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11-1485 - Ordinance - Warranty and Surety DiscussionCITY OF MERIDIAN ORDINANCE NO. [ t ~ ~ 4 g ;J BY THE CITY COUNCIL: BIRD, HOAGLUN, ROUNTREE, ZAREMBA AN ORDINANCE OF THE CITY OF MERIDIAN, ENACTING A NEW SECTION, TITLE 8, CHAPTER 6, SECTION 2, RELATING TO PERFORMANCE AND WARRANTY SURETY FOR PUBLIC INFRASTRUCTURE; AND PROVIDING AN EFFECTIVE DATE. WHEREAS, the City Council of the City of Meridian finds that installation of water, sanitary sewer, reclaimed water, and stormwater infrastructure shall have surety in place prior to the commencement of building construction/installation to assure the City and the public that the project will be completed in a timely fashion; and WHEREAS the need has been demonstrated that the City and the public need adequate surety in place to guarantee the materials and workmanship of public infrastructure projects for a specified period of time following formal acceptance by the City, to assure that the public does not become responsible for repairs or restoration during the warranty period of the installed infrastructure; and WHEREAS the developer of the proj ect is best suited to provide surety for both performance of the infrastructure as well as warranty of the constructed/installed infrastructure once said infrastructure has been formally accepted by the City for ownership; NOW, THEREFORE, BE IT ORDAINED BY THE MAYOR AND CITY COUNCIL OF THE CITY OF MERIDIAN, IDAHO: Section 1: That a new section of Title 8, Chapter 6, Meridian City Code, Section 1-4, shall be, and hereby is, enacted to read as follows: 8-6-1-Purpose 1. To establish a requirement for a Developer to provide a performance surety in lieu of the construction of public infrastructure projects including potable water, sanitary sewer, reclaimed water, and stormwater infrastructure and a warranty surety for the completed public infrastructure prior to the acceptance of the public infrastructure by the City. 2. To clarify that all infrastructure constructed/installedpursuant to the procedures set forth in this chapter shall become part of the City of Meridian's Water, Sanitary Sewer, Reclaimed Water, and Stormwater Systems. 3. To insure that new infrastructure is provided at a lesser initial risk to the City and accompanying rate payers, upon the City's acceptance of such infrastructure. 4. To insure a consistent standard is required for a guarantee for the performance of the initial construction/installation ofthe infrastructure. 5. To insure a consistent standard is required for warranty of the materials and work performed for the construction/installation ofpublic infrastructure improvements when the City takes ownership of the said public infrastructure. 8-6-2 -Definitions 1. Bond Formal, legally enforceable contract between a first party (the Developer), a second party (the City), and a third party (the surety, such as a bank, bonding company, or insurance company) whereby the surety guarantees payment of a specified maximum sum, or to otherwise compensate (indemnify), the City against damage or loss caused by the actions (or a failure to perform) of the Developer. 2. Cash or Cash Equivalent United States currency that maybe lawfully tendered in payment of a debt, such as paper money, Federal Reserve notes, or coins, certificate of deposit (CD), marketable security, negotiable financial instrument (such as a cashier's check), etc., that has a very high degree of convertibility into cash (liquidity). 3. C The City of Meridian, an incorporated City in the State of Idaho. 4. Develo er A person or entity that engages in development of land under the requirements of the City of Meridian Uniform Development Code and associated City of Meridian ordinances. 5. Development Any aspect of improving, constructing, subdividing, and/or investing inland capacity and infrastructure for the purpose of growing residential, commercial, industrial, or other community enhancement opportunities done under the requirements of the City of Meridian Uniform Development Code and associated City of Meridian ordinances. 6. Director The Director of the City of Meridian Public Works Department, and/or his or her esignee. 7. Irrevocable Letter of Credit Firm commitment by an issuing bank to pay an accepting bank a specified sum in a specified currency, provided the conditions included in the Irrevocable Letter of Credit document are met within a specified timeframe. This Irrevocable Letter of Credit cannot be canceled (or its terms amended) without the City's (beneficiary's) prior written approval, and comes usually as a confirmed irrevocable letter of credit. 8. Performance Surety Cash, cash equivalent, irrevocable letter of credit, or bond in place prior to the commencement of construction that guarantees funds are available to complete the project if necessary. Surety method must be approved by the City prior to the commencement of work to be valid and acceptable as complying with this ordinance. 