'We Lose A Lot Of Deals': Building Master-Planned Communities Near Houston Gets Trickier

As Houston’s suburban sprawl pushes outward, Houston master-planned community developers often find that the smaller the town, the bigger the challenges.

A patchwork of constantly evolving zoning codes and regulations in municipalities surrounding Houston create more hoops to jump through while developers grapple with land prices, securing financing and attracting homebuyers, panelists said at Bisnow’s Houston Master-Planned Communities Summit last week.

But given Houston’s population growth and need for housing, none of that will stop them from building. 

Panelists at the Marriott West Loop Galleria shared their hacks for overcoming these issues, measuring their irritation with reminders that the Houston area has better capital, opportunities and permitting processes than most places in the country.

Jurisdiction is a wildly important factor to consider when selecting a site to develop a master-planned community, Hines Managing Director Carson Nunnelly said. Hines announced in January that it purchased 3,000 acres for a master-planned community west of Houston.

“We have cities in Houston that could be the best site in the world, but we’re not going there,” Nunnelly said, stopping short of naming any municipalities. “There’s too much political risk.” 

If land is in a challenging municipality and the seller wants to close quickly, Hines will sometimes back out of the deal, he said. That risk could be minimized if the seller and municipality are willing to preemptively sign agreements about how the deal will go, acknowledging that it could take up to a year to close, Nunnelly said.

Yet some developers are willing to take on the risk without those upfront agreements, he said.

“We lose a lot of deals because of that,” Nunnelly said.

A development agreement is also important because some municipalities’ rules change frequently as new mayors, city managers and council members are hired or elected, panelists said. 

“We’re not trying to screw over the city or the county trying to negotiate this,” Johnson Development Corp. Vice President June Tang said.

“We just want regulations to stay the same, because that’s how we can predict the cost of developing this community over a possibly five to 10-year span. If regulations change, that makes it really hard for the developer to be able to do their job.” 

The Signorelli Co. is building in high-growth areas, including the 1,400-acre Valley Ranch master-planned community in the Porter and New Caney area in Montgomery County.

“You'll see people that just don't go into some of these areas because it's too cost-prohibitive,” The Signorelli Co. Chief Financial Officer Harry Dinham said. “Ultimately, they can't build a product that's affordable enough to attract both home builders and buyers.” 

Having detailed conversations before closing on a piece of property can help minimize risk and reassure investors, he said. Nobody wants to put money into a project that isn’t well figured out, and developers should assure them that the municipality risk is light or at least mitigated, Dinham said.

“If it’s too tough, you’re going to have trouble raising capital,” he said.

It helps when local banks and some national lenders have a granular understanding of small jurisdictions or rural sites and can help developers figure out the regulations, Wilson Cribbs & Goren Attorney Omar Izfar said. 

Building master-planned communities in rural areas is also creating an interesting conversation about schools, since school districts are a top factor for families deciding where to live, Masterson Advisors President Julie Peak said.

Peak has been increasingly crossing paths with Masterson Advisors’ charter school specialty business over the last few months, reflecting concern about rural school districts. 

“They have school districts that have no intention of selling bonds or improving anything,” Peak said. “They can’t get their community going without some sort of good school program … The school problem is all of the sudden on my desk all the time.” 

Toll Brothers Vice President of Master-Planned Communities Jim Jenkins said his secret sauce to successful developments is a land planner.

“Get the very best land planner that you can get. That's where the magic happens,” Jenkins said. “Land planning does not cost. Land planning pays.”

There are a variety of lot sizes and community layouts to consider, and land planners and market research will help determine the best option for each development, he said.

Even though Houston-area developers deal with challenges like entitlement processes and predevelopment taking longer than they have in the past, those pale in comparison to the similar issues in the rest of the country, said Justine Klinke, Texas region vice president and division president of Forestar Group. 

“We fare really, really well,” she said. “I think we're going to continue to grow. It's just, how do we grow?”

Dinham said he’s finding a lot of debt and equity available for projects at the moment, adding that Houston has abundant opportunities compared to other markets.   

“There are not a lot of places across the country that really have the availability to do the things that we do here in the state of Texas, particularly in Houston …. The uniqueness of this market creates a different opportunity for them, for a larger bank, to put dollars into Texas, so I use that as a big pitch.”