Developers and builders have been watching the AIG drama play out with great interest over the past couple of days. Before the government's $85 billion bailout of the insurance titan, there was a real fear that a collapse would not only further freeze debt on new projects but could also trigger chaos in a builder's ability to get surety bonding.
Whenever a builder gets entitled but not improved land, he needs backing to secure surety bonds for improvements, like roads, sewers, and utilities. AIG was one of a small number of companies with high-dollar bonding capacity. Often the company would buy bonds reissued by local bonding companies.
If AIG went away, those bonds would become much more difficult to secure. "If I'm buying an entitlement, how do I get these bonds?" asked Albert Praw, CEO of Landstone Communities in Los Angeles.
In the past, it was rare for a city to call in a bond, but as many more builders and developers have fallen on troubled times, they've had to call in more bonds. Gross said he knows of one case where a city has called bonds in twice. Without an insurer to write a check, the city could be in trouble. "What would cities do for improvements?" asked Barry Gross, principal of Strategic Land Advisors in Irvine, Calif.
Even though AIG was thrown a lifeline by the government, there's speculation price of bonds may be going up, according to Gross.
If AIG had fallen, Praw was also concerned its demise would have stalled an already slowing debt market. "The banks had exposure to AIG," Praw said. "When banks have exposure, they're not making loans."
Les Shaver is a senior editor with Multifamily Executive and Developer magazines.