Municipal Bonding Uniformity Matters

Alabama most adopt consistent bonding standards to streamline development and drive economic growth. While bonds are a well-known part of doing business for developers, it is often difficult to know at the outset of a project the cost of the bond and the requirements and timeframe to get it released. 

There are generally two types of bonds used in land development: performance bonds and maintenance bonds.  Each are designed to protect a municipality in the event a developer does not install and maintain the required infrastructure.  

Performance Bonds

A performance bond is just what it says—it’s a bond that ensures performance.  It’s often required by a municipality for improvements that will be required in future phases of development.  For example, if a municipality requires a turn lane at the second phase of a development, a municipality may require a bond prior to phase 1 to ensure the turn lane is installed. Performance bonds could also be used for sewer lift stations, detention ponds, or the final lift of asphalt.

Maintenance Bonds

Maintenance bonds, however, ensure that the roads, pump stations, landscaping, and other infrastructure are maintained by the developer.  For example, before a municipality will take over maintenance of a road put in by a developer, it must meet certain criteria.  If the developer cannot meet that criteria, the bond is used to improve the road to meet the criteria.  

The Problem: No Uniformity

The problem, at least in some states including Alabama, is that bond requirements vary widely. Some municipalities require bonds at 125% of projected costs; while another down the road in the same county may demand 200%. There have even been stories of municipalities requiring cash deposits in escrow. Further, there is no set procedure or timeframe for municipalities to release a bond.  All of this leads to cost increases, tied-up capital, and unpredictable time frames.

The Solution: Standardization

There should be a consistent system for performance and maintenance bonding across the state.  A commercial or residential developer interested in doing business in Alabama should be able to select a site and know the cost of the bond and the procedure and timeframe for getting it released.  

• Standard bond periods (e.g., one year)

• Uniform markup limits (e.g., no more than 125% of estimated costs)

• Surety bonds should be required, while cash bonds (i.e. deposits) should be prohibited

  
  

This approach balances municipal protection with economic growth. It’s time for Alabama to pass legislation that would create uniformity in bonding.