The City of Calgary has substantially replaced the requirement for property developers to put up letters of credit (L/Cs) to guarantee they fulfil their construction contracts and associated obligations with a Development Surety Bond (DSB).

Developers who do not qualify for a DSB however may still be required to put up an L/C to guarantee their work.

Major advantages

Senior vice-president with Marsh Canada, a major surety company working in insurance brokering and risk management, Fraser de Walle, says the DSB offers major advantages over the L/C guarantee.

"There are several positives to the City accepting a bond as an alternative to the L/C. A bond is classified as off-balance sheet security, meaning it does not tie up capital in the same way that an L/C does," he says.

When that capital is freed up, a developer can pay down costs and invest in new projects.

L/Cs will continue

The City of Calgary is now the only top-10 major city in Canada to forgo the L/C in favour of a DSB, says de Walle, who adds that in the US this type of bond is in common use.

The L/C system will remain in place, as not all developers will be approved to have access to the use of the DSB.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.