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.
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:
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.
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:
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:
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.
Discover how the Tarion marketing and warranty bond works in practice:
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:
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!
The process of acquiring project funding from a financing company is similar to the Tarion surety bond application procedure.
You must submit these documents:
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.
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.
Different stages of development activate other parts of your condominium deposit insurance policy, as you can see below:
Soft costs aren’t necessarily visible, and they aren’t directly linked to building materials. They can include the following:
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:
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.
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!
The rates for condominium deposit insurance sit between 0.5% and 1.25%. Your rate is decided based on the factors listed below:
You’ll find obtaining CDI coverage straightforward if you meet the criteria below:
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:
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.
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.
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:
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.
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.
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.
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.
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.
It lasts for seven years from the closing date. However, it’s split into three separate durations as per the following:
We work with a myriad of leading surety companies in Canada, including: