The people rapidly moving to the Houston area need places to live, whether or not capital is widely available for development. 

This is the problem master-planned community developers face as they try to build large volumes of homes in and around the Houston suburbs. 

To meet the demand for housing, they mitigate risk, present data and find creative ways of utilizing finance mechanisms, panelists said at Bisnow’s Houston Heatmap: The Fastest-Growing Submarkets event at Houston Marriott Energy Corridor on Tuesday.

Getting a master-planned community started requires a mix of ideal circumstances, and capital is especially important, said Elizabeth York, general counsel for Johnson Development. 

“You need capital that is going to understand it’s going to take 10 years for that project to get completed,” York said. “You need a good, stable regulatory environment. You need to make sure that you know what the rules are with the local jurisdictions.” 

Greater Houston added more than 126,000 residents last year, and most of those people went to the counties surrounding Harris, including Liberty, Waller and Fort Bend. Master-planned communities like Johnson Development’s Plow could enable Waller County’s population to nearly double by 2040. 

This kind of development is enabled by financing structures that Texas has and other states don’t, Launch Development Finance Advisors Managing Principal Carter Froelich said. 

A municipal utility district, or MUD, is a taxing entity that provides water, sewer and other services to a certain area. After the area begins generating tax revenue, the MUD sells bonds to repay developers for their investment. 

That creates a revenue stream that developers in Texas can count on and use to predict cash flow, Froelich said.

“I'm on Year 20 of trying to get a district formed in Arizona,” he said. “I swear to God, we can't make this stuff up.”

In 2023, when interest rates were surging and capital became much more difficult and expensive to secure, Launch sought out ways to further leverage the financing structures in Texas. 

Developers were already selling reimbursements to private investors at about a 16% discount rate. Launch had the idea to sell bonds through a conduit, giving developers earlier access to the funds, Froelich said.

“We just put the two together,” he said. “What if we can sell bonds through a conduit, and not necessarily have to adhere to the rules of Texas but be able to monetize and bring those future MUD reimbursements forward to finance infrastructure and/or reimburse equity or debt?”

The first Launch Bond was established in June 2023, and now there’s been about $3.7B of this type of financing done, Froelich said. 

“It’s really changed the way that master plans are being developed and the availability of capital in the state of Texas,” he said.

While the conduit mechanism gives developers earlier access to funding, investors have to wait for MUDs to issue the debt before they can be reimbursed.

Despite rising interest rates and data centers and other developments creating huge demand for capital, investors from across the country are digging into sales data and studies and remain interested in Texas MPCs, Froelich said.

“There's still a big market for buying these kinds of bonds,” he said. “The interest rate depends upon the status of the development, who the sponsor is, and then also what submarket, what market, how developed it is and how many builder contracts we have to de-risk the transaction.” 

Most investors in Maple Development Group’s master-planned communities are from outside the country, CEO Itiel Kaplan said. 

“The capital sees the value we’re creating,” Kaplan said. “How we get them to come on board is all about risk mitigation.” 

Securing power, water and other infrastructure requires good collaboration with the development’s municipality, he said. The Houston area is surrounded by nine counties with numerous individual cities, and each has its own rules and approaches to development.

Some municipalities have chosen to halt development or have been forced to, like the cities of Magnolia and Conroe, which have implemented temporary water infrastructure-related moratoriums on development in recent years. 

Johnson Development buys large parcels of land years in advance, projecting future growth, York said. It initiates conversations with local officials early, letting them know what it plans to do and how they can work together to make the development successful.

“You don’t always get a great response,” York said. “But generally, I find most of the jurisdictions surrounding the Houston area understand that growth is happening, and it’s such an important part of our Texas economy.” 

CORRECTION, AUG. 27, 10:40 A.M. CT: This article has been updated to correct the name of Johnson Development's Waller County master-planned community.