Obtaining Financial Security

Article by: Craig Sharnetzka

With the improving economy over the last several years, municipalities have again been receiving subdivision and land development plans from both commercial and residential developers.  Completion of required improvements such as streets, walkways, curbs, gutters, water mains, sanitary sewers, storm sewers and other improvements as are required by a municipality’s Subdivision And Land Development Ordinance are a prerequisite to final approval. 

Financial Security Requirements

One exception, of course, is that  a developer may propose financial security in lieu of  completion of the improvements.  Municipalities often provide in their respective Subdivision and Land Ordinances requirements as to financial security provided by developers in lieu of completion of the required improvements.  The Pennsylvania Municipalities Planning Code (MPC) provides general requirements about security.  For example, the MPC provides that municipalities may approve Federal or Commonwealth chartered lending institute Irrevocable Letters of Credit and restrictive or escrow accounts in such lending institutions as acceptable financial security.  The MPC does not limit the types of financial security which a municipality may approve, only noting that any approval shall not be unreasonably withheld.  The financial security shall be posted with a bonding company or a Federal or Commonwealth chartered lending institution, provided that the bonding company or lending institution is authorized to conduct business within the Commonwealth. 

The Amount of Financial Security

Not only is the vehicle by which financial security is provided governed generally by the MPC, the amount of financial security is also governed.  Specifically, the MPC provides that the amount of financial security shall be equal to 110% of the cost of completion of the required improvements as of the 90 days following the day scheduled for completion of improvements by the developer.  The developer has to submit  an estimate prepared by a professional engineer licensed in the Commonwealth.  The municipality, upon its review and recommendation by its municipal engineer, may refuse to accept the estimate for good cause shown.  In addition, if necessary, the municipality may require the developer to post additional security at any time during development in order to assure that the financial security equals 110% of the cost of completion. 

The Form of Financial Security

The form of the financial security should be reviewed by the municipality’s solicitor.  It is recommended that any termination of the financial security require a minimum 60 days advance notice both to the municipality and to the municipal solicitor.  Without notice, it is always recommended that the financial security remain in place and have no specific termination date.

Conclusion

When the developer has completed all of the necessary and appropriate improvements, the developer shall notify the municipality in writing by certified or registered mail of the completion of the afore said improvements.  The municipality shall within 10 days of receiving said notice direct and authorize the municipal engineer to perform an inspection.  The municipal engineer shall file a report with the municipality and mail a copy to the developer of the results of the inspection.  The report shall indicate approval or rejection either in whole or in part and contain a detailed statement of reasons for the engineer’s approval or rejection. In the event that any improvements are not installed as required, the municipality is granted the power to enforce any bond or any other security by appropriate legal means. The municipality may at its option complete some or all of the improvements.

Craig Sharnetzka is a shareholder at CGA Law Firm and the chair of the firm’s municipal practice group.