Expert: Mike Fortunato - 4/15/2009

Question
Hi,

I had a question on Tax and Surety Bonds.  The company I work for was doing a condo conversion and I guess there was a surety bond (for the condo map) and a tax bond (for the property taxes).

1. I thought property was used as collateral so why are there bonds?
2. Why do you need a surety bond for the condo map?
3. Why is there a tax bond?
4. Once the bonds are released do we get any money back?

Any information or additional advice would be helpful.

Thank You
Michael

Answer
Surety bonds are required to ensure completion of the parcel map process (including final monumentation). The property itself is not usually used as collateral for this purpose. For the tax bond, the requirement stems from the fact that tax liens are often assessed against properties a period of time before they actually come due. Therefore, the idea is to make sure there's a mechanism in place to guaranty the payment of those taxes before the developer is removed from the project, and prior to the parcel being sold to a buyer. Note that in lieu of a bond, a letter of credit or other security (such as a CD) can be used for that same purpose. If your bond is in the form of secured cash, then yes -- the money gets released when all requirements have been met. If you go through a bonding company, there's a fee you pay for that bond, and that does not get returned. In essence, they are loaning you the money for the bond.