9. Public Infrastructure Potable water, sanitary sewer, reclaimed water, and stormwater mains and all associated components thereof including but not limited to service lines, piping, manholes, and va ving. 10. warrantX Surety Cash, cash equivalent, irrevocable letter of credit, or bond in place prior to the commencement of construction, or prior to formal acceptance of the constructed/installed infrastructure, that guarantees funds are available in the event of the need to repair or replace part of the infrastructure due to defect in materials and/or workmanship of the project if necessary. Surety method must be approved by the City prior to final acceptance of the public infrastructure to be valid and acceptable as complying with this or finance. 5-6-3 -Surety Requirements 1. Performance Surety A. If the Developer does not construct the public infrastructure as required by the City for his/her development, than the Developer shall provide and be the responsible party for a performance surety with the City as the beneficiary in an amount equal to one hundred and twenty-five percent (125%) of the itemized contractor's bid for the development as approved by the City so as to provide performance surety for the project. B. The performance surety shall be in place throughout the entire construction and installation of the improvements. The surety may not be released until the improvements are accepted by the City. C. If a performance surety is obtained by the developer and said performance surety includes a 2 year warranty surety in the amount equal to twenty percent (20%) of the actual construction cost of the installed public infrastructure, than the developer would not need to obtain a separate warranty surety. Under this circumstance, however, the performance surety would not be releasable until the conclusion of the warranty period, 2. Warranty SuretX A. The Developer shall provide and be the responsible party for a warranty surety with the City as the beneficiary in an amount equal to twenty percent (20%) of the actual construction cost of the installed public infrastructure as approved by the City so as to provide warranty surety for the project. B. The warranty surety shall be in effect for two (2) years from the date of acceptance by the City of the public infrastructure improvements. 8-6-4- Savings Clause If any provision of this ordinance shall be held to be invalid by a court of competent jurisdiction, then such provision shall be considered separately and apart from the remaining provisions of this ordinance, which shall remain in full force and effect. Section 2: This Ordinance shall be in full force and effect after passage and on or after ~, v I-~, a~ t 1 2010. APPROVED by the Mayor of the City of Meridian, Idaho, this 12th day of October, APPROVED: ~.. ~~ .~~~-- Tammy eerd Mayor ATTEST: .,a~~~y~"~` r~~ ~~w:';'+~~;~ .,. '~ ~ 9 ~,, ~' '± IFS ~; `~. ',. .~- r•° .:y /.~. !/ ~~Yiiy ,~ ~: f 4n Jayce olman ~ ~" //(,~ ~ ••n "~ W4..i M l r,, .5~..[,~ r,~ g ~.: City C erk ~~~ y+~ ~~ :. 9,q~r ~ Y y ~ ~, ~,~ ~ q / Y l1 ,~~ ,~ a ~~~. ~'t; PYlq~S it #q~.. PASSED BY THE CIT COUNCIL OF THE CITY OF MERIDIAN, IDAHO, this day of , 2011. APPROVED BY T MAYOR OF THE CITY OF MERIDIAN, IDAHO, this day of , 2011. i j ` _ `N~I~A,~OR t~ ~ y 4 ; ' ~,,,, x r ~ , r' l r , ATTEST: . ~` ~' ` ~ '~`~~ ~ "~_ ~" ~~ ~~ r ~," J `~ ~ ~' Z ~ 1 d .~ t ~4""~ ~,~ \ ~ •~ `ti 4,,, q t -~ ~M x •_ e Y K'Y- `~..J? ~~ M ~/ ~,,~~ ~~i.r ~. ~ ~ , ,,,`` . ~te,~, >c'~° ~';~'~y~Pi°y01~ $ . ~ ' , Attachment A ERIDIAN~- IC~AH Private Development Performance & Warranty Surety Proposal Meridian Public Works Department April 7, 2011 Existing Surety Process Background The current City of Meridian Ordinance governing the subject of Development Sureties is found in the Unified Development Code (Chapter 1 1, Title 5, Article C. Surety Agreements}. In general, the pux•pose of this provision is to allow an owner/developer to post surety to guarantee the completion of all required improvements related to public life, safety and health, in order to obtain the City Engineer's endorsement on the final plat. This code also p~•ovides an avenue by which an ownerldeveloper can post surety for non-life, non-safety and non-health related required improvements, such as landscaping, pressurized irrigation and fencing. In both cases, owner and developer can obtain the City Engineer's endorsement on the final plat once surety is posted. The City's endorsement on the final plat allows the owner/developer to proceed with obtaining the remaining endorsements and ultimately the recordation of their plat into Ada County Records and begin selling lots, Unified Development Cade Section MCC lI-SC-3D sets the amount of performance surety at one hundred ten percent (I I0%} of the cost of completing the required improvements although jurisdictions are not