Embarking on a condominium development project? Then don’t skip the Tarion marketing and warranty bond! Not only does it protect your purchasers, but it also improves your cash flow and provides a cost-effective security method.

But here comes the best part — we’re here to help make the process as smooth as possible. The days of worrying about obtaining quotes from loads of surety companies are over.

In the following sections, we’ll introduce you to the ins and outs of Tarion warranty bonds to help you make better-informed decisions for your business.

 

What Is a Tarion Marketing and Warranty Bond?

Tarion, formally known as the Tarion Warranty Corporation, is a not-for-profit organization established in 1976 by the Ontario New Home Warranties Plan Act. It makes sure builders stick to the obligations set out in the Act and protects consumers if you (the condominium developer) fail to perform your duties as stated in the Act.

To build and sell condominiums in Ontario, you must register with the Tarion Warranty Corporation.

As per Tarion’s requirement, you must post security to protect your buyer’s deposits. The minimum amount for this security is $20,000 per unit, which covers the deposits and provides the level of warranty protection needed by Tarion. Newer or less-experienced developers may be required to post a higher per-unit security.

So, if you are building a 250-unit condominium, Tarion requires you to post $5 million in security, provided you’re granted the standard rate of $20,000 per unit.

You can provide the security in three forms:

• Cash
• Letter of credit (sometimes shortened to LC)
• Tarion marketing and warranty bond

Of course, all forms are viable. But Tarion marketing and warranty bonds tend to be the most cost-effective. Why? Because they often have rates as low as 0.5% for well-established developers. Plus, posting a bond means you can use the $5 million to fund your project or deal with other cash flow issues.

Normally, Tarion surety bonds are offered alongside your deposit financing insurance coverage.

 

The Tarion Bond Timeline

Let us take a look at how the Tarion warranty bond works in practice. It’ll give you a better idea of how it will benefit your project:

• The first six months (marketing) — You collect deposits from your unit purchasers. Tarion requires you to post security to protect the buyers. Traditionally, you provide a letter of credit (LC) in the amount of $20,000 per unit. But now, you can acquire a Tarion surety bond in the same amount to benefit from a wealth of advantages not gained with an LC.
• The next 12 to 24 months (constructing) — The next one to two years are spent building the condominium. Any deposits beyond the initial $20,000 per unit must stay inside a trust account until the condominium registers. You can access the funds immediately if you have excess condominium insurance (which we’ll discuss in the next section). This allows you to utilize less bank financing and improve cash flow.
• The following two years (warranty period) — The Tarion warranty is active for two years following the condominium’s registration. Tarion holds the $20,000 per unit for the entire warranty period. If a unit owner submits a claim under your Tarion, you are still responsible for responding.

 

What Is Deposit Financing Insurance?

As deposit financing insurance is usually offered alongside Tarion warranty bonds, it’s worth getting to grips with the essentials of the coverage now.

Under the Ontario New Home Warranties Plan Act we mentioned earlier, you must hold your purchasers’ deposits for your condominium project in a trust account. On top of that, they need to stay there until the condo registers.

Here’s where deposit financing insurance comes in — you can buy condominium deposit insurance (otherwise known as CDI or excess condominium deposit insurance) to use your buyers’ deposits to fund your project. Once the coverage starts, you can access the money that would otherwise have to sit in the trust account!

The CDI policy guarantees the return of the purchasers’ deposits in excess of the $20,000 guaranteed by the Tarion warranty bond.

You’ll often find the costs associated with deposit financing insurance are considerably lower than other construction financing rates. As a result, CDI allows you to gain a better ROI.

 

The Deposit Financing Insurance Timeline

Excess condominium deposit insurance acts differently at the individual development stages, as you’ll see below:

• The terms — The terms of the CDI coverage are usually compiled in conjunction with the terms recorded in your Tarion marketing and warranty bond before sales.
• Prior to construction — Before construction starts, your condominium deposit insurance policy may allow the release of funds to cover soft costs.
• Construction period — Throughout construction, the buyers’ deposits are released alongside the construction financing on a per-month basis.

