What Is an Improvement Bond?

Getting a subdivision project off the ground means navigating dozens of municipal requirements before a single lot can be sold. One of the most important yet misunderstood requirements is the improvement bond. This financial instrument serves as a guarantee between you, your surety company, and the local government that all required public infrastructure will be completed to specification.

Whether you are developing a 20-lot residential subdivision or a 200-acre master-planned community, understanding how improvement bonds work is critical to your project timeline, budget, and ability to secure horizontal construction loans. This guide breaks down everything developers need to know about improvement bonds, from costs and coverage to the application process and what happens if things go wrong.

If you are planning a subdivision project and need financing that works alongside your bonding requirements, contact the Clearhouse Lending team to explore construction and development loan options tailored to your project.

What Is an Improvement Bond in Real Estate Development?

An improvement bond is a type of surety bond that guarantees a real estate developer will complete all required public improvements within a subdivision according to municipal standards and within a specified timeframe. Also called a subdivision bond, plat bond, or site improvement bond, this financial instrument creates a three-party agreement between the developer (principal), the municipality (obligee), and the surety company (guarantor).

Unlike standard insurance policies that protect the policyholder, an improvement bond protects the municipality and, by extension, future homeowners and taxpayers. If a developer fails to install roads, utilities, sidewalks, or other required infrastructure, the surety company steps in to finance the completion of those improvements. The developer remains financially responsible to reimburse the surety for any claims paid.

Most municipalities require improvement bonds before they will record a final subdivision map or issue building permits. According to the American Planning Association, performance bonds for subdivision improvements have been a standard municipal requirement since the mid-20th century, evolving alongside increasingly complex infrastructure standards.

The bond amount is typically calculated to cover 100% to 150% of the estimated cost of all required improvements. This includes a contingency factor of 10% to 20% above the engineer's estimate to account for cost overruns and the expense of bringing in a replacement contractor if needed.

Why Do Municipalities Require Improvement Bonds?

Municipalities require improvement bonds to protect taxpayers from bearing the financial burden of completing public infrastructure that a developer promised but failed to deliver. Without these bonds, a developer could record a subdivision map, sell lots, and then abandon the project before installing streets, sewer lines, or other critical infrastructure.

The core purpose is risk transfer. By requiring an improvement bond, the municipality shifts the financial risk of incomplete improvements from the public to the surety company and ultimately back to the developer. If a developer defaults on their obligations, the municipality can file a claim against the bond and use the proceeds to hire another contractor to complete the work, as noted by Surety Bond Professionals.

There are several specific reasons municipalities enforce this requirement:

• Public safety protection - Unfinished roads, drainage systems, and utilities create safety hazards for residents who purchase homes in partially completed subdivisions
• Infrastructure quality assurance - Bonds incentivize developers to meet engineering standards because the surety will investigate any deficiency claims
• Tax base preservation - Completed infrastructure maintains property values and supports the municipality's tax revenue
• Development accountability - The bonding process requires developers to demonstrate financial capacity before breaking ground
• Enabling earlier lot sales - Bonds actually benefit developers by allowing them to sell lots before all improvements are finished, improving cash flow

This last point is critical for developers financing projects through construction loans. The ability to begin lot sales while infrastructure work continues can dramatically improve project economics and help repay construction debt faster.

How Much Does an Improvement Bond Cost?

An improvement bond typically costs between 1% and 3% of the total bond amount as an annual premium for well-qualified developers. The bond amount itself usually equals 100% to 150% of the estimated improvement costs, so for a $2 million infrastructure package, a developer would need a bond of $2 million to $3 million and pay an annual premium of $20,000 to $90,000.

According to JW Surety Bonds, premium rates can range from less than 1% for large, financially strong developers with excellent track records to over 5% for developers with weaker credit profiles or limited experience. The premium is not a one-time cost. It is charged annually for the duration of the bond, which typically runs one to three years depending on the improvement schedule.

Several factors determine where your premium falls within that range:

• Developer's credit score - Scores above 700 generally qualify for the lowest rates
• Financial strength - Sureties review balance sheets, liquidity, and net worth relative to the bond amount
• Track record - Developers with a history of completing subdivisions on time receive preferential rates
• Project complexity - Simple residential subdivisions cost less to bond than complex mixed-use developments
• Bond amount - Larger bonds may qualify for volume discounts on the premium percentage
• Geographic location - Bond costs can vary by state based on regulatory requirements and local market conditions

For developers working on horizontal construction projects, the improvement bond premium should be factored into the overall project budget from the earliest planning stages. Use the commercial mortgage calculator to model how bond costs affect your total project financing needs.

What Types of Improvements Do These Bonds Cover?

Improvement bonds cover all public infrastructure that a developer is required to install as a condition of subdivision approval. The specific improvements are outlined in the development agreement between the developer and the municipality, and the bond amount reflects the engineer's estimate for completing that scope of work.

