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Subdivision Developer Defaults

Subdivision Developer Defaults. Bobby Sullivan and Susan Matthews July 31, 2009. Statutory Requirements for Guarantees: G.S. 160A-372(c). Define Developer’s Obligations. Subdivision Ordinance Language: Amount of Guarantees . Guarantees. Types of Guarantees:

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Subdivision Developer Defaults

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  1. Subdivision Developer Defaults Bobby Sullivan and Susan Matthews July 31, 2009

  2. Statutory Requirements for Guarantees: G.S. 160A-372(c)

  3. Define Developer’s Obligations

  4. Subdivision Ordinance Language:Amount of Guarantees

  5. Guarantees • Types of Guarantees: • Surety Performance Bond (required) • Letter of Credit (required) • Cash or Equivalent Surety (optional) • Letters of Credit may be preferable to the City. • Surety Bonds may be cheaper and easier for the Developer to obtain.

  6. Requirements of Surety Bonds:Standards for Surety Companies

  7. Requirements of Surety Bonds:Bond Language • No expiration date; Bond lasts until improvements are completed and approved by the City. • Time limit in which a Surety must begin acting after Default. • Form Surety Bond.

  8. Requirements of Letter of Credit:Standards for Issuing Bank

  9. Requirements of Letters of Credit:Letter of Credit Language • Should be irrevocable • Should condition payment upon presentation of a statement only • Should not expire prior to the Developer’s time for installation • May want to require evergreen letters of credit • Allow for local presentation

  10. How To Define Default? • Developer fails to complete improvements in the time allotted • Developer completes improvements, but they do not meet specified standards • Ownership of property changes without the new owner assuming the obligation to install improvements (e.g., foreclosure)

  11. Anticipation of Default

  12. Anticipation of Default (con’t)

  13. Process for Collection on a Surety Bond • Send written notification to the surety stating that the Developer is in default and include a statement of the estimated cost for installation of the improvements (including cushion). • Demand the surety take action within the time specified in the bond. • Surety will either hire a substitute contractor or deliver funds to the City for installation. • If surety does not act, the City will have to file a lawsuit.

  14. Process for Collection on a Letter of Credit • Make sure you comply strictly with the requirements of the letter of credit. • Present in advance of the expiration date, so that you have an opportunity to cure any defects, if necessary.

  15. Top 10 Ways to Protect Your Client: • When possible, use a development agreement which expressly lists all guaranteed improvements, the time period for installation, and the definition of default. If you do not have a development agreement, you should make sure that your ordinance states a definite time in which improvements must be installed and approved and that it defines default. • Require the Developer to Guarantee at least 125% of the estimated costs of improvements. • Require any surety bonding company to be registered with the N.C. Secretary of State, licensed with the N.C. Department of Insurance, highly rated by a credible rating agency, and backed by a sufficient amount of assets.

  16. Top 10 Ways to Protect Your Client: • Require a surety bond to be effective until all improvements are completed and accepted. • Require that the surety bond contain a set time period in which the surety must act following default. • Require that any bank issuing a letter of credit must allow for local presentment and have a sufficient amount of assets. • Require a letter of credit to be irrevocable, have a duration exceeding the time period the Developer has for installation, allow for local presentment, and require only a written statement of default for collection.

  17. Top 10 Ways to Protect Your Client: • Have your engineer perform a detailed inspection of the guaranteed improvements no later than 60 days prior to the Developer’s deadline for installation. • Make sure you mail the surety a letter 30 days prior to the Developer’s expiration of time for installation informing the surety that there is a potential for default. • When collecting, make sure you strictly abide by the requirements contained in the letter of credit.

  18. www.parkerpoe.com

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