the project

As you can see, you must supply a plethora of paperwork when applying for a subdivision bond. With that in mind, we highly recommend you work with a specialist developer surety brokerage.

Luckily, you don’t have to look very far to find one! Just fill in our quick online quote form, and we’ll analyze your requirements to ensure we put you in touch with the best bond provider for you.


How Much Do Subdivision Bonds Cost?

The average cost of subdivisions bonds in Canada is between 0.75% and 1.5% of the bond’s value. Let’s look at an example to give you a clearer picture:

Let’s say your subdivision bond amount is $500,000. You’ll pay anywhere from $3,750 to $7,500, depending on what rate you’re awarded from the surety company.

There are a few factors that can impact the rate you receive, including:

  • Your personal credit rating — A bad credit score could increase the rate to around 3% of the bond amount. However, if your business has a strong financial background, that might not be the case. It’s considered on a case-by-case basis.
  • Your company’s financial history — If your business has a solid financial foundation, you’ll likely be awarded the more attractive rates by the surety company.
  • Subdivision agreement terms — Bond providers look at the terms inside your subdivision agreement to check the project’s viability. They’re unlikely to issue a bond if they think the project is at risk of remaining incomplete or extending deadlines.

The best way to find out how much you’ll need to pay for a subdivision bond is to complete our online quote form. Our bond providers are well-versed in giving their customers the best subdivision bond deal possible.


Why Choose ConstructionBond?

We specialize in connecting developers like you with highly experienced bond providers. With fantastic rates, transparent terms, and never any hidden fees, our leading surety companies are Canada’s finest.

After you complete our surety bond form online, our team starts reviewing your requirements. Then, we assign a brokerage or agent to your case, and they guide you through the process. It’s that simple — no more scouring the web for the best deal ever again!


Frequently Asked Questions


What Other Bonds May Developers and Contractors Need?

Alongside subdivision bonds, you might need to consider the following bond types as a developer or construction contractor:

  • Site improvement bonds — Site improvement bonds are concerned with bettering an existing property. They might seem similar to subdivision bonds, but the distinction is that subdivision bonds only deal with new builds.
  • Bid bonds — A bid bond is a guarantee between you and the project owner. It ensures that, should the project owner accept your bid, you’ll perform all the required actions with the correct resources at the price quoted in the proposal. In other words, it protects the owner if you fail or refuse to enter into the contract at the bid quote.
  • Performance bonds — A performance bond offers a financial guarantee for the completion of a construction project. It ensures you complete the task to the agreed specifications provided by the project’s owner. Here, the project owner can be anyone from a private individual to a municipality to a government entity.
  • Payment bonds — Payment bonds exist to protect material suppliers, labourers, and subcontractors. They ensure timely payment provided all obligations within the project contract are complete.
  • Surety’s consent to agreement — This bond functions as a guarantee that the project owner won’t face financial loss. It’s a legally binding document that formalizes a variety of matters, including:
    • Price and condition of sale
    • Redemption provisions
    • Conditions that allow the contract to be voided
    • Interest rates
  • Labour and materials bond — Labour and material bonds guarantee everybody who works on a construction project as a supplier or subcontractor is paid.


What Is The Subdivision Bonds Claims Process?

If you default on the obligations outlined in the agreement, individuals can exercise their right to file a claim against your subdivision bond. For example, if you leave a project incomplete, your bond pays for the hiring costs of a new contractor to complete the construction.

However, that doesn’t mean you’re off the hook! After all, the bond is in place to protect the financial climate of the municipality, not you, the developer. So, once the surety company pays the claim, they’ll pursue you for reimbursement.


Are Subdivision Bonds a Legal Requirement?

Generally speaking, subdivision bonds aren’t a legal requirement since every project is different from the last. But in the same breath, it’s worth acknowledging that some municipalities and local government bodies won’t allow construction to start until you post a subdivision bond. It’s especially applicable to projects involving public structures (i.e., streets, sidewalks, and electrical lines) because the governing entities must protect the citizens.

Once you’ve received the bond, you must post it. Until then, they won’t grant you a building permit, meaning the project cannot commence.


What Are Subdivision Agreements?

As a developer, you must submit a subdivision application to your municipality’s Department of Planning (in some areas, it’s known as the Planning Board). The application should include enough information to make it easy for the planning authority to decide whether to grant approval.

The subdivision application should:

  • have a description of the homes or commercial buildings to be constructed.
  • have drawings of the homes or commercial buildings to be constructed.
  • include plats showing the proposed boundary lines between the properties and their land.
  • identify the area.
  • have a description of the amenities and utilities to be installed.
  • include plats showing the location of the amenities and utilities.
  • state the average prices and sizes of the homes or commercial buildings to be constructed.

Sometimes, you might need to add details before the Department of Planning can approve the application.

Once approved, they begin negotiating a subdivision agreement (also known as a subdivision improvement agreement) with the city’s planners. It identifies the:

  • specific improvements to be built or installed.
  • ownership of the improvements and states transference to the municipality once complete.

Alongside that, the subdivision agreement will outline the requirement that you buy a subdivision bond as a form of security.


How Are Subdivisions Made?

Usually, somebody who owns an expansive piece of land either partners with you (the developer) or sells it to you to divide it into smaller lots. After all, it’s much easier to sell smaller sections of land with homes or commercial buildings than a massive piece of undeveloped land.

To do that effectively, you create an industrial park or a residential neighbourhood. Once built, you sell the individual commercial buildings or dwellings.

So, where do subdivision bonds come into play?

Well, they’re used to ensure you stick to the terms outlined in the agreement. In other words, if you leave the project unfinished or incorrectly install some features, the bond gives the municipality the cash needed to complete the project successfully.



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