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Show ar I Z monday, April 17, 1978 Cash bonding one of hidden costs pushing prices Its common knowledge the price of new homes is soaring. Developers blame lot costs as one of the prime reasons. But there are hidden costs, not the least of which is the bonding requirements must meet to satisfy the governmental unit sub-divide- rs involved. Until 1974, sub-divisio- ns for presented no bonding real obstacle to developers large and small. Since then, however, things have changed drastically, resulting in higher lot costs and a market suited only to financially strong developers. Said Jim Kier, owner and manager of Kier Corporation, a developer in The last recession Ogden, wiped out all but 12 of the surety bonding companies in the country. Now it is ex well-heele- sub-divisio- tremely difficult to get a surety bond. Guarantee improvements d, n Before the recession, a could simply apply for, and usually get a sub-divid- er surety bond guaranteeing that improvements like gutters, sewers, water, roads and curbs would be installed, went even if the out of business. But the recession put many out of business. The crunch was especially severe in California, where sub-divid- er sub-divide- rs ay weYe dropped like flies, and surety bond outfits sub-divide- the pips! followed close behind. The result has been to 00 532-323- ZCMI STORE OPEN TIL 6 ON 2 SATURDAY re- busistrict the ness to developers with hefty balance sheets, since smaller firms are Unable to comply with both the governments requirements and the surety bond company's requirements. Salt Lake City maintains the strictest requirements for bonding in the valley. Ac sub-dividi- POSTAL INSTANT PRESS 521-002nd South & Main ZCMI Center, 36 S. State rs ng cording to Vern Jorgenson, director of the planning and The zoning commission, or bond city requires a surety some sort of cash bonding. In essence, it means a subdivider not only needs the funds to develop the property, but he also must have a roughly equivalent amount of cash to secure the bonds. Says Phil Hallstrom of American Development Company, Hardly anyone is well capitalized enough to pay cash bonding. And surety bond companies usually require cash for a bond. After the last recession these companies almost always require the developer to put the full amount of the bond in an insured depository account. So it all comes out to be cash bonding regardless of how they go. Other municipalities are not as restrictive as Salt Lake City when it comes to bonding requirement, but the demands are still stiff. For instance, West Jordan City At- - torney Nick Colessides says, the city requires a trust account, or an escrow account, or a surety bond, or a letter of credit from the bank. Ties up cash All mean full cash funding, but the letter of credit from the bank also requires, in most cases, substantial cash outlay. Kier said, Im not wild about the letter of credit, it ties up too much of m cash. And if youre not a well established enterprise program sponsored by your Salt Lake area Chamber of Commerce sub-divid- non-producti- poses demands compensating revenues from other which in any busisources ness comes down to the ultimate consumer. g business The is highly speculative. As Kier said, You could finish your improvements, ready to put the lots up for sale and suddenly find yourself in a recession with no buyers. This high level of risk demands a larger return on invested capital than the normal business. Hallstrom said sub-dividin- Why? Because there would be no incentive for playing well! The same is true in the Free Enterprise game when we talk about a thing called profit, because profit is the incentive for playing well in the business world! Profit is perhaps one of the most misunderstood of all words in our movirr er ing capital. Kier said he should make more than that. "A should turn his captial around at least 15 to 17 times a year, and I would consider sub-divid- 15 to 20 America up against each other but refused to give them credit for a touchdown when they crossed the goal line, chances are theyd refuse to play the game. pur- ve will get any good 15 to 20 percent on his work- Profit...The Reason Its A Good Thing! you put the two best football teams in er and incessantly. Working capital which must be salted sub-divid- If it r, could be the same as cash bonding. The costs of strict bonding procedures are both open and hidden, with by far the greater portion being hidden. On the open side, there is, of course, the premium the pays to the surety company, which according to Hallstrom, can range from one to three percent. But the hidden costs are the ones that add up rapidly, away for A community free sub-divide- vocabulary today because for some strange reason, some people have the idea that profit is bad. Many people mistakenly believe that corporate profits today range as high as 40 to 50 of sales, when in fact the average business today makes a profit of only around 5$ on the dollar! Profit is the incentive reward for fielding a good team and playing the game well! Wed like for more people to understand it this way! Were the Salt Lake Area Chamber of Commerce on to a belief ajtieica SALT LAKE AREA CHAMBER OF COMMERCE er percent a lower range for the kind of return I expect on my working capital. Idle money is a cost Given such high returns, idle money, even when earning generous yields at a depository account, is actually a cost which eventually adds to the price of a lot. Most developers the Enterprise talked to agreed it is possible cash bonding results in raising the price of lots by about 10 to 15 percent, and thats provided can earn sevthe en percent on the funds deposited for a bond. sub-divid- er Another result of the cash requirements is its effect on the competitiveness of the market. Dan Simons, Sr., of Simons & Company said the requirements arc very restrictive, and if anyone wants to get in the business, he better have the money. Hallstrom added theres continued on page 13 |
