A new state act on bonding for subdivisions is proving a headache for local zoning boards.
“This is a disaster,” attorney Jennifer Yoxall of Carmody & Torrance told the Prospect Planning and Zoning Board at its last meeting, calling Public Act 11-79 the “attorney retirement fund.”
The act changes the rules for how towns can accept bonds on construction projects, potentially opening towns up to problems if the project is not completed as specified, Yoxall said.
The main issue of concern in the new rules is that towns must accept surety bonds, a form of bond that is less expensive for developers, but makes it harder for towns to collect cash if a contractor doesn’t fulfill its obligations.
When a developer comes to the town for approval of a new site plan or subdivision, the town usually asks for a guarantee, in the form of cash, savings account, or a letter of credit, that the work will be completed to code. The town could specify what type of bond it requires.
A surety bond, however, acts like an insurance company, stepping into the shoes of the developer and asserting any defense it can to make it hard for the town to collect its money.
Surety companies are notorious for making the process as difficult as possible, Yoxall said. In many cases, she said, towns must go to litigation to collect the money, a process which would take several years.
“You don’t have any certainty then,” Yoxall said.
Another problematic provision of the act is that towns can’t continue to hold maintenance bonds once they accept improvements, such as roads. Usually, the town holds a 10 percent retainer after the rest of the bond is released, in case there is a problem with a new road in the next year or so.
Now, Yoxall said, the town has to be very careful when it accepts roads, which is does by default if it starts plowing, driving school busses, or picking up trash on the road.
A third provision of Act 11-79 limits site plan bonds to the estimated cost plus 10 percent. Some towns add as much as a 25 percent buffer to the bond to guard against inflation over the life of the bond, but Prospect doesn’t usually add any cushion, Yoxall said. She said Prospect should consider adding that 10 percent just in case.
“It puts … a great burden and risk on the town and taxpayers,” Prospect’s Planning and Zoning Commission Chair Donald Pomeroy said.
Another problem with the new act, from the town’s perspective, is that developers may decide at their discretion when to post the bond, meaning they can wait until the project is nearly complete to post the bond.
Towns, however, will not issue a certificate of occupancy allowing homeowners to buy property and move in before the bond is posted.
The last potential problem, of lesser concern, is that towns must release a bond within 65 days of a request or provide written explanation as to outstanding items. This may become difficult if the town needs to hire consultants to review the work, Yoxall said.
In response to the changes in the act, Yoxall suggested the commission change its ordinance to take advantage of a rarely-used option.
Instead of accepting a bond for a subdivision, Yoxall said the town could authorize conditional approval pendent on the completion of the project.
This would protect the town from having to accept surety bonds, but make it difficult for developers to build because they could not sell off lots until everything is done. Usually, developers use funds from selling the first lots in their subdivision to pay for the continued construction of roads and utilities throughout the project.
“This is not good for anybody,” Yoxall said.
For site plans, however, the town doesn’t have that option. The town has no choice to maintain surety bonds. Yoxall suggested increasing fees to cover the risk and asking for a wetlands bond to cover erosion and drainage issues. The Inland Wetlands Commission can still limit the types of bonds they accept.
Yoxall said that home builders were largely in favor of the legislation, but neither they nor the legislature had thought through all the consequences. Developers wanted an easier bonding process that wouldn’t tie up as much capital. Some towns may have held on to bonds for years, making it difficult for developers to move forward, Yoxall said.
“I see the problems that may have created this (legislation), but this is not the answer,” Yoxall said.
According to zoning commissioner Gregory Ploski of Prospect, it is almost impossible for a developer to get a letter of credit these days.
“Legislators wanted to encourage growth and jobs, but failed pretty miserably,” he said.
The act goes into effect Oct. 1, so planning and zoning commissions don’t have long to react.
If the commission decides to change its ordinances, Yoxall said it would cost about $2,200 to hire a consultant to do it properly.
Pomeroy said the decision of whether or not to accept surety bonds is a decision for town growth. Without a bonding process, developers will not be willing to invest in construction, he said.
It wasn’t clear what would happen with site plans and subdivisions already in the works.
The commission made no decision, but decided to mull over its options until the next meeting.
In Naugatuck, Town Planner Keith Rosenfeld said the new rules could be a double-edged sword that, if handled the right way, could instigate something positive for the borough.
He said the new rules could save developers money because they don’t have to bond the whole amount at once and save towns the heartache of a long, drawn-out process.
If a developer doesn’t put up a bond before starting work, it will encourage the developer to complete the project in order to sell lots, Rosenfeld said.
“These laws are going to make the towns be more diligent in what they bond and what companies the surety bonds are from and when the work is not done, we’re going to have to go in and do it,” Rosenfeld said.
He said it will be up to the town to make sure the surety company holding the bond is financially sound.
Naugatuck regulations do not currently allow the town to accept surety bonds, a provision the town would have to change to comply with the state law.
“We’ve had better history with accepting letters of credit from local banks,” said Rosenfeld, who added local banks are more responsive to the town’s needs.
He said the provision that the town can’t hold maintenance bonds once roads are accepted will delay the acceptance of roads.
“The problem is when there are homes that were sold on a road that hasn’t been accepted, that will deny citizens basic services,” Rosenfeld said.
Rosenfeld said he was glad that wetlands commissions aren’t under the new requirements, allowing them to enforce erosion and sedimentation controls.
He said the rule limiting bonds to estimated cost plus 10 percent will not affect Naugatuck since that is the amount the borough requires currently.
He also said the 65-day time limit on releasing bonds should not be difficult since Naugatuck has its own planning and engineering consultants on staff.
Rosenfeld said he planned to talk to borough attorney Ned Fitzpatrick about what changes Naugatuck should make in response to the new regulations.
“If we can move to change our regulations and protocol to fit these changes, I think we’re going to be a little more vigilant in making sure things are done correctly and in a timely manor,” Rosenfeld said.