Embarking on a condominium development project? Then don’t skip the Tarion marketing and warranty bond! Not only does it protect your purchasers, but it also improves your cash flow and provides a cost-effective security method.
But here comes the best part — we’re here to help make the process as smooth as possible. The days of worrying about obtaining quotes from loads of surety companies are over.
In the following sections, we’ll introduce you to the ins and outs of Tarion warranty bonds to help you make better-informed decisions for your business.
Tarion, formally known as the Tarion Warranty Corporation, is a not-for-profit organization established in 1976 by the Ontario New Home Warranties Plan Act. It makes sure builders stick to the obligations set out in the Act and protects consumers if you (the condominium developer) fail to perform your duties as stated in the Act.
To build and sell condominiums in Ontario, you must register with the Tarion Warranty Corporation.
As per Tarion’s requirement, you must post security to protect your buyer’s deposits. The minimum amount for this security is $20,000 per unit, which covers the deposits and provides the level of warranty protection needed by Tarion. Newer or less-experienced developers may be required to post a higher per-unit security.
So, if you are building a 250-unit condominium, Tarion requires you to post $5 million in security, provided you’re granted the standard rate of $20,000 per unit.
You can provide the security in three forms:
Of course, all forms are viable. But Tarion marketing and warranty bonds tend to be the most cost-effective. Why? Because they often have rates as low as 0.5% for well-established developers. Plus, posting a bond means you can use the $5 million to fund your project or deal with other cash flow issues.
Normally, Tarion surety bonds are offered alongside your deposit financing insurance coverage.
Let us take a look at how the Tarion warranty bond works in practice. It’ll give you a better idea of how it will benefit your project:
As deposit financing insurance is usually offered alongside Tarion warranty bonds, it’s worth getting to grips with the essentials of the coverage now.
Under the Ontario New Home Warranties Plan Act we mentioned earlier, you must hold your purchasers’ deposits for your condominium project in a trust account. On top of that, they need to stay there until the condo registers.
Here’s where deposit financing insurance comes in — you can buy condominium deposit insurance (otherwise known as CDI or excess condominium deposit insurance) to use your buyers’ deposits to fund your project. Once the coverage starts, you can access the money that would otherwise have to sit in the trust account!
The CDI policy guarantees the return of the purchasers’ deposits in excess of the $20,000 guaranteed by the Tarion warranty bond.
You’ll often find the costs associated with deposit financing insurance are considerably lower than other construction financing rates. As a result, CDI allows you to gain a better ROI.
Excess condominium deposit insurance acts differently at the individual development stages, as you’ll see below:
With a CDI policy, you can use your purchasers’ deposits to fund both hard and soft costs associated with the specific project.
Hard costs refer to the materials needed for the physical build. They can include:
On the flip side, soft costs are not associated directly with the required materials or labour. Instead, they include:
Furniture and ongoing maintenance charges are also deemed soft costs.
Estimating hard costs tend to be easier. Although, they vary massively, depending on the project’s complexity.
Condominium deposit financing insurance rates can run as low as 0.5% if you’re an experienced developer. Without much experience in the industry, you should expect to pay up to 1.25% of the total amount.
However, other factors manipulate the rate, including but not limited to the below:
Not all condo projects were created equal, meaning they don’t all fall under Tarion’s warranty coverage. The warranty exists solely for residential projects. However, this does include converting a commercial building into a residential condominium (such as changing an old school or church into a condo building).
With that said, residential projects aren’t automatically granted RCCP (residential condominium conversion project) status. To acquire this, you need to adhere to the requirements held under the Building Code Act, ONHWPA, and the Condominium Act:
As we’re sure you can imagine, Tarion has a stringent review process in place that allows them to scrutinize your project before offering warranty coverage. As part of this process, you must present the documents listed below:
In general, Tarion warranty bonds can be as low as 0.5% for experienced developers and up to 1.25% for newer developers working on small projects.
Let’s take a look at a real-world example:
You are an established developer working on a 100-unit condominium project with a $20,000 per unit Tarion security. One hundred units multiplied by $20,000 equals $2 million, so you’d need to post a surety bond of that amount. You’re awarded a rate of 0.75% for the bond, meaning it would cost you $15,000.
