Legislation requires developers like you to offer financial security before developing new condominiums. Surety companies provide various products to meet all the security obligations. If you’re developing a new condo in Ontario, you must obtain the appropriate insurance before beginning. Luckily, we can connect you with leading specialist providers.

We’ll uncover everything you need to know about developer surety for condominium projects in the following sections, including how we can help you acquire comprehensive coverage.

 

The Tarion Warranty Corporation

Before diving into the various types of developer surety required in Ontario for condo projects, it’s worth understanding the corporation behind these requirements.

The Tarion Warranty Corporation, typically referred to as Tarion, is a not-for-profit protection organization established in 1976 by the Ontario New Home Warranties Plan Act. The group’s main job is administering the Act and ensuring complete protection for home buyers and owners.

As per the Act, all new homes constructed in Ontario are given a warranty by you (the developer or builder). Tarion’s job is to make sure that the buyers of these homes are afforded the coverage. Specifically, the organization’s roles and responsibilities include:

• Analyzing warranty claims to figure out if they’re valid by inspecting the site or other investigation methods
• Protecting home buyers and owners if you fail to fulfill your warranty obligations
• Educating new homeowners and buyers about their rights and responsibilities under the warranty
• Managing the MyHome portal that allows homeowners to view their warranty and report any defects
• Ensuring disputes between you and the homeowner over repairs, customer service, or coverage are resolved fairly
• Holding a guarantee fund to protect buyers
• Compensating successful warranty claims with the money held in the guarantee fund
• Handling valid claims directly with the owner that you’ve failed to address
• Requiring all condominium developers to be registered with Tarion to build and sell establishments in Ontario
• Requiring all new condo projects to be enrolled with Tarion before the marketing phase

The Tarion Warranty Corporation was responsible for licensing too. But as of February 1, 2021, all licensing duties have transitioned to the Home Construction Regulatory Authority.

 

What Is The Home Construction Regulatory Authority?

Like Tarion, the HCRA is a not-for-profit corporation. It was designated by the Government of Ontario as of February 1, 2021, to enforce the New Home Construction Licensing Act, 2017 and other relevant regulations.

It regulates new home builders and vendors in Ontario. They ensure the marketplace stays safe, fair, and informed by continuously striving to improve the home building industry in the province.

The Authority ensures you and your construction team adhere to professional standards, allowing buyers to purchase new builds with confidence. On top of that, they provide educational material to consumers to give them the best chance of making informed decisions.

In a nutshell, the HCRA ensures:

• A well-regulated home building industry in Ontario
• Continuous improvement of consumer protection and confidence
• Industry fairness and efficiency
• Stakeholders are involved with the collaboration and innovation process

 

Tarion Bonds: What Are They? Why Do You Need One?

As part of Tarion’s efforts to protect the buyer’s interests, the corporation requires you to post security. You must give them $20,000 per unit to keep your purchasers’ deposits safe and offer the warranty protection needed by regulation.

There are three main ways you can provide Tarion security. They are as follows:

• Cash
• Letter of credit (LC)
• Tarion bond

Utilizing a Tarion bond is not mandatory. However, most developers choose this route thanks to its cost-effective nature — the rates for well-established developers run as low as 0.5%!

Take a look at this example to get a clearer picture of how a Tarion marketing and warranty bond can make your condo project easier:

Imagine you are building a 250-unit condominium. You must post $20,000 per unit to Tarion, meaning the total security amount is $5 million.

If you decide to use cash or a letter of credit, you won’t be able to use that money to fund your project. However, using a Tarion bond means you can utilize the $5 million for the project or to sort out other cash flow necessities.

Typically, we recommend purchasing a Tarion warranty bond alongside condominium deposit insurance coverage.

