Abracadabra: the Developer is Gone and You're Left Holding the Bag
Abracadabra – Poofthe Developer is Gone andYou’re Left Holding the BagLife with Lawyers, Banks,Insurance Companies, andAngry Homeowners
The Legal Stuff• MGL Chapter 41, section 81U“Any such bond may be enforced and any such deposit may beapplied by the planning board for the benefit of such city ortown, as provided in section eighty-one Y, upon failure of theperformance for which any such bond or deposit was given tothe extent of the reasonable cost to such city or town ofcompleting 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 depositagreements, escrow agreements & surety bonds prior toPlanning Board acceptance*
Types …..• Cash (or passbook)▫ Legal agreement indicating purposerecommended▫ If passbook/bank account, must be in the nameof subdivider AND the Town/City of _____▫ Use subdivider’s SSN/tax ID number (for interestpurposes)▫ Municipality should control all associateddocuments (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 offunds”▫ Trigger mechanism for disbursement of fundsspecified▫ Doesn’t require substantial documentation toaccess…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 subdividerpromises not to sell or build on the new lots untilthe roadway and associated infrastructure is fullyconstructed
PerformanceGuaranteesThe Good, The Bad,and The Ugly
The GoodCash & Tri-Partite AgreementsMagnolia 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 inpace with development (includingcontingency)▫ Developer experiencing severefinancial hardship/assets frozen▫ Unanticipated, widespreaddeterioration of roadway due topoor maintenance, constructionpractices & physical constraints
The BadInsurance Performance BondsCortland Manor
Bond Case StudyA Tale of TwoSubdivisionsTwo completelydifferent approaches:one cooperative,one adversarialBoth guaranteed bysame insurancecompany
Default ChallengesChallenge: How do we protect municipalities from weaknessesinherent in surety bonds?Response:▫ Surety bonds should always be in name of subdivider, not sitecontractor▫ Never accept surety bonds with expiration dates▫ Consider requiring cash deposit to accompany surety bond to covermaintenance and costs associated with calling the bond▫ Be picky! Only accept surety bonds from companies with goodreputations (i.e. companies that actually honor their obligations indefault scenario)
Default ChallengesChallenge: What if the subdivision completion costs outweighperformance guarantee amount due to deterioration of existingcomponents or runaway inflation?Response:▫ Performance guarantee amounts should be determined byPlanning Board’s consulting engineer (44/53G) based onprevailing wage and conservative pricing. It’s ALWAYS betterto have too much money than not enough▫ Performance guarantees should have at least 20% contingencyfactor to take into account what-if’s & inflation▫ Contingency factor shouldn’t be reduced until projectcompletion – The 20% Solution
Default ChallengesChallenge: Who will maintain the roads & infrastructure untilsubdivision completion?Response:- Insert operation & maintenance provision in Subdivision Rules &Regulations- Require operation & maintenance provision as part of anyperformance guarantee and tie it to approved plan- Require maintenance performance guarantee (ideally cash) thatthe municipality can tap into to cover routine maintenance costsassociated with snow plowing, sanding, sweeping, and cleaningof catch basins (81Q) in default scenario
Default ChallengesChallenge: How does a municipality accept roads when the subdivideris not available or won’t execute transfer of ownership?Response:▫ Assessor’s Office may consider taxing roadways so that roadwayscan 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 vestsgood title) Downside - G.L. c. 79 requires appraisal and payment of damages to ownersbefore taking. Resulting award can be challenged in Court for up to 3 yrsfollowing recording of order. Avoid this scenario by obtaining owner waivers ofdamages & appraisal rights.
Default ChallengesChallenge: What is the value of development rights under acovenant and how does it translate into value?Response: ?Challenge: What if nobody wants the remainingdevelopable land in a partially constructed subdivision(i.e., mortgaging bank and municipality)?Response: ?
The central issue remains:Whether existing legislationadequately protectsmunicipalities whenconfronted withsubdivisions in default.