Common improvements covered by these bonds include:

• Streets and roads - Grading, base preparation, paving, and striping for all public roadways within the subdivision
• Curbs, gutters, and sidewalks - Concrete work along all public rights-of-way
• Storm drainage - Catch basins, underground piping, detention basins, and outfall structures
• Sanitary sewer - Main lines, lateral connections, manholes, and pump stations
• Water distribution - Mains, fire hydrants, valves, and service connections
• Street lighting - Poles, fixtures, wiring, and connection to the electrical grid
• Landscaping - Street trees, median plantings, and erosion control in public areas
• Signage and traffic controls - Street signs, stop signs, and any required traffic signals
• Monumentation - Survey monuments and lot corner markers as required by the subdivision map

For developers focused on subdivision road construction, roads and related improvements often represent 40% to 60% of the total bonded amount. Understanding this breakdown is essential when structuring your horizontal construction loan.

How Do You Obtain an Improvement Bond for a Subdivision?

Obtaining an improvement bond requires working with a licensed surety company or a surety bond broker who specializes in construction and development bonds. The process typically takes two to four weeks from initial application to bond issuance, though complex projects may take longer. Having your financial documentation organized before you begin can significantly speed up the process.

Here is what to expect at each stage:

Step 1: Gather your documentation. Before approaching a surety, compile your personal and business financial statements (typically three years), a current balance sheet, your development agreement with the municipality, the engineer's cost estimate for all required improvements, proof of project financing (such as a commitment letter from your construction lender), and your resume of completed development projects.

Step 2: Select a surety company or broker. Work with a surety that has experience in subdivision and development bonds. A broker can shop your application across multiple sureties to find the best rate. According to Commercial Surety, choosing a surety licensed in your state and rated A- or better by AM Best is recommended.

Step 3: Submit your application. The surety will review your financial capacity, credit history, development experience, and the specifics of the project. They want to verify that you have adequate funding set aside to complete the improvements, often evidenced by a set-aside letter from your construction lender.

Step 4: Underwriting review. The surety evaluates the risk by examining your debt-to-equity ratio, working capital, project feasibility, and the adequacy of your construction financing. They may request additional documentation or clarification during this phase.

Step 5: Bond issuance. Once approved, the surety issues the bond in the amount required by the municipality. You sign an indemnity agreement making you personally liable for any claims, pay the premium, and deliver the bond to the municipality.

Step 6: Ongoing compliance. As you complete improvements and pass inspections, you can request partial bond reductions. When all improvements are accepted by the municipality, the bond is released, though a maintenance bond for one to two years may be required afterward.

If you need construction financing that aligns with your bonding timeline, reach out to Clearhouse Lending for guidance on structuring your development loan alongside surety requirements.

What Is the Difference Between Improvement Bonds and Performance Bonds?

While the terms are sometimes used interchangeably, improvement bonds and traditional performance bonds serve different purposes and place financial responsibility on different parties. The critical distinction lies in who pays for the work. With a standard performance bond, the project owner (obligee) is paying for the construction through a contract, and the bond guarantees the contractor will perform. With an improvement bond, the developer (principal) is financing the improvements at their own expense.

According to the International Risk Management Institute (IRMI), subdivision improvement bonds are unique because the principal is responsible for funding the bonded work rather than receiving payment for performing it. This fundamental difference affects the underwriting process, the risk profile, and the cost structure of the bond.

Here are the key distinctions:

• Payment direction - In a performance bond, the obligee pays the principal for work performed. In an improvement bond, the principal pays for the improvements out of their own funds
• Obligee identity - Performance bonds typically protect private project owners. Improvement bonds protect government entities
• Scope of coverage - Performance bonds cover the full contract between owner and contractor. Improvement bonds cover only the public improvements required by the subdivision agreement
• Underwriting focus - Performance bond underwriting emphasizes contractor capacity and backlog. Improvement bond underwriting emphasizes the developer's net worth, liquidity, and project financing
• Duration - Performance bonds last the duration of the construction contract. Improvement bonds may extend beyond construction through a maintenance period

For developers who need both types of bonds on the same project, such as those building vertical structures in addition to horizontal infrastructure, understanding how these bonds interact with your overall financing structure is essential. Learn more about structuring debt for complex projects in our guide to how to finance subdivision development.

How Do Improvement Bonds Affect Subdivision Financing?

Improvement bonds have a significant impact on subdivision financing because they affect how lenders evaluate project risk, how much equity a developer needs, and when lot sales can begin generating revenue. Lenders view bonded improvements favorably because the surety provides an additional layer of financial protection beyond the construction loan itself.

When applying for a horizontal construction loan, your lender will want to know the bonding status of your project. Most construction lenders require that the developer obtain the improvement bond before the first draw on the loan. The lender may also require that the surety company acknowledge the lender's interest in the project through a dual obligee rider on the bond.