 

The Condominium Development Tarion Bond Timeline

Discover how the Tarion marketing and warranty bond works in practice:

• Six months (the marketing stage) — At this stage, you’re collecting deposits for the condominium units. Tarion requires you to post security to protect your buyers. As we’ve mentioned previously, you can use a letter of credit. But a surety bond has some clear advantages over the LC.
• 12 to 24 months (the construction stage) — The following one to two years after the marketing period is the construction stage. Any deposits beyond the initial $20,000 have to be held in a trust account unless you take out excess condominium deposit insurance (we’ll discuss this in more detail later).
• Two years (the warranty stage) — After the condominium building is registered, Tarion keeps $20,000 per unit for two years. If a unit owner submits a claim during the warranty period, you must respond.

 

How Much Does a Tarion Marketing and Warranty Bond Cost?

Experienced developers can expect attractive rates as low as 0.5%. However, newer or less-experienced developers working on smaller condo projects should anticipate spending up to 1.25%.

Here’s a real-world example to give you some context:

You are a new developer working on a 100-unit condominium project with $20,000 per unit Tarion security. The total security you must post is $2 million, so you’re looking to receive a surety bond for that amount. You are charged the highest rate of 1.25% by the surety company due to your inexperience, meaning the bond will cost you $25,000 per year.

The rate you receive depends on a multitude of factors, including:

• Your credit score — Financial security is one of the main metrics considered by bond providers. It’s used to prove your level of sensibility when handling money and other valuable items. Higher rates are often given to those who aren’t financially stable.
• Your team’s experience — More experienced developers are awarded lower rates. Likewise, your team’s credentials are taken into account, meaning a highly qualified team working on the project could result in lower Tarion bond costs.
• Your project’s size and viability — Usually, the size of the project is considered alongside your experience. On the flip side, viability is measured as a standalone metric. It estimates the likelihood of your project being successful. If the bond provider believes completion is likely, they’ll offer the Tarion warranty and marketing bond.

Depending on the surety company, they might require you to pay a commitment fee. It’s normally a flat rate but can vary in price from $2,500 to $10,000.

At ConstructionBond, we’ll connect you with the best providers in the business, so you get the best rates Ontario has to offer!

 

How Do You Apply For a Tarion Surety Bond?

The process of acquiring project funding from a financing company is similar to the Tarion surety bond application procedure.

You must submit these documents:

• A copy of your project’s budget, including hard and soft costs
• A copy of the Tarion terms and conditions of registration letter
• Your company’s most recent financial statements
• Any applicable land title details and appraisals
• A copy of the standard purchase and sale agreement
• A form showing the Tarion statement of critical dates and disclosure statement
• Copies of any geotechnical reports and environmental audits
• A completed personal net worth statement for each of the project’s shareholders
• A developer surety application
• A copy of the letter of intent or construction financing agreement

To ensure you complete the process correctly, we recommend working with a specialist developer surety firm. By completing our secure online quote form, we can connect you to the best Tarion bond providers in Canada.

 

What Is Excess Condominium Deposit Insurance (ECDI) and Condominium Deposit Insurance (CDI)?

Another developer surety product for condominium projects is excess condominium deposit insurance, which is typically recommended alongside a Tarion bond.

The Condominium Act in Ontario requires that your purchasers’ deposits must be kept in a separate trust account managed by an appointed trustee. However, purchasing condominium deposit insurance (CDI) or excess condominium deposit insurance (CDI) allows you to release the deposits during the project.

The coverage guarantees that you will repay any money taken from the trust account if you fail to deliver the buyer’s condo in line with the purchase agreement.

Excess condominium deposit insurance policies are issued on new-build residential condominium construction projects in Ontario. It guarantees deposits over the $20,000 covered by the Tarion Bond. Once activated, the policy lets you use buyers’ deposits to fund soft and hard costs.

Generally, deposit financing insurance costs are considerably lower than other construction financing rates, enabling you to get a better ROI.

 

The Condominium Deposit Insurance Timeline

Different stages of development activate other parts of your condominium deposit insurance policy, as you can see below:

• The terms — The terms of CDI are set up in congruence with your Tarion marketing and warranty bond wording prior to sales.
• Before construction — Depending on your specific coverage, you might be able to release a portion of the deposits to cover soft costs.
• During construction — At this stage, your buyers’ deposits are released on a monthly basis in accordance with your construction financing.

