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The following are acceptable means of guaranteeing subdivision improvements agreements, although others may also be acceptable. The irrevocable letter of credit is often the preferable guaranty because it is usually feasible for a subdivider to secure, and the local government can readily obtain funds to complete the required improvements should the subdivider fail to install the required the improvements. A suggested irrevocable letter of credit and commentary are included as part of this chapter and other common guaranties are also explained below.
The subdivider shall provide one or more of the following financial security guarantees in the amount of one hundred twenty five percent (125%) of the estimated total cost of installing all required improvements:
A. Letter Of Credit: Subject to governing body approval, the subdivider shall provide the governing body a letter of credit from a bank or other reputable institution or individual certifying the following:
1. That the creditor guarantees funds in an amount equal to one hundred twenty five percent (125%) of the cost, as approved by the governing body, of completing all required improvements.
2. That if the subdivider fails to complete the specified improvements within the required period, the creditor shall immediately pay to the governing body upon presentation of a sight draft without further action, an amount of cash necessary to finance the completion of those improvements, up to the limit of credit stated in the letter.
3. That this letter of credit may not be withdrawn, or reduced in amount, until released by the governing body.
B. Escrow Account: The subdivider shall deposit cash, or collateral readily convertible to cash at face value, either with the governing body or in escrow with a bank. The use of collateral other than cash, and the selection of the bank where funds are to be deposited must be approved by the governing body.
Where an escrow account is to be used, the subdivider shall give the governing body an agreement with the bank guaranteeing the following:
1. That the funds in the escrow account are to be held in trust until released by the governing body and may not be used or pledged by the subdivider as security for any obligation during that period.
2. That, should the subdivider fail to complete the required improvements, the bank shall immediately make the funds in escrow available to the governing body for completing these improvements.
C. Property Escrow: The subdivider may offer as a guarantee land or other property, including corporate stocks or bonds. The value of any real property to be used, accounting for the possibility of a decline in its value during the guarantee period, must be established by a licensed real estate appraiser or securities broker, as applicable, at the subdivider's expense. The governing body may reject the use of property as collateral when the property value is unstable, when the property may be difficult to sell, or when other factors exist which will inhibit the exchange of the property for an amount of money sufficient to complete required improvements.
When property is offered as an improvement guarantee, the subdivider shall:
1. Enter an agreement with the escrow agent instructing the agent to release the property to the governing body in the case of default. The agreement must be placed on file with the county clerk and recorder.
2. File with the governing body an affidavit affirming that the property to be used as a guarantee is free and clear of any encumbrances or liens at the time it is to be put in escrow.
3. Execute and file with the governing body an agreement stating that the property to be placed in escrow as an improvement guarantee will not be used for any other purpose, or pledged as a security for any other matter until it is released by the governing body.
D. Sequential Development: Where a subdivision is to be developed in phased portions, the governing body may, at its discretion, waive the use of a guarantee on the initial portion, provided that the portion contains no more than twenty five (25) lots, or fifty percent (50%) of the total number of lots in the proposed subdivision, whichever is less. The governing body may grant final plat approval to only one portion at a time. The plat approval for each succeeding portion will be contingent upon completion of all improvements in each preceding portion and acceptance of those improvements by the governing body. Completion of improvements in the final portion of the subdivision must be guaranteed through the use of one of the other methods detailed in this section.
E. Surety Performance Bond: The bond must be executed by a surety company authorized to do business in the state of Montana and acceptable as a surety to the governing body and countersigned by a Montana agent. The bond must be payable to the county by the governing body.
F. Special Improvements District: The governing body may enter into an agreement with the subdivider, and the owners of the property proposed for subdivision if other than the subdivider, that the installation of required improvements will be financed through a special or rural improvement district created pursuant to Montana Code Annotated title 7, chapter 12. This agreement must provide that no lots within the subdivision shall be sold, rented, or leased, and no contract for the sale of lots executed, before the improvement district has been created.
If the proposed subdivision lies in an unincorporated area, the subdivider, or other owners of the property involved must also petition the board of governing body to create a rural improvement district pursuant to Montana Code Annotated section 7-12-2102.
An agreement to finance improvements through the creation of a special improvement district, or a petition to create a rural improvement district, constitutes a waiver by the subdivider or the other owners of the property of the right to protest, or petition against, the creation of the district under either Montana Code Annotated section 7-12-2109 or section 7-12-4110. This waiver must be filed with the county clerk and recorder and shall be deemed to run with the land.
Note: Local officials should be cautious in accepting special improvement districts or rural improvement districts as forms of improvements guarantees. In a number of cases in Montana, the subdivider has been unable to pay the assessments, and the city or county has had to bear the cost of completing the required improvements. These problems occur most frequently where improvement districts are formed as a means to provide improvements on raw land, and local officials may want to avoid creating improvement districts for undeveloped property.
Local officials should consult a bond underwriter before accepting an improvement district as a form of improvements guaranty.
Letters of credit may be revocable, so it is important to express that the letter of credit is irrevocable. Because the letter of credit does not incorporate the subdivision improvement agreement, the issuer of the credit cannot raise objections to the demand for payment. If the letter of credit specifies that the local government need only present a signed statement or affidavit that the subdivider is in default, the local government need not present proof of default or signed statements from any other party.
Under the letter of credit the local government is committed to use the funds for completion of the improvement.
It is important that the expiration date of the letter of credit allows the local government a reasonable amount of time after the improvements completion deadline to inspect the improvements and, if defects are found, prepare proper drafts and present a notice of default to the lending institution.
Lending institutions may be reluctant to issue letters of credit to be in force for long periods of time. Typically, improvements can be completed in eighteen (18) to twenty four (24) months, and an additional one year warranty period is appropriate to allow the local government to monitor for defects or failures. Following the warranty period an additional ninety (90) days is reasonable to give local officials time to submit any drafts and documentation to draw funds, if necessary.
A "sight draft" commits the payor to make payment at the time the draft is presented, or on sight. Other types of drafts allow a waiting period or approval before the payor must make the payment. (Ord. 784, 8-6-2007)