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Thread: Improvement guarantees--pros, cons and general definitions.

  1. #1
    Nov 2006

    Improvement guarantees--pros, cons and general definitions.

    I'm a young city planner, and I don't know much about finance and the like. Does anyone recommend a book or other source where I can learn about the various forms of improvement guarantees that cities require developers provide for public improvements?

    For instance, I work in a city that requires performance bonds; whereas I know irrevocable letters of credit from developers are accepted in other jurisdictions. I've also seen where a city accepts an amount of money held in escrow.

    I know very little about these various mechanisms and would like to know about their differences, and if there's one that's inherently better.



  2. #2
    Aug 2005
    Funky Town, CO.
    Jim: You might check the Rocky Mountain Land Use Institute at the University of Denver. This is their main web page http://www.law.du.edu/rmlui/ They have a couple of publications on the issue that you can download.

    You are correct about different jurisdictions wanting different forms of guarantees. Some like the LOC that automatically renews. The method you choose may depend on whether your community is really willing to complete the work if it does not get done. If you are willing then you need the funds without much hassel so a LOC or cash for small project will work. I have seen the amount vary from 5% to 125% of the value of the improvements.

    If you don't want to do the work if the developer defaults then some people think that a performance bond provides additional leverage on the developer since the cost of the bond is based on the risk. If a developer defaults on the bond it hurts their credit worthiness and they will have to pay more to the bonding company the next time. Much like collecting from an insurance company I think its harder to collect from the bonding company. You can't just present the bond to the company and ask for your money like you can with a LOC from a bank.

    That's my 2 cents worth.

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