OZ Pitch Day - July 20, 2023
OZ Investing In Ohio And Kentucky, With Nest Opportunity Fund
In this webinar, Clint Edgington discusses Nest’s strategy focused on single-family and multifamily housing in Ohio and Kentucky.
- The rationale for Nest’s unique geographic focus on Ohio and Kentucky.
- How restrictions put in place in Lexington will limit the expansion opportunities.
- An update on Nest’s progress since the last OZ Pitch Day.
- Monthly rent trends in the Nest portfolio over the last several months.
- Live Q&A with webinar attendees.
Industry Spotlight: Nest Opportunity Fund
The Nest Opportunity Fund is an OZ investment program designed to not only do well for investors, but also do good for those in the communities targeted for fund investments. The fund invests in single-family homes and smaller multi-family homes because they present a lower risk to investors while maintaining the culture and character of the neighborhoods.
Learn More About Nest Opportunity Fund
- Visit NestOpportunityFund.com
Jimmy: Our next presenter is Clint Edgington with Nest Opportunity Fund.
Clint: Good afternoon. This is Clint Edgington with Nest Opportunity Fund. Appreciate y’all spending a little bit of time with us today, and appreciate Jimmy putting this on. For those that are looking for kind of a conservative OZ offering, this would be good use of time. We built this fund in 2019 for ourselves, me and my family, and our partners, and operator in Lexington. And opened it up in 2020 to other folks. And it’s a little bit of a quirky fund. But we built it the way we like it, and we wanted to share that with other folks. And so far we have, and it’s worked out pretty well for us.
The Nest Fund focuses on heavy rehab in single-family and smaller multifamily in the Columbus, Ohio and Lexington, Kentucky areas. And we’ve assembled a pretty good team, and we’re excited to share it with you today. We’ve built what feels more like a partnership rather than a product. In our fund, we’ve got kind of best-in-class for the Midwest in the OZ space that’s helping us put things together. Kegler Brown does some co-counseling with Ashley Tilson. And our tax and audit group is some of the largest in the state that has that OZ competency. And I’m excited to share it with you today.
But really, comes down to our operators on the ground who are really kind of involved with putting it together, and the real kind of day-to-day management. And for us, we also have a social impact side of our fund. And for that, my job is to make sure that we protect the investors, and that we do financially what’s right for them. But then if our operators on the ground have a passion, then my job is kind of to get out of the way and make sure that it works out well for us.
Clint C.: We’re currently daily impacting our community. We are providing safe, secure housing for people to have the opportunity to live their best life. We are providing the opportunity for those in transition to utilize their current skillset or develop a new skillset so they can live their best life. We are providing on a daily basis, good houses for good people, built by good people, managed by good people, and funded by good people.
Clint: That’s Clint Capel. He’s our operator in Columbus. He has a passion for helping those who have graduated from addiction and recovery services to find kind of that first job. A lot of them kind of graduate from that with some sort of record, and it’s difficult for them to find that first job out. So, not only do they find a first job with us in Columbus, but they’ll build a skill. And skills in the trades right now are valuable skills. And it would be tough for them to really kind of find that career path in other areas. And so, you know, it was something I was skeptical of at first, but it’s been a wonderful thing. I mean, the folks who have built those skills up with Clint have a loyalty to him that you just don’t really see in the trades much. So we don’t have much turnover in Columbus, and it’s turned out to be a wonderful thing.
Jeff, down in Lexington, his real focus is kind of just community revitalization and building the houses, not back to their former glory, but building them back cooler and making, you know, more front porches that are not with vacant houses on the street than they had before. So, we won’t spend time with that, but for us, it’s important. Our asset class is on the conservative side. So, when you look at single-family, they don’t throw a bunch of yield off, but they do kind of give you relatively consistent gains over time. And my view is, is that it’s hard to sell for a loss in single-family if you can choose when you’re gonna sell. So, for us, with a kind of a long hold period, like we have with the 10-year OZ hold, we’ve got that ability. We’re pretty conservatively leveraged. We’re relatively conservatively run in all aspects. So, we certainly probably won’t be the highest performing OZ Fund out there over the next 10 years, but we won’t be the worst.
Also, where we’re at, if you’re not familiar with the Midwest, some people think everything is the Rust Belt. And really if you kind of draw a line from, you know, Chicago to Cleveland to Pittsburgh, everything above that has kind of that industrial base that has been having a hard time in the last 50 years or so. But below that, where we’re categorized…you know, we’re kind of characterized by the rural areas have some population decline. But areas with kind of a college, you know, like Ohio State University, University of Kentucky, generally have good demographics and a relatively young and stable workforce. And so we like the areas that we’re in. So, I can get to the assets of back in time for dinner.