prohibited from requesting higher amounts. The Unified Development Code Section MCC 11- SC-3E also specifies the forms of surety that are appropriate. Currently, only an Irrevocable Letter of Credit or Cash surety is accepted by the City -bond sureties are not currently accepted. Additionally, while the City of Meridian requires a one year warranty period for completed infrastructure, it does not currently require a wal•~•anty surety to guarantee correction of waa~•anty deficiencies. Need for Change There are two surety-related issues that need to be addressed for the City to adequately cover its potential risk relating to the construction and transfer of developer-constructed infrastructure. The first of the surety concerns is related to the performance surety amount and the second is related to the need to develop a warranty surety process and amount. Performance Surety: As stated above, the City's existing performance surety alnoullt is 11 ~% of the cost of completing the required improvements per UDC minimum requirements. City Staff has recently reevaluated the performance surety amount and has determined that 11 as/o is an inadequate a~nowlt to cover the City's likely costs in order to satisfy a developer's obligations when they fail to perform. The current surety amount of 110% does not account for additional cost factors like Bid Variability, Economic/Inflationary Factors, Project Management/Administrative Costs, Rework Costs, Constr~~ction Contingencies or Project Timing costs associated with completion of the project. Warranty Surety. Additionally, the City of Meridian does not currently require the posting of a surety to cover the warranty period following the completion of construction. This has proven to be problematic and costly for the City. If the contractor or owner of a project is financially unable or unwilling to address warranty deficiencies, the City must currently fix the problems at its expense and use legal recourses in an attempt to recoup its casts. f )) j q ~ ~ ,~,.~,.I~ ~ { ~ t ~. + ray r ~ I t~ ~~ - ~ I I. i ~l i~:~et. ~Jt..:l ~., ~S t~EE1 ft~~14. ~ rat ri tl~l;~sjl.~~ ~~~'~. ~r .~.~~t,tlilr 't if w.i F .c~t~'iltli ~ 7~i~ .. .... The Approach In light of these concerns, the Public works Depa~•tment assembled across-functional team of individuals from several divisions and depaltlnents including Engineering, Development Services, Business Operations, Finance, Construction, Inspection and Legal to review our current surety process and develop recommendations. Additionally, experts from the bonding, insurance and legal fields were consulted to gather information, answer questions, ald provide recommendations to the group. The Department also developed a stakeholder focus group comprised of a nulnbe~• of developers with whom which several meetings were held to refine the proposal. Additionally, the Department conducted a regional benchma~•king study to identify the surety practices of other municipalities and districts to further strengthen the proposal. Guiding Principles: The Team used guiding principles to help direct its actions and approach. These principles included the following: ^ Be open and transparent in developing the process, method used, and recommendations ^ Be fair and balanced in both the approach and outcome ^ Engage stakeholders in developing the path forward ^ Address the City's exposure and meet Developer requirements in the most optimal way possible ^ Ensure that all Developers are offered the same options to eliminate favoritism ^ Seek solutions that best fit any economy --whether growth, recession, or recovery ^ Use a simplified and streamlined approach ^ Use benchmark data from regional entities to compare and calibrate the approach taken ^ Align outcomes and recommendations with the City's mission, vision, and values Every effort was taken to ensure outcomes based on collaboration, communication, and coordination. The team met weekly to engage in process development, research, and analysis to develop its recommendation. Actions Taken; Several actions were taken by the Team in an effort to address the situations, issues, and problems. These additional actions included: ^ Reviewing statutes and policies to determine options available ^ Evaluating current and past development projects to assess the level of exposure to the City ^ Sur. veying general practices in regional cities and highway districts ^ Evaluating both current and future conditions ^ Defining the surety process for construction and non-construction scenat~os ^ Conduction communication sessions with Council members to get their input ^ Conduction multiple focus group sessions with the developing community ^ Engaging Subject Matter Experts in the legal, financial, and insural~ce industries The City's Engineering Division also conducted a survey of Z~ entities comprised of 19 regional cities, 5 highway districts, and 1 sewer district (see Exhibit A). Conclusions of that study are as follows: l'fil.