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.
On Monday, the city's community growth and infrastructure standing committee heard a presentation around development bonds, a move that John Reid, city manager of development engineering, called a "win-win" initiative for developers and the city.
Instead of being backed by cash, development bonds are more like an insurance policy, Reid explained.
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.
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.
"Theres 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 (base) 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, he said.
Another reason to go down this path is to increase St. Albert's competitiveness in the region as more municipalities turn to development bonds, Reid said.
The City of Calgary was the first large municipality in Canada to provide developer surety bonds last year. Recently, the City of Edmonton began accepting development bonds for select servicing agreements.
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. Right now, a punctuation change to the document has to go back to council for approval.
"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 uncertainy around development due to the COVID-19 pandemic.
Committee passed a motion recommending city council should include the option of development bonds and allow for more flexibility in the agreement.
Courtney Jensen, chair of the UDI St. Albert committee and a managing partner with Strata Development Corp., said development bonds offer a great tool for developers in St. Albert.
Land development is a very cash-intensive process, and surety bonds allow developers to finance the project in a different way without coming up against borrowing limits, she said.
"Developers only have so many assets to secure their loans and using a surety bond doesn't use up some of that room," Jensen said. "Sometimes the rates that we get on a surety bond are very competitive with the rates that we pay the bank, so it can actually be a less expensive option for us in terms of security to the city."
As more municipalities neighbouring St. Albert incorporate development bonds as a security option, Jensen said she appreciates the city coming to the table with the local UDI chapter to move this forward.
"If surety bonds are not an option, it just makes the municipality a little bit less appealing from an investment perspective," she said.
"The city really came to the table on this in terms of working with the development community here, getting up to speed really quickly and moving forward on it. We really appreciate that."