 

What Are Hard and Soft Costs?

Soft costs aren’t necessarily visible, and they aren’t directly linked to building materials. They can include the following:

• Accounting fees
• Moveable furniture
• Post-construction maintenance charges
• Ongoing upkeep fees
• Loans and interest
• Off-site costs
• Land fees
• Any marketing, public relations, and advertising costs
• Insurances, licenses, taxes, and permits
• Other fees

On the other hand, hard costs refer to the items needed to construct the building. Often referred to as brick-and-mortar costs, they include:

• Foundations
• Drainage
• Interior finishings
• Superstructure
• Labour
• Equipment
• And much more

Calculating hard costs is much more straightforward than soft costs as they’re tangible. With that said, they vary wildly depending on the type and size of your project.

Regardless, you can fund both cost types with your buyers’ deposits once you’ve attained deposit financing insurance coverage.

 

Why Is Condominium Deposit Insurance a Good Idea?

The main advantages of condominium deposit insurance are the low rates (between 0.5% and 1.25% annually) and the ability to get a much better return on investment. It prevents you from damaging your borrowing potential by freeing up money that would otherwise be withheld.

Consider this real-world example to see the potential savings:

You are developing a 50-unit condominium establishment. On average, each unit is $500,000, and every buyer needs to place a 20% deposit to secure their unit.

The projected revenue is $25 million, $5 million of which is deposits. The deposit financing you need is $4 million because Tarion covers $20,000 per unit (in this case, $1 million).

Obtaining traditional construction financing for $4 million can be pricey. In fact, the interest rate savings are between 3% and 4% if you choose CDI coverage, meaning you could save as much as $120,000 per year!

 

How Much Does Deposit Financing Insurance Cost?

The rates for condominium deposit insurance sit between 0.5% and 1.25%. Your rate is decided based on the factors listed below:

• Your team — Insurance companies consider the qualifications and reliability of the builders, lawyers, lenders, cost consultants, and anybody else working on the condominium project.
• Your experience — Newer or less-experienced developers working on small projects often receive higher rates. Conversely, well-established developers benefit from low CDI costs.
• The size of the project — The bigger the project, the more money at stake. But believe it or not, that doesn’t necessarily raise the insurance price if you’re experienced in the industry.
• The project’s deemed viability — Insurance providers will consider the likelihood of your project’s success before deciding whether they’re willing to cover it. They’ll usually utilize a CBA or cost-benefit analysis to determine the economic viability.

 

What Do You Need to Get Condominium Deposit Financing Insurance?

You’ll find obtaining CDI coverage straightforward if you meet the criteria below:

• Strong financial background — If both your corporate and personal finances are in order, you’re more likely to receive coverage. Insurers may ask you to supply evidence of your most recent bank statements and tax returns.
• Demonstrated abilities — You have a record of demonstrating competent construction abilities. Sometimes, you’ll need to fill in a CCA Form 11 to prove your experience.
• Knowledgable team — The insurance provider might require copies of your team’s qualifications, licenses, and credentials.
• Experienced — The more experience you have developing condominiums, the easier you’ll find the insurance acquisition process.

Don’t worry if you aren’t checking all those boxes. Here at ConstructionBond, we specialize in finding underwriters with a risk appetite perfect for you.

As for the specific documents needed to acquire CDI, you should expect to submit:

• The project’s budget detailing both hard and soft costs
• Land title details and appraisals, if applicable
• Your development company’s most recent end-of-year financial statements (you might need to supply your personal statements if you’re a new company)
• The construction financing agreement or letter of intent
• The Tarion terms and conditions of registration letter (also known as the Tarion risk assessment letter)
• Personal net worth statements for all relevant shareholders
• Geotechnical reports and environmental audits
• Your developer surety application form

 

What Is a Purchaser’s Deposit Bond?

Unlike Tarion bonds or condominium deposit insurance, purchasers’ deposit bonds are for your buyers.