~:. ~~~>.'4'~~i~?'''si~i~ ~;,t# s,~-~ ` `tti ~ ,Fff'w'~'tEC~'i~~f'it,~~f:•L~1~. Y~~~~~,'~}~~ ~ :. 13 YI. {i.t~t~ 4. F+. l J~L. W ~ i c4 t.~ ~ lkl~'l.' _ f..+i E ^ ? 1 entities require a Warranty Surety/Bond ranging from 1 ~% to 50% The regional average of the Warranty Surety/Bond amount is 34% ^ The regional average of the warra~lty period is 1.2 years ^ 11 entities require a Performance SuretylBond in excess of 110%, ranging from 120% to 150% ^ The regional average for the Performance S~~rety/Bond is 127% The study covered 14 Idaho locations, 3 Oregon locations, 5 Washington locations, and 3 Utah locations. These locations ranged from just under 10,040 to over 200,004 in population. Proposed Surety Changes and Recommendations '~arranty Surety (Developer Projects): A. Proposed Warranty S~~rety Requirements 1. Require 24-month warranty period (See Exhibit $) 2. Conduct warranty inspections 3. Add cost of warranty inspection to initial inspection fees 4. Require a warranty surety in the amount of ? 0% of total construction cosis 5. Allow the following surety options: warranty bond, letter of credit, cash, or cash equivalent Warranty Surety (City Projects): A. Unlike private projects, on publically owned and managed projects the City requires a Pe~•formallce Bond (required for all City projects via the Construction Contract}. This is not a cash equivalent surety, it is an actual bond. However, Staff will need to extend the warranty time period from 12 months to 24 months on public utility projects to comport with the privately constructed infrastrltctrire warranty period recommended above. Performance Surety: A. Proposed Performance Surety Requirements 1. Increase amount from 110% to 125% a. Surety amount is based on the engineer's estimate 2. Allow the following surety options: performance bond (automatically includes warranty coverage}, letter of credit, cash, or cash equivalent The following exhibits p~•ovide additional detail and information that formed the basis of the above recommendations: A. Supporting Documentation and Concepts 1, Exhibit A: Benchmarking Survey 2. Exhibit B: Construction Warranty Period Timeline 3. Exhibit C: Calculations, Basis for Warranty and Performance Sureties 4. Exhibit D: Estimated Premium Costs for Bond options 5. Exhibit E; Proposed Surety Process for Private Development Projects E~~1;=ti.. !.~.. ,~~t;j`;'tj.~lil iJi.~;4..tifi{i1:4.,i, L~~. 4.;~,~.'ii!:~ '.{~!.;-~x .. i~.E{~1~~`.i~~ ~f ~!l .. .,. Conclusion The City of Meridian currently requires performance sureties for developer projects. However, the surety amount requi~•ed is inadequate to cover all costs that could result if the City were required to cash the surety and construct the project on its own. Therefore, a 15 percentage point increase in the overall cost of the performance surety is recommended to protect the City against unplanned and ua~budgeted expenses. Currently, the City of Meridian does not require a warranty surety. It has become apparent, due to recent events and the current economy, that the absence of a warra,~ty surety leaves the City exposed to the cost of making infrastructure repairs even though the project may be under warranty. The adoption of the warranty surety process outlined above would protect the City against unplanned and unbudgeted expenses. It would also provide a means to insure that the cost of private development is born by those benefiting from or requiring the development, In addition, it would help protect subsequent property owners from the cast and delays that can occur from resolving warranty related issues. Next Steps If the recommendations made are supported, then the following next steps are recommended: ^ Direct Staff to revise/create ordinance(s~ and fee schedules enabling the recammendations presented ^ Update Development Agreement Templates ^ Revise the Meridian Supplemental Specif cations (MSS ^ Update Public Works Contract Documents ^ Modify Public Works bid specs and other applicable documents to include a 2-year warranty ^ Develop a su~•ety agreement template for use in private development projects ~~f 4ili ~.~ ?~k '~V~lf}'i~~iS~~S ~~..~111.:~1'l it~.~'. ~...'. t.`>~. it, :E{I:ji,:~5 ~' ~y~1 4.4 t}~{'s;3(}'t~E! ~ ~tf~'~;il }5f! ~'~E~~..3 ;1~,~ ~. 0 .~ -- LL Q r~ ~~ W ~ N L L 1.. !» I.. I,~. s.. l.. f.. S,. !.. L N !.. s.. !.. ~ s.. 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V cc ~- N .a w~ ~~~ ~. ~ N VpU 0 ~ ~' ~:- ~~ U~ d {p C ~o v N C O V .... ,~ ~ ~ O~~ cQo ` °~z . ~~ '~. a ,a . ....... ~~ G v (jCu~i .~~~ ~~a~ ro'~~ ~~ S~ ~y ~....~• i ...~rw.n~ { tf ~ i °~a .. ~ ~ v i ~ i w ! i f ~ ~ ~ ~ ~ ro-°m ~~ ro~ ~ ~-~~~ C1 ~ i ~ NV1 ~~ ~a~ ~~ ~ ~ ~ 3 I ~p. ~ 1 ~~~~~ ..~ t~ ~ro ~ 1 Q~ ~ ~~ ~~. --~ 0~'a ~ -~-r---~ ~ U ~ 1' T ~ ~~~ o ~ ~ o 4 ,~ 'a ~ a, a a 3 ~ Q ° ~~ Nw~ ~c ~¢~ ~~C ~~~~° ~, ~ ~~a ~~ ~° ~ o d~~, E a~ ~~ ~ N ~~ ~ oN ~ U a H d G ~f a tJ, ...... V~ .