Bonds – Purpose & Definition

Revised on 06-17-2020

PURPOSE


Bullseye graphicTo guarantee the construction of proposed public works improvements or the protection or replacement of existing public works improvements, the owners or developers must provide security. This security is commonly referred to as the bond. The bond also serves the following purposes:

  1. The work will be performed according to City Engineer standards.
  2. The work will be completed in a specified time and at no cost to the City.
  3. The contracted labor and materials for subdivision improvements will be paid.
  4. Any B-Permit fee deficits will be paid.
  5. Any improvement conditions, as set forth by the Advisory Agency, Planning Commission, Council, etc., will be met.

Note: Grading bonds are processed by the Department of Building and Safety and further information can be found on the LADBS Website.

DEFINITIONS


Types of Securities (Bonds)

Magnifying glass graphicSurety Bond:  A surety bond is a legal instrument issued by a bonding company, which guarantee to the City a fixed sum if the project is not completed.  Surety bonds are issued by a bonding company approved by the State of California Insurance Commission. A list of approved bonding companies is available in the Bond Control Section located at the Valley District Office.

Cash Securities:  Cash securities may be in the form of:

  • Cash
    • Money order
  • Check
    • Cashier's check
    • Certified check)

Certificate of Deposit:  A certificate of deposit is issued by a financial institution whose deposits are insured by an instrumentality of the Federal Government. A non-revocable assignment to the City is required which pledges that the funds are on deposit to guarantee the completion of the improvements. Such certificates of deposit may provide the interest be paid to the depositor. The assignment shall allow the City to withdraw the principal amount, or any portion thereof, upon declaration of default by the Board of Public Works without the necessity of any further consent by the depositor.

The improvement security shall be on a form prepared by BOE and shall be a joint and several obligations and shall be in an amount estimated by the City Engineer to be reasonably necessary to complete the construction and installation of all of the required improvements.

Letter of Credit:  A letter of credit is a document from a bank, which guarantees payment to the City in the event of non- performance. A letter of credit is only accepted when authorized by Council action.

Cash Payment in Lieu of Construction:  A cash payment may be required in lieu of construction where:

  1. the construction of improvements in the foreseeable future is uncertain
  2. the interest from a cash payment is required for maintenance purposes
  3. an assessment project is being processed which includes the required public improvements of the private development and their removal would unduly delay the assessment project.

A cash payment in lieu of construction is only used when directed by an administrative action and should be discouraged as much as possible. A cash payment for (a) and (b) is generally non-refundable. However, when cash is used as a deposit against an assessment project (c), any excess will be refunded, and any deficit must be paid.

Bond Rider

A surety bond rider is a change or amendment to the original bond. Riders are the only way to fix mistakes after a bond has already been written.  Changes requiring a bond rider include: 

  • Time Extension:  Time extension letter from District Engineer. Should be uploaded to B-permit. Customer may bring in a copy.
  • Increased/Decreased Bond Amount
    • New bond estimate on permit, or
    • Letter from inspector showing % of work completed
  • Add/Remove Cases (E.G. CPC, APC, DIR)
    • Case added or removed from permit title
    • Tract/Parcel map cannot be added to general improvement bonds. New subdivision bond is needed in this case (see Replacement Bonds)
  • Permittee Business Information Change
    • Permittee business name changed (not ownership)
    • Address being bonded needs to be changed
    • Change in the business type of the Permittee

Replacement Bonds

A replacement bond is required under the following circumstances: 

  • Change in Principal
  • Change in Surety
  • Change from a General Improvement Bond to Subdivision Bond (this happens when tract needs to be added to subdivision bond)

 

 

LAWS, CODES, AND REGULATIONS CONCERNING BOND PROCESSING


Graphic of the justice scale

  • Subdivision Map Act (underlying authority for the posting of bonds for the construction of improvements in connection with tract maps, condominiums, parcel maps, reversions to acreage and vacations of public right of way).

  • California Streets and Highways Code (underlying authority for the posting of bonds for the construction of improvements in connection with tract maps, condominiums, parcel maps, reversions to acreage and vacations of public right of way).
  • LAMC 17.08 – Division of Land Regulations, Improvements
  • LAMC 62.110 – B Permits
  • LAMC 62.202 - Import and Export of Earth Materials – Bond Requirement
  • LAMC 62.201 - Import and Export of Earth Materials – Fees Required

 

HISTORY


 

When California was settled by the Spanish, it was divided up and doled out by the King of Spain. Some land was designated for pueblos (towns) and other public land. Some was granted to the missions. A significant portion was given to individuals, in the form of grants known as Ranchos. Same Ranchos in the area of the present City of Los Angeles were Rancho San Rafael, Rancho Las Cienegas, Rancho La Ballona, Rancho San Pedro, and Rancho Los Feliz.

As the population grew, the land was further divided. Villages and towns were formed. A pattern of roads and streets developed. These were mainly unimproved, except where businesses chose to install wooden sidewalks.

With the increasing population and growth of cities it became apparent that an orderly system of street improvement was necessary. The philosophy developed that those putting the burden on the streets, namely those properties adjacent to the street, should bear the cost of improving the street.

In 1929, the Subdivision Map Act of the State of California was rewritten to allow 1ocal governments to require subdivisions to improve streets, provide for minimum lot size, setbacks, utility easements, etc.

It required that improvements to be made on public right of way be guaranteed by a bond if not completed prior to approval and recordation of the final map. Unfortunately, personal bonds as well as surety bonds were allowed.

Although the posting of a bond was a step in the right direction to guarantee street improvements, the personal bond proved to have two major faults. Quoting from a CAO’s Risk Management Section letter of 1936:

". . . . The defects in bonds, which we have examined, are not related to their form but are related to (1) the nature of the surety required; and (2) the procedure to keep the bonds in force.

"The practice of accepting personal sureties on such bonds has not turned out well. So far as we can learn, there has been no definite method adopted whereby the sureties are examined concerning the property which they hold in order to make certain that their guarantee is good. Furthermore, there is no assurance that at some subsequent time their financial standing will be the same. As a matter of fact, many of the personal sureties and bonds held by the City have become bankrupt, insolvent or have disappeared, while business corporations signing as sureties have gone through mergers and reorganization, thus affecting the enforceability of the bonds.

"The second condition on which we have become advised is that there is no uniform system of following-up these bonds to make sure they are kept in force. Where surety companies have issued bonds, their liability has been cut off in many cases because of the obligor's failure to pay annual premiums. In many cases the contractors and subdividers who have given such bonds have gone out of business; have reincorporated, etc., without corresponding changes having been made in the bonds . . . . "

In 1941, the City Council adopted Ordinance No. 84,480, which eliminated the two faults described above. This ordinance is the basis on which the present procedures function. Originally, the bonds were required far safety and health-related improvements, which included adequate streets, street lighting, sewerage systems, and drainage.

Through subsequent ordinances, Council motions and changes in the Subdivision Map Act, the requirements for bonds were extensively broadened beyond the subdivision requirements, to include aesthetics such as oak trees, parkway trees, and landscaping.