Escrow Bonds

Developers who sell and build residential condominiums often pre-sell a percentage of the building prior to construction. Each unit buyer places a deposit with the developer's escrow agent, which is held in trust until closing. The contract allows for a refundable deposit under specific circumstances.

Many states have consumer protection laws or administrative directives to ensure that the deposit is kept in trust for the contract purchaser. In some states, a developer may access the funds in escrow with a letter of credit or a condominium escrow deposit bond. The bond provides funds to make the contract purchaser "whole" if the developer defaults on the contract.

Condominium Escrow Deposit Bonds (CEDBs) offer a low-interest source of working capital for developers. By leveraging pre-sold deposits, developers can use the escrow funds for construction costs rather than obtaining additional capital from investors. Savings from using CEDBs instead of borrowing construction funds can be substantial.

With the costs of construction funds increasing, developers should consider purchasing a CEDB early in the pre-sales process. A professional surety agent can negotiate a lower bonding limit and collect a lower premium, while increasing the bond amount and collecting more premium as sales increase. This approach reduces the developer's carrying costs of the bond. The bond is not a loan but an indemnity agreement that protects the rights of the purchaser to know that their deposit funds are secure.