~~ , oa~~ , ...E~ , ~E;~, .~Q~. a ~. ~ •m~o• . ~, . ;~~~' ~~ ~ ~ , • m N ~ ~. ~o, N ~ to .~ •~~~ N L ~~ a~ ~ ~~ U LL 'Q N 0~4~ aG~~ ~o ~ ~ U a~~ J ~~ o~t~ A C =a oc 0 N N ~ L $~z~, ~"~tOC~ ~~~N~ CN ~ ~~° ~~ c `- ~~ °~ wa Attachment B From the International Risk Management Institute -April 2003 Types of Guarantees Most frequently, the owner/developer will select one of the following forms to guarantee completion of the improvements: 1. Corporate surety bonds 2. Irrevocable letters of credit issued by a financial institution, e.g. bank 3. Certificates of deposit (CDs} 4. ether, such as cash, certified/cashiers check or money order 5. Tripartite agreement Pros and Cons Corporate surety bonds are far and away the most preferred option for most owner/developers when you consider the potential disadvantages of the alternative guarantee forms.. Irrevocable fetter of Credit ~ILOC}: To secure an ILCC, the owner/developer typically encumbers a portion of its line of credit for a fee. The security for the ILQC may be funds on deposit at the bank with their immediate right of set-off seizure). If the bank elects not to renew the iLOC, the public agency would have the right to promptly draw down on the full amount of the IL~C. Such a drawdown of the IL~C will create a loan, which the bank could promptly cal[ for immediate repayment, • The governmental entity holding the ILOC has the right to draw on the IL~C anytime they believe there is a breach of the owner's obligations and the owner would have Tittle or no opportunity to stop the drawdown. The IL4C is strictly a financial instrument and the bank provides no prequalification services to assure the owner/developer has the capacity or experience to perform. Certificates of Deposit {CDC: It is effectively a cash deposit that ties-up the owner/developer's capital, which normally can be deployed more productively. The CD is subject to forfeiture by the unilateral demand of the public body. For the public body accepting the CD as security, it provides no prequalification benefits. In addition, it saddles the public body with administrative burdens to make sure they accepted a CD that was in proper-assignable form, that they in fact had unequivocal authority to draw down on the CD, that they don't release it until all possibility of nonperformance had passed, and that they hold the instrument in safekeeping and properly return it to the owner/developer. other security such as cash): This option has many of the same concerns as with CDs. In addition, the public agency would have to make some determination that the cash being deposited was "legitimate" and not subject to possible bankruptcy preference rules. Tripartite Agreement: These agreements fused infrequently} may involve set-aside letters from a bank, special escrow accounts, and/or fund controls. Tripartite agreements typically place disbursement of the construction funds under the direct control of the governmental agency. Disbursement of monies may be delayed by concerns about the value of completed work or the adequacy of monies to complete the improvements and provide the required maintenance. Tripartite agreements are not really performance guarantees but rather control over a fund of monies that may not be adequate to pay for all the improvements. These type arrangements place significant additional administrative burden on the public agency and can create liabilities if the funds are not properly administered. Advantages of Bands Corporate surety bonds generally have none of the disadvantages of the alternative guarantees referenced above and have the following distinct advantages. • Surety bonds provide prequalification of the owner/developer through the underwriting process. ^ Surety credit is unsecured and does not reduce or tie-up the owner/developer`s source of funding, ^ Surety's claim department will work to facilitate a resolution of any problem and not merely to forfeit the owner/developer's security. Corporate surety bonds typically provide the public agency with a 100 percent performance, 100 percent payment, and 1-year maintenance bond. Irrespective of how much the owner/developer may have spent to complete the improvements up to the time of default, the full amount of the bonds are available to complete the work, Important Distinction The key difference between subdivision bonds, often also referred to as site improvement bonds, plat bonds, completion bonds, or simply performance bonds from regular contract performance bonds is that the owner/developer (the Principal) has to pay the cost of building the bonded improvements rather than the public agency (the Obligee). This is also an important point to remember if a general contractor should agree to secure/post the subdivision bonds on behalf of the owner/developer. Normally, the general contractor has the contractual right to stop work if the owner does not pay