Report To:

From:

Date:

Subject:

The Corporation of the District of Saanich

Mayor and Council

Harley Machielse, Director of Engineering

Sharon Hvozdanski, Director of Planning

5/13/2020

~~©~DW~[Q)

MAY 1 4 2020 LEGISLATIVE DIVISION DISTRICT OF SAANICH

Use of Surety Bonds as Security for Development Works and Services

RECOMMENDATION

That council approve a pilot program of up to five development projects to use surety bonds as security for works and services or landscaping in lieu of letters of credit, certified cheques, and cash, subject to the applicant being qualified by an acceptable surety bond insurer and the surety company having a minimum of an A level rating from A.M. Best rating services.

PURPOSE

The purpose of this report is to provide Council with data to support the use of development variance permits as part of a pilot program to test the use of surety bonds as security for servicing agreements.

DISCUSSION

Background

Potential applicants have approached District of Saanich staff about using surety bonds as security for works and services. The District of Saanich's Subdivision Bylaw currently only permits irrevocable letters of credit, cash, and certified cheques as bonds/security for development servicing and/or landscaping.

Pros District of • Surety bonds could be leveraged to reduce the cost of housing and Saanich support the Districts goals in providing more affordable housing.

• Less staff time spent inspecting works to confirm project progress, and associated administration work to partially release bonds during construction and landscaping.

• Surety company/insurer conducts research on applicant's reliability .

• Additional forms of bonding may help to encourage development in the District of Saanich.

Applicant • Lower cost for applicants .

Page 1 of 4

Cons District of Saanich Applicant

Surety Bond

• More funds available for an applicant may result in larger projects or more simultaneous ro·ects.

• The District of Saanich would have to manage the project to complete the works in the event that an applicant defaults.

• A variance to the Subdivision Bylaw No 7 452, 1995, would be required as surety bonds are not recognized as acceptable types of bonds within the current definitions.

• Surety bonds would not be available to applicants who lack a financial history or strong financial assets as determined by the insurer.

The surety bond is an agreement between three parties; the principal (applicant); obligee (District of Saanich); and surety (surety company), in which the surety financially guarantees that the principal will complete the terms of the bond. In this case, the surety would guarantee that the works and services of a development constructed by the applicant are finished. Should the principal be unable to fulfill their obligations, the obligee would make a claim for the bond that the surety must pay on behalf of the principal. If there is a surplus between the bond amount and the cost of the work remaining, the obligee would return that amount to the surety. The surety would seek repayment from the principal should they have to pay out a bond claim.

Before issuing a bond to a principal, a surety reviews aspects of their financial health such as assets and tenure to determine that they are a low risk for default. Similarly, the obligee can select eligible sureties based on their rating provided by credit rating companies such as A.M Best.

The principal pays premium to the surety for the bond which is typically less than the interest paid on a letter of credit or the cash and certified cheque amount for the works and services. Through this process, surety bonds allow applicants to have increased access to capital/cash.

The current forms of bonding allowed by Saanich; letters of credit, certified cheques, and cash; draw from the developer's liquid assets, reducing the total funds available to them. This can limit the scope of developments and how many developments an applicant can construct within a certain time frame. Additionally, when an applicant finances a project and they have drawn down their financed amount to where it matches the amount of the letter of credit or certified cheque, they need to capitalize assets in the amount of the bond to complete the work. This can cause a delay in construction and places additional financial burden on the applicant.

Discussion with senior Development staff revealed that the District of Saanich has called a applicant's bond twice since the early 1980's, once during the market downturn around 1982 and again about 20 years ago to complete the landscaping obligations of an applicant who defaulted. The current forms of bond have been effective in ensuring that development works and services and landscaping commitments are completed.

Page 2 of 4

Experience from other Municipalities

Several Canadian municipalities allow surety bonding for works and services. The City of Surrey began in 2016 with a pilot program that allowed up to three developments to use surety bonding from "A+" rated surety bonding companies. Their program was recently expanded to allow twelve developments and they have reduced the required surety rating to "A". The City of Calgary began allowing surety bonds in the spring of 2019. Both municipalities report a positive experience with their programs and have not had to call any surety bonds.

FINANCIAL IMPLICATIONS

Financial risks originate from the wording of the form of bond, the surety's credit rating/financial security, and the cost of the works exceeding the engineer's estimate. All of these risks derive from the contractor defaulting on their obligations.

These risks can be mitigated by wording the form of bond to favor the obligee, requiring stringent criteria for the surety's credit rating, and continued staff scrutiny of engineering estimates. As well, Engineering will continue to require 120o/o of the construction estimate for works and services or landscaping, whichever is higher, for the bond amount.

STRATEGIC PLAN IMPLICATIONS

The recommendation aligns with Council's Strategic Plan goals of improving organizational excellence.

SUMMARY

Staff recommends allowing surety bonds, approved through development variance permits, as security for development works and services or landscaping. Surety bonds allow applicants to have more available capital to fund development projects. By allowing financial flexibility for applicants, more development may be encouraged within the District of Saanich.

The requirement for the surety to have a minim.um "A" rating ensures that they have a strong financial standing in the event that a developer defaults. Surety companies will scrutinize developers for financial stability to minimize their own risk, which also protects the interests of the District.

Page 3 of 4

Prepared by

Reviewed by

Director of Engineering

Sharon Hvozdanski

Director of Planning

ADMINISTRATOR'S COMMENTS:

I endorse the recommendation from the Director of Engineering and Planning.

Page 4 of 4