No Zoning, All Infrastructure

By Alex Vandiver, Associate, Entoro Capital, LLC

Last column I argued that the sponsor is the scarce input in middle-market real estate. This time I want to look at the market I know best, and the one where that argument gets tested every day.

Houston is the largest city in the country without zoning. People outside Texas hear that and picture a free-for-all, with a refinery next to a daycare. That's not what it is. Houston has plenty of rules. They're just not the ones most investors are used to reading. And in my experience, the scarce inputs here aren't permits or rezonings. They're drainage, utilities, roads, and a sponsor who actually knows the block.

No zoning doesn't mean no rules

Instead of a zoning map, Houston runs on three things: subdivision and development rules from the city, private deed restrictions written into individual neighborhoods, and the market. Setbacks, lot sizes and parking all have rules. What the city doesn't do is tell you that a parcel can only ever be one use.

The clearest example of what that allows is lot size. In 1998 the city cut the standard minimum lot inside the Loop from 5,000 square feet and allowed lots as small as 1,400 square feet under certain conditions. In 2013 it extended that citywide. By one 2023 estimate, close to 80,000 homes have been built on those smaller lots, mostly townhomes near job centers. That's a lot of housing that never needed a rezoning hearing.

I believe that flexibility is a real advantage for a good sponsor. It also means the rules that matter are scattered. Some of them sit in a city ordinance. Some sit in a 1950s deed restriction for one subdivision. You have to know where to look.

The water decides

If you want to know what really controls land use in Houston, look at the floodplain. After Harvey in 2017, the city rewrote its rules. Since 2018, new buildings in the 500-year floodplain have had to sit two feet above the 500-year flood elevation. Then NOAA's Atlas 14 study raised Houston's 100-year, 24-hour rainfall estimate from about 13 inches to as much as 18 inches. More rain in the model means bigger pipes, bigger detention ponds and more fill mitigation.

That shows up in the numbers. A few years ago, developers were telling Bisnow that flood mitigation added as much as 12% to upfront costs on some projects, and that a meaningful slice of a large site could go to drainage instead of lots. Detention land doesn't sell. It just has to be bought, built and carried.

In Houston, the floodplain map is closer to a zoning map than anything the city actually calls one.

Who pays for the pipes

The other half of the story is the municipal utility district, or MUD. Outside the city core, most new communities don't get water, sewer and drainage from the city. The developer builds it. A MUD is then created, issues tax-exempt bonds and reimburses the developer for that infrastructure once enough homes are built and on the tax rolls. The residents pay those bonds back through property taxes over 20 to 30 years. There are hundreds of these districts across Texas, and much of the Houston suburbs was built this way.

It's a good system. But look at the timing. The developer spends the money first and gets reimbursed later, sometimes years later, and only after the homes show up. That gap is exactly the horizontal-phase problem I wrote about in Horizontal First. Someone has to fund the roads, utilities and detention before the project produces cash flow. In Houston that someone is usually the sponsor and its capital partners, carrying the infrastructure until the MUD bonds come through.

The sponsor who knows the block

Put those pieces together and you can see why the sponsor matters so much here. The Houston metro added roughly 127,000 people from mid-2024 to mid-2025, the most of any metro in the country, according to Census estimates. That growth has slowed from the year before, but demand is not the hard part. Execution is.

With no zoning to lean on, a deal's real risks are local. Which subdivisions have deed restrictions, and do they still hold? Where does the water go in a heavy storm, and has the site flooded before? Is there utility capacity, or is it a promise? Is there a MUD, and how much bond capacity does it have left? A sponsor who has built in that corridor knows the answers. A sponsor from out of town often learns them the expensive way.

That's also why so many good Houston deals come from operators. Someone who has run a business on a corridor for ten years knows the drainage, the traffic and the neighbors better than any market report.

What to look for in a Houston deal

Drainage first. Ask for the drainage plan and the detention numbers before the pro forma. Check the site against the current floodplain maps and the Atlas 14 rainfall, not the old ones.

Utility capacity in writing. A letter of availability or an executed agreement, not a verbal promise that service is coming.

Read the deed restrictions. In a city without zoning, private covenants do a lot of the work. Know what they allow before you underwrite what you want to build.

Know the MUD. Is there one, what is its tax rate, how much bond capacity is left, and when does the sponsor realistically get reimbursed? That timing is part of the capital stack.

The bottom line

Houston proves you don't need zoning to build a lot of housing. You need water, pipes, roads and someone willing to carry them before the first home sells. Those are the real scarce inputs here, and they reward sponsors who know the ground they're building on. Overall, I believe that is what makes Houston one of the best markets in the country for a disciplined middle-market sponsor, and one of the riskiest for an undisciplined one.

Next time, I'll hear from one of those sponsors directly.

Definitions

Zoning: local rules that divide a city into districts and set which uses, such as residential, commercial or industrial, are allowed in each.

Deed restriction: a private covenant recorded on property in a neighborhood that limits how the land can be used, often enforced by a homeowners association.

Minimum lot size: the smallest lot a single-family home can be built on under local development rules.

500-year floodplain: land with roughly a 0.2% chance of flooding in any given year.

Atlas 14: NOAA's updated rainfall frequency study, which raised Houston-area estimates for heavy storms and the drainage standards built on them.

Detention: a pond or underground storage that holds stormwater on a site and releases it slowly so new development doesn't add to downstream flooding.

Municipal utility district (MUD): a Texas special district that issues bonds to pay for water, sewer, drainage and sometimes roads in a new community, repaid by property taxes on that community.

Developer reimbursement: the repayment a MUD makes to a developer, from bond proceeds, for infrastructure the developer built and paid for up front.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of Entoro, LLC, or any of their respective affiliates. This article is provided for general informational and educational purposes only and does not constitute investment advice, a recommendation, an offer to sell, or a solicitation of an offer to buy any security, financial product, or investment strategy. The information presented is believed to be reliable but is not guaranteed as to its accuracy, completeness, or timeliness. Any forward-looking statements or opinions are subject to change without notice.