 

What Costs Can You Cover With Buyers’ Deposits Under CDI?

With a CDI policy, you can use your purchasers’ deposits to fund both hard and soft costs associated with the specific project.

Hard costs refer to the materials needed for the physical build. They can include:

• Interior finishes
• Labour
• Equipment
• Foundations
• Drainage
• Superstructure
• And other items

On the flip side, soft costs are not associated directly with the required materials or labour. Instead, they include:

• Land costs and accounting fees
• Insurances, taxes, licenses, and permits
• Off-site costs
• Loans and interests
• Marketing, public relations, and advertising costs
• Other fees

Furniture and ongoing maintenance charges are also deemed soft costs.

Estimating hard costs tend to be easier. Although, they vary massively, depending on the project’s complexity.

 

How Much Does Deposit Financing Insurance Cost?

Condominium deposit financing insurance rates can run as low as 0.5% if you’re an experienced developer. Without much experience in the industry, you should expect to pay up to 1.25% of the total amount.

However, other factors manipulate the rate, including but not limited to the below:

• The project’s size — If you have years of experience in the industry, you shouldn’t have to worry about this metric too much. Larger projects don’t always equal higher rates if you’re a well-established developer.
• Your team — Insurers will look at the credentials of the project’s team, including your lawyers, lenders, and builders.
• The project’s viability — Condominium insurance providers check the economic likelihood of success to determine whether they’re willing to offer insurance. Usually, they’ll use a cost-benefit analysis to assess the viability of your condominium project.

 

What Are The Condominium Deposit Financing Insurance Coverage Limitations?

Not all condo projects were created equal, meaning they don’t all fall under Tarion’s warranty coverage. The warranty exists solely for residential projects. However, this does include converting a commercial building into a residential condominium (such as changing an old school or church into a condo building).

With that said, residential projects aren’t automatically granted RCCP (residential condominium conversion project) status. To acquire this, you need to adhere to the requirements held under the Building Code Act, ONHWPA, and the Condominium Act:

• You must register with Tarion.
• The units must be listed under the Ontario New Home Warranties Plan Act.

As we’re sure you can imagine, Tarion has a stringent review process in place that allows them to scrutinize your project before offering warranty coverage. As part of this process, you must present the documents listed below:

• The pre-existing elements fund study — Otherwise known as the PEFS, the report provides an overview of the whole project. It contains similar information to the documents below, alongside a calculation of the vendor’s contribution to the project fund.
• The capital replacement plan — Shortened to the CRP, the plan deals with the current condition of the property and/or land. It lists the key risks, details any pre-existing components, and states the heritage status of the building. In addition, it should also include two schedules:
  • The first schedule — It shows the major repairs due to happen within 45 years after the condominium’s registration.
  • The second schedule — It details the major repairs expected to occur within seven years of the condominium’s registration.
• The property assessment report — Also known as the PAR, it concerns the overview of the building and its land. It should state the components you wish to convert, the current condition of the property, and the details of the intended conversion task.

 

How Much Does a Tarion Warranty Bond Cost?

In general, Tarion warranty bonds can be as low as 0.5% for experienced developers and up to 1.25% for newer developers working on small projects.

Let’s take a look at a real-world example:

You are an established developer working on a 100-unit condominium project with a $20,000 per unit Tarion security. One hundred units multiplied by $20,000 equals $2 million, so you’d need to post a surety bond of that amount. You’re awarded a rate of 0.75% for the bond, meaning it would cost you $15,000.

Keep in mind that the rate is yearly. So, it would cost $15,000 for every year you need the bond to stay in place.

Furthermore, you may need to pay a one-time commitment fee. They vary in price but can be anywhere from $2,500 to $10,000.

 

What Factors Affect The Rate You Receive for a Tarion Surety Bond?

