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

Statutory Requirements for Guarantees: G.S. 160A-372(c) Guarantees may cover the cost of required improvements. City must provide range of options for types of Guarantees, including Letters of Credit and Bonds. City must allow Developer to elect type of Guarantee.

Define Developer’s Obligations How? Options could include: 1) Written agreement between the City and Developer, or 2) Language in Ordinance/Subdivision approval documents Improvements Make sure it is clear what improvements are being guaranteed and when they must be complete Default Define what constitutes a default

Subdivision Ordinance Language: Amount of Guarantees Guarantees in the amount of 100% of the costs of the improvements. Guarantees in an amount equal to at least 125% of the costs of the improvements.

Guarantees 1. Types of Guarantees: a. Surety Performance Bond (required) b. Letter of Credit (required) c. Cash or Equivalent Surety (optional) 2. Letters of Credit may be preferable to the City. 3. Surety Bonds may be cheaper and easier for the Developer to obtain.

Requirements of Surety Bonds: Standards for Surety Companies Not Enough: A surety bonding company must be authorized to do business in the State of North Carolina. Unless otherwise required, a surety bonding company must be: (1) Registered with the N.C. Secretary of State (2) Licensed with the N.C. Department of Insurance (3) Be rated at least a “B+” by a reputable bond rating company (4) Possess a sufficient amount of assets (upwards of $5o-100 million)

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.

Requirements of Letter of Credit: Standards for Issuing Bank A letter of credit must be issued by a bank licensed to do business in the State of North Carolina. Unless otherwise required, a letter of credit should be issued by a bank: (1) authorized to do business in the State of N.C., and (2) with a sufficient amount of assets (suggested minimum $100,000,000.00).

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

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)

Anticipation of Default Step 1. Request the City engineer to compile a report which lists all incomplete improvements and inadequate improvements and then provide a cost estimate for installation (including cushion). Step 2. Send a certified letter to the Developer no later than 60 days before expiration of the time permitted to install the improvements requesting the Developer to either finish installing or seek an extension. Make sure your guarantee will remain effective before granting an extension.

Anticipation of Default (con’t) Step days prior to expiration of the Developer’s time for installation, send the Developer a second certified letter reiterating that the City will declare default if the improvements are not installed in time. Include a statement of the estimated cost for finishing the project. Send a copy of this letter to the surety. Step 4. Declare default once time for installation has expired. If the Council will not declare defaults, your ordinance should state who possesses that authority.

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.

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.

Top 10 Ways to Protect Your Client: 1. 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. 2. Require the Developer to Guarantee at least 125% of the estimated costs of improvements. 3. 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.

Top 10 Ways to Protect Your Client: 4. Require a surety bond to be effective until all improvements are completed and accepted. 5. Require that the surety bond contain a set time period in which the surety must act following default. 6. Require that any bank issuing a letter of credit must allow for local presentment and have a sufficient amount of assets. 7. 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.

Top 10 Ways to Protect Your Client: 8. Have your engineer perform a detailed inspection of the guaranteed improvements no later than 60 days prior to the Developer’s deadline for installation. 9. 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. 10. When collecting, make sure you strictly abide by the requirements contained in the letter of credit.

(704) Anthony Fox (704) Bobby Sullivan (704) Susan Matthews