Here is how improvement bonds interact with the financing process:

• Equity requirements - Bond premiums and indemnity obligations count against the developer's available equity, which may require additional capital beyond the lender's standard equity requirement
• Loan sizing - Lenders may include the bond premium in the project budget when sizing the construction loan, but the indemnity exposure is evaluated separately
• Draw scheduling - Construction loan draw schedules are typically coordinated with the improvement completion schedule and bond reduction requests
• Lot release pricing - When lots are sold before all improvements are complete, lenders set release prices that account for remaining improvement costs covered by the bond
• Interest reserves - Because improvement bonds enable earlier lot sales, developers may need smaller interest reserves than they would without bonding

The interplay between bonding and financing makes it critical to work with a lender experienced in subdivision development. Contact Clearhouse Lending to discuss how improvement bonds factor into your project's financing structure and explore our commercial bridge loan calculator to model different scenarios.

What Happens If a Developer Defaults on Improvement Obligations?

If a developer defaults on their improvement obligations, the municipality files a claim against the improvement bond, and the surety company becomes responsible for ensuring the improvements are completed. This triggers a series of consequences for the developer that extend far beyond the immediate project, including financial liability, legal action, and lasting damage to their ability to obtain future bonds and financing.

According to Integrity Surety, when a default claim is filed, the surety has several options. It can finance a replacement contractor to complete the work. It can provide funds to the municipality to hire its own contractor. Or it can work with the developer to cure the default and complete the improvements under a revised timeline.

Regardless of which path the surety takes, the developer faces these consequences:

• Full financial liability - Under the indemnity agreement, the developer must reimburse the surety for all claim costs, legal fees, and administrative expenses. This is not like insurance where the carrier absorbs the loss
• Personal guarantee enforcement - Most surety indemnity agreements require personal guarantees from the developer's principals, putting personal assets at risk
• Permit and approval freezes - Municipalities typically halt all building permits and stop processing new lot sales upon declaration of default
• Construction loan acceleration - A bond default is almost always a default under the construction loan agreement, allowing the lender to accelerate the loan and demand full repayment
• Loss of future bonding capacity - A bond claim severely damages the developer's ability to obtain surety bonds on future projects, effectively preventing future subdivision work
• Reputational damage - Bond defaults are investigated by the surety and can become known within the local development community, affecting future business relationships

Developers who are concerned about meeting improvement timelines should proactively communicate with both the municipality and the surety company. Most bond agreements allow for extensions and modifications if the developer can demonstrate the ability and commitment to complete the work. Early communication is always preferable to a formal default.

Frequently Asked Questions

How long does an improvement bond remain in effect?

An improvement bond typically remains in effect for one to three years, matching the timeline in the development agreement for completing all required public improvements. Once the municipality inspects and formally accepts all improvements, the completion bond is released. However, most jurisdictions then require a maintenance bond, typically lasting one to two years, that guarantees the developer will repair any defects in the improvements during that period.

Can I use a letter of credit instead of a surety bond?

Yes, many municipalities accept alternatives to surety bonds, including irrevocable letters of credit from a bank, cash deposits, or certificates of deposit assigned to the municipality. However, these alternatives tie up capital that could otherwise be used in the project. A surety bond typically requires only 1% to 3% of the improvement cost as a premium rather than 100% of the cost held as collateral, making it the most capital-efficient option for most developers.

Do improvement bonds cover privately owned infrastructure?

Improvement bonds specifically cover public improvements that will be dedicated to the municipality upon completion. Privately owned infrastructure, such as internal roads in a gated community or private utility systems, is not typically covered by improvement bonds. These would be addressed through the construction contract and potentially through standard performance and payment bonds between the developer and the contractor.

What credit score do I need to qualify for an improvement bond?

Most surety companies prefer developers with credit scores of 700 or higher for the best premium rates. However, developers with scores in the 650 to 700 range can often still obtain bonds at higher premium rates, typically 3% to 5% rather than 1% to 3%. Below 650, options become limited, and the surety may require additional collateral, such as a letter of credit for a portion of the bond amount, before issuing the bond.

How does an improvement bond differ from a grading bond?

A grading bond is a subset of improvement bonds that specifically covers earthwork, grading, and erosion control. An improvement bond covers the full scope of public infrastructure including roads, utilities, drainage, and landscaping. In some jurisdictions, a grading bond is required as a separate instrument in addition to the broader improvement bond, particularly in areas with steep terrain or environmental sensitivity.

Can the bond amount be reduced as work progresses?

Yes, most improvement bonds include provisions for partial bond reductions as the developer completes and the municipality inspects specific phases of the improvements. For example, once all streets are paved and accepted, the bond amount can be reduced by the value of that work. This progressively frees up the developer's bonding capacity for other projects and may reduce the annual premium.