The cost of a Tarion bond depends on several factors, including the following:

• Your experience — As a newer or less-experienced developer, you’ll likely have to pay higher rates. But as you gain experience, you’ll benefit from lower Tarion surety bond rates.
• Your team — Surety companies look at the qualifications and credentials held by your team, including any builders, cost consultants, lawyers, and lenders.
• The size of the project — This factor is typically considered directly alongside your experience. Smaller projects with newer developers often have higher Tarion warranty bond price tags.
• Your financial security — Your credit score and other financial metrics are taken into account when deciding how risky you are. Those who aren’t financially well-established might be hit by higher rates.
• The project’s viability — In other words, the project’s likelihood of successful completion. Tarion surety bond providers aren’t willing to issue a bond to developers working on not-so-viable projects.

 

How Can You Apply For a Tarion Surety Bond?

The application process for a Tarion bond is similar to the process of obtaining project funding from a development financing company. You will need to supply the following documents:

• Your development company’s most recent financial statements (if you’re a new company, you might need to supply your personal financial statements to prove financial stability)
• A copy of the project’s budget, including both hard and soft costs
• Standard form condominium documents which should include:
  • A copy of the standard purchase and sale agreement
  • A completed Tarion statement of critical dates and disclosure statement
• A copy of the letter of intent or the construction financing agreement
• Any land title details and appraisals you have
• A copy of the Tarion terms and conditions of registration letter (in some cases, it’s called the Tarion risk assessment letter)
• Copies of any geotechnical reports
• Any environmental audits
• A completed personal net worth statement from each of the project’s shareholders
• A completed developer surety application form

To make sure you’re completing the application properly, we highly recommend working alongside a specialist developer surety brokerage. We know it can be tricky to find the right broker for you, which is why we’ve made it simple — just fill in our secure online quote form, and we’ll connect you with the best in the business!

 

What to Focus on When Negotiating Tarion Bonds and CDI

Every Tarion bond and CDI insurer has different terms and price factors. The industry is highly competitive, meaning there is often room to negotiate an attractive deal.

So, we suggest focusing on the following four areas to help make your Tarion bonds and condominium deposit insurance terms more favourable:

 

#1 The Fees and Costs

The commitment letter outlines the price of the Tarion bond and your deposit financing insurance policy. As long as you understand the market, you can negotiate to bring the rate down.

Depending on the insurer, you can pay anywhere from 0.5% to 2%.

 

#2 The Release Terms and Ratios

The deposit release terms and ratios are two of the most significant factors in your bond. They dictate how and when you can take your buyers’ deposits from the trust account.

For instance, you have a release ratio of 3:1. So, when the bank release $300,000, your condominium deposit insurance allows you to take out $100,000 from the trust account.

But if you have a release ratio of 1:1, you can take out an equal amount from your trust. For example, the bank releases $300,000, so you can remove $300,000 from the trust.

Some bond companies request the bank to release an amount before they’re willing to release deposits at the agreed ratio.

 

#3 The Holdback Security Retained Against Warranty

The bond company holds the security once the project closes to cover the warranty’s obligations. However, it’s worth noting that the security reduces over time as the warranty’s responsibilities decrease.

 

#4 The Indemnity and Security Agreement

All Tarion bonds are written with indemnity agreements. You can enter it either corporately or personally. But sometimes, the spouses of the shareholders are also asked to indemnify.

Generally speaking, the bond company wants as much indemnity as possible. Make sure you know what’s reasonable before entering into the agreement.

 

Why Choose ConstructionBond?

We understand that the world of Tarion warranty bonds and condominium deposit insurance can be stressful. Not only are there countless requirements to meet and documents to submit, but negotiating the best deals is no small feat.

But you’re in luck because you’ve found our expert team at ConstructionBond who can help you secure the perfect deal with a specialized provider.