him. However, if the general contractor posts the improvement bonds in favor of the public agency, the general contractor is obligated to complete the improvements and pay all the bills irrespective of whether the owner/developer paid him. Therefore, a general contractor should generally avoid posting such bonds on behalf of the owner/developer or seek advice from their legal counsel on how best to protect him or herself. Not All Sureties Write Subdivision Bonds Subdivision/improvement bonds are a type of bond that not all surety companies want to write. The reasons for avoiding this class vary. Some bonding companies lack the familiarity or underwriting expertise. Some have had poor experience in the past and have found that these bonds can have a very long Iifespan. Some are uncomfortable with developers whose financials may show considerable leverage (debt) and whose valuation of land and developed properties are subject to wide market fluctuations. Nonetheless, over time the surety industry has reported favorable underwriting results for those companies who properly underwrite this class of business. General Underwriting When an owner/developer applies for surety credit, the surety underwriter will begin by developing the usual background and financial information to make a general assessment of the owner/developer's capacity/experience, their credit/financial and their character. They should be prepared to provide three fiscal year end financial reports on their operations, concurrent personal financial statement on all owners, resumes on key people, list of completed projects, information on banking relationships, business continuity plans, and copies of any trust, partnership, or operating agreements. Most surety companies will also have their own application form, which may ask other specific information. Once the bond underwriter is comfortable with the account in general, they will then underwrite each subdivision bond request. Specific Bond Underwriting The underwriter will require information such as the scope of the improvements to be made, an estimate of the cost to complete the work, and information about where the money to pay for the work is going to come from, Scope of Work. The subdivision/improvementhond guarantees the completion of specified improvements such as grading, storm drains, utilities, curbs and gutters, streets, sidewalks. Therefore, the underwriter will want details on the work or scope of the improvements to be installed, This information will normally be spelled out in the subdivision/improvement agreement that the owner/developerslgns with the public agency. When will the work start and be completed? What is the estimated cost of the improvements and the amount of the bonds? Usually engineer worksheets are available that outline the cost estimates including how the amount of the bond(s) was established, The public body will generally include some cushion or "fudge" factor to allow for possible escalation in the cost to complete the work. This increase factor is not entirely unreasonable because experience has shown that sometimes the improvements are not completed within the original time frame and the ultimate cost months or years later could be greater. Cost of Wark. The underwriter will also want some confirmation of the owner/developer's estimate of cost to complete. The preferred method is for the developer to have firm bids or signed contracts from trade contractors to complete the work. Depending on the value of the work and/or time to complete, the surety may want the owner to secure performance and payment bonds from the trade contractors} to assure satisfactory performance. At first blush this may seem, like double bonding but the bonds from the trade contractors run in favor of the owner/developer and not the public agency. Since the owner is obligated to complete the improvements, it is really in the owner's interest to have this guarantee or they may find that they have to hire someone else to complete the work for more money. Funding Source, Because the owner/developer is responsible for paying the cost of all the bonded improvements, a major underwriting concern/question is where is the money to pay for the work? The necessary funds should be set aside under an arrangement whereby they can only be used to pay for the improvements as work progresses, This can be accomplished under an escrow agreement with a lender or title company. Most often, however, the owner/developer will have secured a development loan for the overall project. The surety will then want to obtain aset-aside letter from the lender whereby an amount sufficient to cover the cost of the bonded improvements will be irrevocably set aside and held in trust for the benefit of the surety. It effectively carves out a portion of the development loan to pay for the bonded improvements, The surety will most likely have their own set-aside form.