Typically, you’ll require a substantial deposit (around 20%) from anybody who wishes to purchase a unit in your new condominium building. The purchaser’s deposit bond, however, allows them to defer a portion of the deposit until they move into the unit.

As the developer, you can issue a purchaser’s deposit bond program and use it as a marketing tool to potential buyers.

 

How Do Purchaser Deposit Bonds Work?

Essentially, a purchaser deposit bond is a promise that your buyer will give you the full deposit once the sale closes and they occupy the unit.

They can defer up to 50% of the deposit payment, depending on the bond company. If your buyer is selling a home to purchase your condo unit, the deposit bond dictates that they must sell their current house on or before they occupy your unit.

 

Things to Keep In Mind When Negotiating a Developer Surety Deal

A plethora of bond companies provide CDI and Tarion bonds in Canada, each of which comes with its own risk acceptances and requirements.

To ensure you get the best deal, we suggest focusing on these four primary areas:

 

#1 The Costs for the Tarion Bond and Condominium Deposit Insurance

The commitment letter dictates the Tarion bond and deposit usage fees. Since the market is so competitive, surety companies are more than happy to negotiate the rates. You just need a basic understanding of the market, and you’ll breeze through negotiations!

Depending on your opening offer, you’ll have plenty of room to shift the percentages. Remember, rates can go as low as 0.5%, especially if you have experience.

 

#2 Indemnity and Security Agreement Terms

All bonds are written with indemnities. You can enter into said indemnity corporately or personally.

It’s in the interest of the bond provider to acquire as much indemnity as possible. With that in mind, it’s important to know what classifies as a “reasonable amount” before entering into the agreement.

 

#3 The Terms for Deposit Release Ratios

The ratios and terms for deposit release govern how you take the money from the trust account.

If you have a release ratio of 3:1, you can release $100,000 from the trust when the bank sends you $300,000. On the flip side, a ratio of 1:1 allows you to take an equal amount out each time (i.e., if the bank sends you $500,000, you can release $500,000).

Some bond companies require the bank to release a certain amount before they allow you to take the deposits.

 

#4 The Holdback Security Obtained Against Warranty Obligations

The bond company holds the security provided for a pre-determined period of time after the project ends to cover all the warranty obligations. Over time, the obligations reduce, decreasing the amount of security needed.

 

Why Choose ConstructionBond?

• Easy access — Ring our toll-free number or complete our simple and secure online form. We’ll ask a few basic questions before pairing you with a bond or insurance provider.
• Outstanding relationships with industry specialists — We’ve built strong working relationships with Canada’s leading licensed surety companies. No matter the type of insurance or bond you need, we know the specialist broker for you.
• Experienced — Our team members have years of experience under their belts, allowing them to easily analyze your insurance and bond requirements to connect you with industry leaders.

 

Frequently Asked Questions

 

How Do You Know Which Developer Surety Products to Purchase?

We understand that navigating the developer surety world can be difficult. So, all you need to do is complete our quick request form and let us do the rest! We’ll use the information you provide to accurately determine your insurance and/or bond requirements.

 

How Long Does Tarion Warranty Last?

It lasts for seven years from the closing date. However, it’s split into three separate durations as per the following:

• One year — It ensures the condo is fit for habitation and protects against Ontario Building code violations. Plus, it guarantees the unit is built in a skilful manner.
• Two years — Everything from water penetration through the basement to material defects to displacement to health and safety violations is covered for two years.
• Seven years — The final section of the warranty covers defects in the materials or labour that:
  • adversely affect the usage of a large part of the condo unit.
  • compromises a loadbearing element, regardless of whether actual failure has happened.

 

What Surety Companies Does ConstructionBond Work With?

We work with a myriad of leading surety companies in Canada, including:

• Allianz
• ACE Insured
• Aviva
• Berkley Canada
• CFC Underwriting
• Chartis
• Chesterfield Canada, Inc.
• Chubb Insurance
• Cutter Underwriting Services
• Cowan Insurance Brokers
• Elliott Special Risks LTD
• First Media