Unlock Access to Capital for Developers

Working capital is essential to a residential land developer’s financial health and operational business success. With adequate management of working capital, a developer is able to maintain liquidity and invest in new opportunities and acquisitions. The avoidance of “tied up” cash that is not earning a return on investment can help to optimize operational efficiency.

There are many requirements that developers must manage when undertaking a development, such as municipalities requiring security in the form of a Letter of Credit (LOC).  An LOC is a form of security provided through a bank which guarantees the developer will follow through on their development obligations with the municipality (e.g. complete the roads, pathways, sidewalks, landscaping, civil works, etc.). The disadvantage of an LOC is that it restricts access to capital for the developer. Municipalities across Canada are holding millions of dollars in LOCs from developers, which is capital that could otherwise be invested.

The alternative solution to an LOC is a surety product called a Subdivision Bond. This demand instrument bond provides the same quality of financial protection as an LOC.  The Subdivision Bond is most often procured by the developer on an unsecured basis and is inherently subordinate to project lending arrangements. It is also an “off balance sheet” transaction so it does not affect debt covenant calculations or tie up valuable lines of credit or working capital. There are no stand-by fees with the bond and the cost is often lower than an LOC, depending on the financial strength / credit profile of the developer. The result is optimization of capital and balance sheet liberation for the developer.

Marsh Canada’s Construction & Surety Practice is at the forefront of the Subdivision Bond initiative across Canada. So far, Marsh was instrumental in transitioning Calgary, Edmonton, and Airdrie to accept the bond as an alternative to an LOC. The Subdivision Bond reduces red-tape and promotes affordability, while creating positive business relations and investment between local developers and the municipality. Marsh was fortunate to work together with local homebuilder and land development associations from Calgary and Edmonton and forward-thinking municipalities that took the time to understand that the Subdivision Bond provides the same level of protection as an LOC.

With the help of industry experts and local associations, we expect to see a significant increase in the amount of municipalities accepting Subdivision Bonds, which will help to further unlock access to capital for developers.