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Alberta developers can ante bonds, not cash

Surety bonds allow developers to finance a project without facing borrowing limits or cash reserves in an idea that started in Calgary
Photo of St. Albert downtown

Last year, the City of Calgary was the first large municipality in Canada to provide real estate developer surety bonds, in an effort to promote construction in a city hard hit by the downturn in oil prices. This year, as the COVID-19 pandemic further slowed Alberta's economy, the City of Edmonton began accepting development bonds for select servicing agreements. 

The concept is now migrating to smaller Alberta municipalities.

Instead of being backed by cash, development bonds are more like an insurance policy, explained John Reid, city manager of development engineering in St. Albert, an Edmonton satellite community which is considering the idea.

Reid said the development bonds could be a "win-win" initiative for developers and the city. It allows the developer to pay a fee to a surety bond company that will give funds to the city if the developer defaults.

This will mean developers do not have to provide the full value up front for security, leaving more capital for them to work with for further developments, Reid explained.

The City of St. Albert is looking to start accepting surety bonds as an alternative to letters of credit as a way to spur more development in the city.

Currently, the city either uses cash, a certified cheque or a letter of credit through an accredited bank to withdraw funds to execute work for a project in the case a developer defaults on their contractual obligations. Even though this is a widespread practice, Reid said there's been a recent push for municipalities to use another form of security.    

New agreements require more up-front capital every time, he said, which reduces the amount the developers have to reinvest because the capital is tied up in a letter of credit. 

"There is a definite attractiveness for developers to not have to have their cash flow tied up with letters of credit, as this will allow less requirement up front for capital to get their developments done," Reid said.

"With developments being built, the city's tax rate increases. This could be seen as a win-win situation for developers and the city."

Developers with existing letters of credit can swap those out for bonds as well. Surety bond companies with an A- rating will do a full review of the company that's applying to see if they're financially viable. The risk to the city would be if the developer defaults at the same time a surety bond company defaults, but that's a "highly unlikely" scenario, Reid said.

St. Albert's competitiveness in the region is threatened as more municipalities turn to development bonds, Reid said. 

Strathcona County administration is also considering following suit, according to a release from the Urban Development Institute (UDI) Edmonton Region.

The UDI committee for St. Albert formally requested to follow the City of Edmonton's footsteps, Reid said. A recommendation for more administrative flexibility around the development agreement template for unique situations would also be welcomed by developers, he said.

"It's critical that the city move quickly to adopt a similar policy so developers see they are not being significantly impacted by working in the city of St. Albert," Reid said, noting the uncertainty around development due to the COVID-19 pandemic.

On September 1 the city's community growth and infrastructure standing committee passed a motion recommending city council include the option of development bonds and allow for more flexibility in the agreement.