Keep in mind that the rate is yearly. So, it would cost $15,000 for every year you need the bond to stay in place.
Furthermore, you may need to pay a one-time commitment fee. They vary in price but can be anywhere from $2,500 to $10,000.
The cost of a Tarion bond depends on several factors, including the following:
The application process for a Tarion bond is similar to the process of obtaining project funding from a development financing company. You will need to supply the following documents:
To make sure you’re completing the application properly, we highly recommend working alongside a specialist developer surety brokerage. We know it can be tricky to find the right broker for you, which is why we’ve made it simple — just fill in our secure online quote form, and we’ll connect you with the best in the business!
Every Tarion bond and CDI insurer has different terms and price factors. The industry is highly competitive, meaning there is often room to negotiate an attractive deal.
So, we suggest focusing on the following four areas to help make your Tarion bonds and condominium deposit insurance terms more favourable:
The commitment letter outlines the price of the Tarion bond and your deposit financing insurance policy. As long as you understand the market, you can negotiate to bring the rate down.
Depending on the insurer, you can pay anywhere from 0.5% to 2%.
The deposit release terms and ratios are two of the most significant factors in your bond. They dictate how and when you can take your buyers’ deposits from the trust account.
For instance, you have a release ratio of 3:1. So, when the bank release $300,000, your condominium deposit insurance allows you to take out $100,000 from the trust account.
But if you have a release ratio of 1:1, you can take out an equal amount from your trust. For example, the bank releases $300,000, so you can remove $300,000 from the trust.
Some bond companies request the bank to release an amount before they’re willing to release deposits at the agreed ratio.
The bond company holds the security once the project closes to cover the warranty’s obligations. However, it’s worth noting that the security reduces over time as the warranty’s responsibilities decrease.
All Tarion bonds are written with indemnity agreements. You can enter it either corporately or personally. But sometimes, the spouses of the shareholders are also asked to indemnify.
Generally speaking, the bond company wants as much indemnity as possible. Make sure you know what’s reasonable before entering into the agreement.
We understand that the world of Tarion warranty bonds and condominium deposit insurance can be stressful. Not only are there countless requirements to meet and documents to submit, but negotiating the best deals is no small feat.
But you’re in luck because you’ve found our expert team at ConstructionBond who can help you secure the perfect deal with a specialized provider.
Over the years, we’ve built outstanding relationships with the leading surety and insurance providers in Canada. As a result, our process is seamless, as you can see below:
No, acquiring a Tarion marketing and warranty bond isn’t a legal requirement in Canada. However, it’s highly beneficial as it eliminates the necessity to post cash security or a letter of credit with Tarion.
The Home Construction Regulatory Authority (otherwise known as the HCRA) was borne as a not-for-profit corporation in April 2018.
Its primary duty is to regulate vendors and builders of new builds in the event it’s assigned as the regulatory authority under the NHCLA (New Home Construction Licensing Act, 2017). The authority’s goal is to protect the public interest by ensuring an informed, safe marketplace that constantly works to improve Ontario’s residential building industry.
Historically, Tarion regulated this market sector under the Ontario New Home Warranties Plan Act. But Justice Cunningham committed to creating the new regulator (HCRA) following an independent review of the Act in 2016.
In a nutshell, the Home Construction Regulatory Authority’s missions are as follows:
Ontario’s government implemented the program and Act in 2017 to further strengthen consumer protection for current owners and buyers of new homes in the area. To ensure their goals are met, the Act outlines the following main regulations:
Tarion warranty lasts seven years from the date of possession (i.e., the closing date or the occupancy/interim occupancy date). The statutory warranties are split into three separate timeframes, as you’ll see here:
The One-Year Warranty
Within this warranty, you must ensure the condo or home is free from material defects and constructed in an efficient, skilful manner. It guarantees the house is fit for habitation and protects against any violations of the Ontario Building Code.
On top of that, it stops unauthorized substitutions of materials for construction or finishing that were selected by the buyer.
The Two-Year Warranty
The Tarion two-year warranty protects against:
The Seven-Year Warranty
The final part of the Tarion warranty covers against structural defects, such as: