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As you lay the groundwork for a thriving community, the last thing a real estate developer or contractor wants to encounter is unforeseen challenges that could impede progress. This is where the importance of subdivision bonds comes into play—a critical aspect that savvy developers should prioritize from the outset.
In this article, we’ll explain what a subdivision surety bond is, how it works, and why getting one can benefit you as a developer. Let’s get learning!
What Is a Subdivision Surety Bond?
A subdivision surety bond is a type of specialized performance bond designed to safeguard the interests of local municipalities and ensure the successful completion of a development project.
Also called plat bonds, developer bonds, site improvement bonds, or completion bonds, they guarantee that the developer (you) will adhere to the approved plans and complete necessary public infrastructure improvements within a specified timeframe.
Essentially, when a developer embarks on a subdivision project, the local government or municipality may require them to obtain a subdivision bond. This bond serves as a commitment that the developer will fulfill obligations such as constructing roads, sidewalks, drainage systems, and other essential public infrastructure. If the developer fails to meet these requirements, the bond can be utilized to cover the costs of completing the unfinished work or addressing any deficiencies.
→ Learn more: The Ultimate Guide to Surety Bonds in Canada
Subdivision Bond vs. Performance Bond
The main difference between a subdivision bond and a performance bond is the involvement of a regulating authority.
A subdivision surety bond is a guarantee that developers will finish work within a set deadline. They ensure the developer will abide by the obligations set out in the subdivision agreement contract and the municipal code.
Meanwhile, a performance bond is broader and covers the entirety of the project. It is less concerned with the subdivision aspects—such as the utilities and road infrastructure—and more with the timelines, materials, payment terms, and so on.
Subdivision bonds are placed upon contractors/developers by a regulating authority to protect the project issuer in the case of malfeasance. Meanwhile, a standard performance bond only involves two parties: the developer and the project owner.
As such, the onus of initiation falls on the developer rather than the project issuer as with other bonds. It’s on them, the developer who wants to work on the land, to ensure they are in line with the regulations set by the municipality’s governing body.
What About a Letter of Credit?
Sometimes, developers may opt to pursue a letter of credit rather than a subdivision surety bond to earn a project. A letter of credit is a promise made by a bank that guarantees any agreed-upon payments will be made to the claimant under specific conditions.
The issue is that obtaining a letter of credit for every project isn’t sustainable for developers. Letters of credit hold cash idle, which limits your borrowing potential. Municipalities can also hold letters of credit for multiple years.
How Subdivision Bonds Benefit Developers
There’s a misconception that surety bonds only benefit project issuers, but here’s how a subdivision surety bond can benefit you as a developer:
- Sheet security: They don’t encumber your balance sheet like a line of credit, meaning you’ll have more working capital by reducing your debt burden.
- Lower premiums: The premiums you pay to a surety provider are often less than the interest you’d pay if you obtained a letter of credit.
- Access to cash: Subdivision bonds give access to more money than a letter of credit. This puts you in a better financial state to meet any sudden cash requirements for the duration of the construction project.
Beyond these reasons, a subdivision surety bond also reduces risks for developers by ensuring they have the financial capability to meet the required improvements.
How to Apply For a Subdivision Bond
During the surety application process, the bond company will conduct a background check and verify your ability to fulfill the task relative to the project scope and funding. They’ll also assess your experience in the industry, finances, and personal character.
For certain projects, you may be asked to provide:
- Financial reports from the past three years
- Personal financial statements
- Key information in applicable partnerships, trusts, or operating agreements
- Your business plans
- Project completion history
- Other banking information
It’s always best to consult experienced surety bond brokers to ensure the application process is straightforward and so you receive a fair quote.
Speaking of quotes, subdivision bonds cost an average of 0.75% and 1.5% of the bond’s total value. However, several factors can impact the price, such as your credit rating, your company’s financial background, and the subdivision’s agreement terms. These could lead the total to increase to around 3% of the bond amount.
Build Your Development Strategy with Specialized Surety Bonds
As you now know, a subdivision surety bond is something you must seek out as a developer to work on specific projects. They’re a guarantee that you’ll fulfill subdivision-specific obligations when working on them. So, where do you start?
Step one should be calling KASE Insurance. As one of the top surety bond companies in the Greater Toronto Area, our expertise in the construction and development industry is highly specialized and targeted to help your business grow. We’ve worked with countless developers to secure subdivision bond and performance bond partnerships, simplifying the application process.
We’re here to help!
(416) 588 5273 
