MAPD 2010 - Abracadabra the developer is gone mapd 2010
Abracadabra – Poofthe Developer is Gone andYou’re Left Holding the Bag Life with Lawyers, Banks, Insurance Companies, and Angry Homeowners
The Legal Stuff • MGL Chapter 41, section 81U “Any such bond may be enforced and any such deposit may be applied by the planning board for the benefit of such city or town, as provided in section eighty-one Y, upon failure of the performance for which any such bond or deposit was given to the extent of the reasonable cost to such city or town of completing such construction and installation.”
Acceptable Forms ofPerformance Guarantees • Covenant • Cash • Tri-partite Agreement • Surety Bond • Or Any Combination Thereof *Municipal counsel and treasurer should review deposit agreements, escrow agreements & surety bonds prior to Planning Board acceptance*
Types …..• Cash (or passbook) ▫ Legal agreement indicating purpose recommended ▫ If passbook/bank account, must be in the name of subdivider AND the Town/City of _____ ▫ Use subdivider’s SSN/tax ID number (for interest purposes) ▫ Municipality should control all associated documents (fin dir) ▫ Most easily accessible in default situation
Types…• Tri-Partite (TriParty) Agreement ▫ Agreement between 3 parties – subdivider, mortgaging bank and municipality ▫ “shall provide for the retention by the lender of funds” ▫ Trigger mechanism for disbursement of funds specified ▫ Doesn’t require substantial documentation to access…Planning Board vote only
Types…• Bond ▫ Must be posted pursuant to MGL Ch 41 S 81 U ▫ Tied to subdivision approvals ▫ Local insurance agent! ▫ Most difficult to exercise of the four types
Types…• Covenant ▫ Legal document stating that the subdivider promises not to sell or build on the new lots until the roadway and associated infrastructure is fully constructed
Performance GuaranteesThe Good, The Bad, and The Ugly
The GoodCash & Tri-Partite Agreements Magnolia Farms
Case Study: When Seemingly “Good”Situation Goes Horribly Awry• Cronin Brook Heights▫ Performance Guarantee- Combination of Covenant & Tri- party Agreement▫ Tri-party Agreement reduced in pace with development (including contingency)▫ Developer experiencing severe financial hardship/assets frozen▫ Unanticipated, widespread deterioration of roadway due to poor maintenance, construction practices & physical constraints
The BadInsurance Performance Bonds Cortland Manor
Bond Case StudyA Tale of Two Subdivisions Both guaranteed by same insurance company Two completely different approaches: one cooperative, one adversarial
Default ChallengesChallenge: How do we protect municipalities from weaknesses inherent in surety bonds?Response:▫ Surety bonds should always be in name of subdivider, not site contractor▫ Never accept surety bonds with expiration dates▫ Consider requiring cash deposit to accompany surety bond to cover maintenance and costs associated with calling the bond▫ Be picky! Only accept surety bonds from companies with good reputations (i.e. companies that actually honor their obligations in default scenario)
Default ChallengesChallenge: What if the subdivision completion costs outweigh performance guarantee amount due to deterioration of existing components or runaway inflation?Response:▫ Performance guarantee amounts should be determined by Planning Board’s consulting engineer (44/53G) based on prevailing wage and conservative pricing. It’s ALWAYS better to have too much money than not enough▫ Performance guarantees should have at least 20% contingency factor to take into account what-if’s & inflation▫ Contingency factor shouldn’t be reduced until project completion – The 20% Solution
Default ChallengesChallenge: Who will maintain the roads & infrastructure until subdivision completion? Response:- Insert operation & maintenance provision in Subdivision Rules & Regulations- Require operation & maintenance provision as part of any performance guarantee and tie it to approved plan- Require maintenance performance guarantee (ideally cash) that the municipality can tap into to cover routine maintenance costs associated with snow plowing, sanding, sweeping, and cleaning of catch basins (81Q) in default scenario
Default ChallengesChallenge: How does a municipality accept roads when the subdivider is not available or won’t execute transfer of ownership?Response:▫ Assessor’s Office may consider taxing roadways so that roadways can be taken through tax title in default scenario▫ Eminent domain Confirm title to land within the road right-of-way Town Meeting accepts the road layout Within 120 days of affirmative vote, record order of taking (automatically vests good title) Downside - G.L. c. 79 requires appraisal and payment of damages to owners before taking. Resulting award can be challenged in Court for up to 3 yrs following recording of order. Avoid this scenario by obtaining owner waivers of damages & appraisal rights.
Default ChallengesChallenge: What is the value of development rights under a covenant and how does it translate into value?Response: ?Challenge: What if nobody wants the remaining developable land in a partially constructed subdivision (i.e., mortgaging bank and municipality)?Response: ?
The central issue remains: Whether existing legislation adequately protects municipalities when confronted with subdivisions in default.