Over the years, we’ve built outstanding relationships with the leading surety and insurance providers in Canada. As a result, our process is seamless, as you can see below:

1. Submit our secure quote form.
2. We review your Tarion bond needs.
3. Our team connects you with a highly acclaimed licensed surety company that has extensive experience offering Tarion bonds to condo developers.
4. The assigned company contacts you to guide you through the bond acquisition process.

 

Frequently Asked Questions

 

Is a Tarion Marketing and Warranty Bond a Legal Requirement in Canada?

No, acquiring a Tarion marketing and warranty bond isn’t a legal requirement in Canada. However, it’s highly beneficial as it eliminates the necessity to post cash security or a letter of credit with Tarion.

 

What Is The Home Construction Regulation Authority?

The Home Construction Regulatory Authority (otherwise known as the HCRA) was borne as a not-for-profit corporation in April 2018.

Its primary duty is to regulate vendors and builders of new builds in the event it’s assigned as the regulatory authority under the NHCLA (New Home Construction Licensing Act, 2017). The authority’s goal is to protect the public interest by ensuring an informed, safe marketplace that constantly works to improve Ontario’s residential building industry.

Historically, Tarion regulated this market sector under the Ontario New Home Warranties Plan Act. But Justice Cunningham committed to creating the new regulator (HCRA) following an independent review of the Act in 2016.

In a nutshell, the Home Construction Regulatory Authority’s missions are as follows:

• To ensure a well-regulated industry building increasingly better homes
• To constantly enhance consumer protection and the confidence of home buyers
• To always create a fair and efficient environment
• To involve stakeholders and the entire HCRA team when innovating

 

What Are The Main Regulations Under Ontario’s New Home Warranty and Protection Program?

Ontario’s government implemented the program and Act in 2017 to further strengthen consumer protection for current owners and buyers of new homes in the area. To ensure their goals are met, the Act outlines the following main regulations:

• The HCRA must post extra information to the Ontario Builder Directory to help consumers make better decisions when choosing their new home, including:
  • Conditions on a license which the licensee or applicant consents
  • License conditions ordered by the Licence Appeal Tribunal
  • Registrar-specific conditions on a license
• Discipline committee to determine if a licensee fails to comply with the Minister’s code of ethics, as per § 57 of the New Home Construction Licensing Act, 2017
• Licensees must abide by the ethical standards or risk a robust disciplinary process

 

How Long Does Tarion Warranty Last?

Tarion warranty lasts seven years from the date of possession (i.e., the closing date or the occupancy/interim occupancy date). The statutory warranties are split into three separate timeframes, as you’ll see here:

 

The One-Year Warranty

Within this warranty, you must ensure the condo or home is free from material defects and constructed in an efficient, skilful manner. It guarantees the house is fit for habitation and protects against any violations of the Ontario Building Code.

On top of that, it stops unauthorized substitutions of materials for construction or finishing that were selected by the buyer.

 

The Two-Year Warranty

The Tarion two-year warranty protects against:

• water penetration through the foundation or basement.
• material defects, including but not limited to doors, caulking, and windows.
• work defects that cause water penetration.
• Ontario building code violations that compromise health and safety, including but not limited to fire safety, air and vapour barriers, heating, structural adequacy, and insulation.
• defects in the materials or work provided on the electrical, heating, distribution, and plumbing systems.
• defects in the materials or work that cause displacement, deterioration, or detachment of exterior cladding, like vinyl siding, aluminum, or brickwork.

 

The Seven-Year Warranty

The final part of the Tarion warranty covers against structural defects, such as:

• defects in the materials or labour that compromises a loadbearing element, even if such failure hasn’t happened or isn’t imminent.
• defects in the materials or work that adversely affect the use of a considerable part of the dwelling.
• defects in the materials or work that affect a loadbearing element of the building, resulting in a structural failure.

 

Can ConstructionBond Help You Get Deposit Financing Insurance Too?

Absolutely! Usually, we offer Tarion warranty bonds alongside deposit financing insurance. Just fill in our surety bond quote form or call us on our toll-free number to get started.