Arizona Subdivision Assurances: Bonds, Letters of Credit and Trusts

Published city materials show how much the menu varies. Scottsdale's guide to its covenant to construct and assurance, citing Scottsdale Revised Code Section 48-102, requires every developer to sign a covenant to construct and accepts three financial assurances: subdivision performance bonds, letters of credit or cash. A draft covenant and assurance on the city's templates is due with the second improvement plan submittal after Development Review Board approval of the preliminary plat, and forms other than the city templates go to the City Attorney for review and may not be accepted.

Tucson's partial and final release form, citing §9-463.01(C)(8) and Tucson Development Standard 1-04.0, lists four accepted forms: a third-party land trust assurance agreement, a letter of credit, a performance bond or an escrow account. Oro Valley's zoning code, Section 26.6, requires residential subdivisions to use a third-party trust in addition to monetary assurances for site stabilization, landscaping and water infrastructure. For other development it lists cash, surety bonds from a company authorized in Arizona, government securities, escrow deposits and letters of credit.

A trust assurance secures the improvements with the land rather than with credit. Under Oro Valley's code, the subdivided property is placed in trust with an escrow agency or trust company licensed in Arizona, and the trust agreement provides that no lot may be transferred until the town authorizes it in writing. The agreement also lets the town abandon and re-subdivide the property if the improvements are not installed to its specifications, and it is recorded with the Pima County Recorder.

The trade-off is control of the sales schedule. No surety capacity or bank line is used, but lots cannot close until the city releases them, and the trust usually has to fit around the construction lender's deed of trust and the title company's requirements. Oro Valley allows the trustee to sell all unreleased lots in a phase to a single purchaser bound by the trust agreement, which is how a bulk sale to a homebuilder can proceed before improvements are done. The same code bars trusts from securing recreation areas, landscaping, site stabilization or water infrastructure and requires another assurance for safety-related flood and traffic improvements, so a trust rarely stands alone.

Local codes set the amount, and some go above the estimate. Oro Valley's Section 26.6.F sets assurances for construction, site stabilization, landscaping, water infrastructure and other improvements at 120 percent of costs estimated under its rules, with estimates signed and sealed by the engineer or landscape architect and approved before any assurance is accepted; a contractor's itemized formal bid may substitute for the estimate. Site stabilization and landscape assurances are posted before a Type 2 or Type 3 grading permit or the start of work, so security is due earlier than plat recording on graded sites.

The Arizona Department of Real Estate applies its own test when a subdivider seeks a public report. Rule R4-28-A1211 asks whether the city or county has approved the completion assurances and, for a bond, letter of credit, loan commitment or trust or escrow account, requires an instrument payable to a third party who is not the developer, expiring at least 90 days after the last estimated completion date, in an amount 10 percent greater than the estimated cost to complete and supported by a registered engineer's, architect's or contractor's estimate. A bond used for that purpose must come from a company licensed in Arizona with a rating of good or higher.

Release follows the city's acceptance, not the contractor's completion. Scottsdale completes a final inspection at the developer's request; before staff recommends final acceptance, the work must pass inspection, Mylar as-built plans and a PDF set must be submitted and a financial assurance for 10 percent of the total improvement cost must be in place for one year from final acceptance. That 10 percent can come from reducing the existing bond, letter of credit or cash, or from a new warranty bond, letter of credit or cash, in which case the city releases the construction assurance after final acceptance.

Oro Valley's code releases trust assurances after completion and inspection, with partial releases of up to 50 percent for a group of lots whose improvements can be used and maintained separately. Monetary assurances may be reduced as work progresses but not below 50 percent of the original amount until all safety-related improvements are complete, and once a reduction is approved, a rider or substitute assurance must be in place within 14 days of the release letter. Full release requires accepted as-builts, a close-out package and a landscape maintenance assurance, such as a bond for 10 percent of the original landscape assurance for one year. Tucson issues a notarized release by lot or by dollar amount, and the agreement stays in effect for the portions not yet released.

Phasing decisions are made when the assurance is posted. Scottsdale requires assurance for all phases when a phased project is submitted as one plat; after each phase is completed and accepted, the developer may ask to lower the assurance by that phase's amount, or it may post separate assurances per phase that are released one by one. Oro Valley asks for cost estimates itemized by phase so assurances can be released phase by phase, and lets multifamily and commercial projects graded in phases post only the first phase's assurance with the plat.

Selling the project does not end the seller's assurance. Scottsdale states that when ownership changes, it will not release the current owner's obligations until the new owner's covenant to construct and financial assurance are received and approved, and Oro Valley reviews ownership-driven changes in assurances through its Planning and Zoning Administrator and Town Engineer. For a land developer selling a phase to a homebuilder, that means the developer's surety and indemnitors stay on the hook until the builder's replacement assurance is accepted, so the purchase agreement should set a deadline for the buyer to post it.

When the developer chooses a bond, the surety underwrites the developer's balance sheet against the city's amount, which may be above the estimate. Typical requests include the city's template and covenant or assurance agreement, the approved cost estimate itemized by phase, the developer's and guarantors' financial statements, a schedule of open assurances by city and phase and the funding source for the improvements. Sureties also ask whether any other assurance, such as a trust on the same lots, is in place and how the public report assurance under the Department of Real Estate rule will be met.

Release planning is part of the same request. A developer that shows when each phase will be accepted, which 10 percent warranty assurance will follow and how a replacement assurance will be handled on any bulk sale gives the surety a clear picture of how long each bond will stay open.