Bonds and Bond Exoneration?
It is very typical that a local jurisdiction will require bonds to be posted prior to the issuance of permits for grading and site improvements, with the prime reason being the city or county wants to ensure that a developer does not leave this site work uncompleted. A bond surety company will provide these bonds, for a fee paid by the developer, that essentially provides insurance to the local jurisdiction in the cases where a developer does not complete its obligations. In such a case, the city/county would then “call” the bonds, meaning that the bond company would need to provide the funds for the city to complete the improvements. During the last economic recession with many bankrupt developments, these bonds were being called consistently – but that is another story.
So, as part of the process of pulling these permits, the city/county will usually have a bond calculation form that is essentially estimating the cost of the improvements to be authorized by the permit. And in most cases, the calculation on these bond forms tend to be on the high side, providing a cushion for the city/county in case they need to call the bonds and finish the improvement. As example, let’s say that some public street improvements are estimated to cost $1.0 million by the contractors – the bond estimate on the city/county form might be in the range of $1.3 – $1.5 million. The developer or builder will need to purchase a bond for the higher amount.
These improvement bonds become a liability on the financial balance sheet of the developer/builder, which is the critical reason for “bond exoneration”. To exonerate a bond, the project manager or others will request a bond exoneration once the improvement is completed. What typically follows is an inspection by the city/county, which then tends to result in a punch list of repair items. After the punch list items are completed, the developer/builder will then request a final inspection and hopefully have the bond requirement released by the city/county, therefore allowing the bond to be cancelled and removed from the company balance sheet. The process isn’t always this simple, but that is the general idea.
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