What is a Bond Exoneration - as it relates to a builder

[GrewUpInIrvine_IHB]

As I read the Woodbury Association Minutes (they post them on-line) - to see what I might be getting myself into - I noticed one action last month entitled "Bond Exoneration" whereby a $6300 bond from Lennar was exonerated as it related to certain lots in the Villa Rosa development. Does anyone understand what the bond is/was for and whether it was actually posted by the builder, etc? I'm wondering if this is one ofmany fees that are merely passed along to buyers, etc...

 

[jcaraway_IHB]

Negative, a bond is required by municipalities to guarantee the completion of work. A bond is issued and backed by an insurance company and cost the builder approximately 1% of the value of the improvement. For example, $100,000 of public sewer is required to be installed to serve the development, to guarantee that this happens, the city requires that the developer provide a $100K bond from an insurance company (i.e. aon), this costs the developer 1% annually and gives the city peace of mind that if the developer bails, they can go after the insurance company to pay for the completion of the sewer. Alternatively, the developer could hand over $100K to the city, which the city will hold and release upon completion OR keep if the work is not completed, obviously, this is not financially feasible or responsible.



If the developer does not exonerate the bond, the insurance company keeps invoicing a 1% fee each year, unless its a tax bond, which automatically expires. In order to exonerate a bond, the developer needs to prove to the city that it has completed the work that it was bonded to do. City inspectors will sign off and then they will send a sign off to their bond dept which will issue exoneration letters to the bond company.



$6,300 bond is VERY small, i'm guessing it may have been for the installation of street trees, hmmm or it may relate to the completion of HOA doc's if the HOA had to sign off on it. This is not a big deal.

 

[jcaraway_IHB]

The cost past on to you is the cost of the completing whatever improvements that were bonded, in this case $6,300 of work on something hoa related. Also cost of the bond 1% is passed on to you. This is typicall, not an added fee by the developer.

 

[GrewUpInIrvine_IHB]

jcaraway - Thanks for the explanation. It was helpful. I am just on the look-out for silly added/hidden fees. IMHO, considering spending 1-m for an SFR is plenty of $$ to begin with... so when I see a thousand here, a thousand there, I start to wonder if there is more of a "nickel and dime" model of selling to prospective buyers like me. Eg. I learned that the builder requires that you qualify through "their" mortgage people, who are nothing but mortgage brokers, who do nothing but get a commitment from Countrywide, etc. for a loan... and then get the kick-back of 1-1.5 percent from the actual lender... meanwhile, they play "smoke and mirrors" by offering 6K towards closing costs if you use their "lender" (aka loan broker)... when they are actually making $$$ off of buyers to begin with. It just seems like a shell game. And it seems offensive, if like me, you get caught up on self-described notions of principle.

 

[jcaraway_IHB]

Article on how infrastructure bonds will affect the home builders.



Bonded and Gagged



* Home Builder Exposure to Surety Bonds [Download PDF]



Builders find their ability to get new communities off the ground stifled, as surety bond providers pinch access to credit.



Although credit rating agencies don't factor in builders' surety bond obligations when evaluating credit-worthiness, surety providers consider builders' ratings?along with other financial measures and leadership characteristics?when underwriting bonds. As home builder credit ratings continue to slide and the threat of more bankruptcies grows, surety bond providers are clamping down, hampering some builders' ability to move projects forward.



Municipalities ask builders and developers to secure surety bonds, most often of the performance or subdivision ilk, as guarantees that they will complete the infrastructure?streets, sewers, water mains, sidewalks, etc.?needed to support a new community.



As the surety bond market has tightened, builders are pressured to put up more collateral in the form of cash, assignment of assets, or letters of credit. But according to David Rhodes, executive vice president of Insco/Dico, a leading issuer of performance and subdivision bonds, that's becoming more difficult; not only are builders short on cash these days, but the current credit crunch is rendering many banks unwilling to provide letters of credit, especially for smaller home builders and developers.



"We expect that the relationship that the home builders have with their banks becomes ever more important to us as we view future obligations," says Rhodes.



While good banking relationships are paramount in turbulent times, Robert Duke, director of underwriting for the Surety and Fidelity Association of America, says builders and developers should also look to keep their surety providers abreast of any potential issues. Sureties can help negotiate with municipalities to avoid defaults and repayment of bonds for uncompleted work.



"When we have economic downturns, the best thing any bond principle can do is maintain open lines of communication," Duke says.