A common practice in cities across Canada is that residential land developers are required to post letters of credit (LOC) prior to securing land development approvals to offset potential risks posed by such costs as site servicing and deferred levy payments.
“The letter of credit is a form of security where, in the event the developer does not complete the project according to the agreement, the City can call on the letter of credit as security,” says Fraser de Walle, senior vice-president, national residential construction project leader with Marsh Canada, a major surety company, working in insurance brokering and risk management. “It’s all about transfer of risk and when the City allows developers to develop land, they incur risks that they must protect themselves against.”
While it is good business practice for cities to protect themselves, and therefore, their taxpayers from risks associated with some developments, a letter of credit ties up developers’ capital, which could be better spent on other projects.
In the middle of March, the City of Calgary became the only top-10 major city in Canada to forgo the LOC in favour of a Developer Surety Bond, says de Walle
“A Developer Surety Bond provides protection to the City, guaranteeing that the developer will complete the project development,” he says. “Developer Surety Bonds are commonly used throughout the United States but are just now starting to be accepted by municipalities in Canada. The City of Calgary is trailblazing this initiative among the major cities in Canada.”
Hand-in-hand with BILD Calgary Region, de Walle and the City of Calgary administration have been working on the initiative since April 2018 and it’s a win-win situation for developers, the City and new home buyers.
“The Developer Surety Bond acceptance by the City of Calgary is a major positive progressive move by the City to create business opportunities and support industry and city teamwork towards new home purchase affordability in our city,” says de Walle. “There are several positives to the City accepting a bond as an alternative to the LOC. A bond is classified as off-balance sheet security, meaning it does not tie up capital in the same way that an LOC does. When that capital is freed up, a developer can pay down costs and invest in new projects and/or innovation and in an economy like we are in today, the opportunity for a developer to free up capital is significant.
“And it does affect the home buyer because when a developer is more liquid and has better access to capital, this will improve their business conditions and aid in improved affordability for the consumers.”
The move is the latest in a business-friendly relationship that has formed between BILD Calgary Region and The City of Calgary.
BILD was formed three years ago with the amalgamation of the Canadian Home Builders’ Association Calgary Region and the Urban Development Institute-Calgary.
“By removing financial barriers for business owners, our aim is to strengthen Calgary’s reputation as a great place to invest in land development and redevelopment,” says Darren Lockhart, managing director of Calgary Approvals, adding the City’s decision to accept bonds issued by a surety company comes after consulting with stakeholders in the industry. “The City is working to make improvements for businesses in Calgary that make it easier to invest.
“Our hope is that this business-friendly change will allow our developer partners to invest those funds into projects that make Calgary one of the most livable cities in the world.”
Another benefit is, in the event of a company transferring their ownership, bonds can be transferred in a manner similar to letters of credit. For companies that choose to use surety bonds to secure their development obligations, the City’s security reduction process will continue to be the same as with letters of credit. Once the Final Acceptance Certificate has been issued, bonds will simply expire after one year; no further action is required by a developer.
The LOC system will remain in place, as not all developers will be approved to have access to the use of the Developer Surety Bond, says de Walle.
“The bond promotes good development, meaning companies that have a solid balance sheet and history will be more quickly approved for the bond,” he says. “There may be some cases where a developer would need to use a combination of LOC plus a bond.
Or there may be some cases where the developer cannot get approved for a bond — these would be the same developers that may have issues gaining access to capital from the bank.”
In the end, the initiative benefits all involved.
“For the City of Calgary, it removes barriers to entry for good development. Acceptance of the bond promotes growth and sends a message to the development industry that the City of Calgary is open for business, innovative and listening to the needs of the development industry,” says de Walle. “A Subdivision Security Bond provides the same quality of financial protection as a Letter of Credit. The bond pre-qualifies the developer, providing assurance to the City that the developer is qualified to successfully complete the development. The developer is motivated to perform the development obligations due to the indemnities provided to the surety by the developer.”