Performance Guarantees-2.09.21Basic Guarantee Issues Clear model language (in local regulations) Guarantees filled out and signed Developer engineer provides completion cost estimate Municipality (or consultant)
reviews and approves Contingency: inflation, project manager, legal costs, fixing problems NON-PUBLIC Funds– therefore prevailing wage may not apply Certification of default as sole
standard Expiration dates Solvent banks and sureties Minimum construction and warrant guarantee Covenants mixed with guarantee Irrevocable dedications & permissions to enter Permits
Requiring Financial Guarantee (Nationwide) Subdivision 92% Zoning/Site Plan 56% Wetlands* 39% Erosion/Sedimentation* 53% *sometimes as part of other regulations Use of
Financial Guarantees (Nationwide) Performance Bond 33% Cash Escrow 13% Letter of Credit 45% 3-Party/Improvement Agreement 2% (mostly MA) Lien/Property escrow
1% Recommendations for Use Specifically authorize in all regulations Use for critical improvements Recommendations for Structure Letters of Credit or Three-Party or Cash Track Guarantees
Model language Certification of Default as sole criteria Warranty (82%) One to Two Years (72%) Margin of Safety (74%) 11 to 20% (39%) Ensure sufficient Funds when called (11%) Performance
Guarantees Wayne Feiden, FAICP Case Study: Northview Subdivision, Northampton Failed project Developer ceased doing work No bankruptcy Performance secured by Lender’s Agreement by
among Sturbridge Development, LLC ("Subdivider" or "Applicant"), Florence Bank ("Lender" or "FB") and the City of Northampton …At its meeting on June 11, 2020, the Northampton Planning
Board voted to direct the City of Northampton to commence proceedings to draw on the remaining balance of the above referenced Lender’s Agreement based on their finding that the Applicant
has failed to complete crucial elements of the stormwater management system at the project site in accordance with the permit for this project and consistent with the terms in the Lender
Agreement. Further, the Applicant has failed to respond to repeated requests to address this situation. This failure is compromising the existing infrastructure that has been installed,
the homes, and abutting wetland resource areas… …we have incurred liability by reason of the failure of the developer/owner to complete the construction of Northview Subdivision (previously
known as Village Hill Circle Subdivision) in accordance with the definitive subdivision plans endorsed May 18, 2016 recorded in Plan Book 237 Page 78, the Northampton Zoning Ordinance,
and the Rules and Regulations Governing the Subdivision of Land in Northampton. Thus in accordance with the above referenced Lender’s Agreement, originally dated February 2017 and amended
thereafter, the City is call… the Lender’s Agreement and draw down the remaining balance of the financial guarantee in the amount of $208,681.99. Northview Subdivision Performance
Guarantees Tri-Party Agreement $208,600 at subdivision failure Originally higher amount, released as project proceeded Covenant Not to Build (two lots) Negotiated releases for $115,000
Balance of maximizing payment and NOT freeze project Non-Financial Performance Guarantees Covenant-Not-To-Sell For subdivisions (not for zoning) Certificate of Occupancy Building
Permit Irrevocable Offer of Dedication Financial Performance Guarantees Three-Party Agreement (Improvement Credit Agreement) Irrevocable Standby Letter of Credit Cash Escrows Surety
Bonds Liens Property Escrows Can combine guarantees Summary (developer choice for subdivisions only) Guarantee Function Bonds From Surety Company Surety can complete work or pay off
Must prove work not completed Letters of Credit From Bank, Savings & Loan, Credit Paid off when there is a claim Three-Party Agreement (a/k/a Tri-Party) Financial Institution Bills paid
as work approved Cash Escrow Cash held by municipality or escrow agent Summary Guarantee Benefits Problems Bonds Experience Can be difficult to collect Worthless if expires* Worthless
if surety fails Letters of Credit Easy to collect Minimal burden Worthless if expires* Worthless if surety fails Three-Party Agreement (Tri-Party) Easy to collect Minimal burden No expiration
Worthless if expires* May not cover increased costs Cash Escrow Easy to collect Very expensive Whose funds *tracking systems are critical Letters of Credit: No Private Enforcement Rights
Letter of credit are three-party agreements (bank, developer, municipality) Others (lot owners) have no rights– not party to contract Future claim for non-enforcement unanswered!!!
Jim Macon Building Contractors, Inc. v. Lake County Florida 763 So. 2d 1223 (2000) County collected—partially completed subdivision Lot purchasers claimed rights to letter of credit
Letter of Credit: (MA) Municipality NOT a Guarantor Municipality not obligated to complete beyond funds in guarantee Lot owners not entitled to permits just because town holds partial
guarantee Marlborough Savings Bank v. Marlborough 45 Mass App. Ct. 250 (1998) Town allowed reduction in Letter of Credit Called Letter, which funded PARTIAL improvements Bank obtained
lots Wanted building permits and complete street Surety Bonds: No Private Enforcement Rights NO third-party rights to collect on BOND BUT: “Possible rights of lot owners to require
the enforcement… are not in issue" Gordon v. Robinson Homes, Inc, 342 Mass. 529 (1961) Surety bond to Beverly, MA, for subdivision Lot owenr purchased based on guarantees Lot owner
sued surety to collect bond. Developer did not perform and plaintiff injured Performance Guarantee EVEN if Constructive Grant Even if permit granted constructively, board still can require
performance guarantee. Just as for permit timelines, tracking guarantees is still critical Stoner v. Planning Board of Agawam 358 Mass. 709 (1971) Insolvent Financial Institutions A
legacy from 1989-1992 FDIC and insurance does NOT cover Letters of Credit or Three-Party Agreements Who Decides Guarantee Type?? Limited local discretion MA Subdivision: escrows, bonds,
and negotiable securities MA: Often, not always, interpreted to include Letters of Credit Local conditions consistent with law OK Can SOMETIMES combine guarantee types Gatto Design
& Development Corp. v Township of Colts Neck, 316 N.J. Super. 110 (1998) Gatto wanted to use bond, allowed by state statute Town said Letter or Credit or cash escrow– NO same as MA
subdivision Who Decides Guarantee Type?? Massachusetts Land Use Reform Act (NEVER PASSED) SECTION 26. Section 81U of said chapter 41, as so appearing, is hereby amended by striking out
lines 74 through 79 and inserting in place thereof the words "Before endorsement of its approval of a plan, a planning board shall require a performance guarantee so that the construction
of ways and the installation of municipal services will be secured by one, or in part by one and in part by another, of the methods described in the following clauses (1), (2), (3),
and (4). The method or combination of methods shall be selected by the planning board, provided, however, that the applicant shall have the right and option to substitute a covenant
referred to in clause (3)." * *