Both Lexington and Columbus are kind two, the top four in the Midwest, as far as growth cities. And you can see Columbus has a lot of…you know, it’s kind of hit the top housing markets list in the last few years. We like Louisville as well. We just don’t have operations there. And we don’t have an operational footprint, but something we’d be open to adding to in the future. We can see, you know, Columbus and Lexington, as far as in the states of Ohio and Kentucky are some of the highest growing cities.
In addition, Lexington is one of the few cities in the Midwest that has a supply constraint. So, if you’ve ever driven from Louisville to Lexington, it’s a pretty drive, you’ll see the horse farms. And those are basically protected, essentially through an urban growth boundary and kind of easements that are put in place. And so the urban growth boundary has been set so that the city votes on it every five years. And in 2018, they voted to extend it for five years, and they also voted to not vote on it again in the 2023 time period. So, we know between now and 2028, there still will be that ring around Lexington proper, where development is very difficult and they just really can’t add more units. So, the urban infill area is a good place for us to be for the next decade or so. And we’re excited about it. I won’t take you too much through that.
We’re kind of in the core of Lexington, and there’s a lot of redevelopment that’s going on there. You know, that line that you see the purple line, the Town Branch Trail right now, it’s been developed some, but it’s kind of a culvert, essentially, through the middle of the downtown. And they’re opening it up, making some bicycle lanes, splash parks. That’s gonna really connect the downtown to the neighborhoods that we’re in, which is kind of the Novi neighborhood. And we’re seeing throughout kind of the line of houses, which we’re pretty much buying vacant houses that need complete rehab, that there’s expansion going on, kind of to the north of it and to the downtown side. So, it’s kind of, we’re in a good place as far as the connecting goes.
Working through, like, how have we’ve been doing, you know, real estate in urban infill rehab, heavy rehab is the ground game. So, we’re running pretty efficiently, you know, but we’re constantly kind of putting out different fires. So, we started the fund actually in January of 2020. And in total, we’ve put in about three-quarters of a million. And right now we’ve got 82 units in total. I’m sorry. As of last year, we had 82 units, now we’ve got 90. And we’ve had 16 properties appraised, and our rehab appreciation off appraisal is about 11% over our cost. And our cost has kind of been all over the place, like most folks. But the graph on the left shows since the last Pitch Day, which was November, how have we done as far as execution. And we had a pretty good run. So, you can see last November we had about 37 units that were online and rented or available for rent. And we now have about 57, 56 units that are online. And of those, the rental market’s been really strong. I believe we’ve got about, of the ones we have on the market, about two that are available for rent right now. So, we can start to see that.
We only have kind of rent numbers through December. Our auditors are working on January and February, but our monthly rent has pretty much steadily progressed. You can see a bump we had in kind of April and May. And that’s when we purchased a property. One of our few properties that has had tenants in it, and some of them were paying, but most were not. And so we’ve had to do a tenant turn on that property, and it was a 31-unit in Lexington. And we’ve made that turn, and we’ve rehabbed those units, and most of them are coming online now. So, we’re excited for that.
As far as our financials go, when we go to underwrite properties, we wanna see a project level, 15% internal rate of return in order to purchase the property. And we’re still able to find those right now. A lot of folks aren’t used to seeing the decks on a single-family offering because there’s just not many out there. It’s tough to deploy capital efficiently. But we can see that the majority of single-family returns are really gonna stem less from that rental yield more to the appreciation, and pay down of debt. So, we don’t have a lot of like bullet debt structures. We have amortizing loans and we’re working to pay those down.
So, our class A units are closed, and we are now open with the class B units. We’ve raised about $4.5 million for our class B units, of which about half of that is currently deployed. And we’re gonna probably close the class Bs down in a few months. And then likely as long as we can continue to underwrite, we’ll open up class Cs.
As far as kind of basic financial terms go, again, you’re gonna see we’re a relatively conservative and simple offering. We don’t have a lot of nickel and dime fees. So, we don’t have kind of loan fees, we don’t have disposition fees. We’ve got a regular 1.5% of net asset management fee and a relatively low preferred because ours is not a huge income-producing asset class when we have kind of that mix of single-family, smaller multifamily. So, while we have that lower preferred, we do have kind of a lower carried offset as well at a 15% share of profits. We do partner letters on a quarterly basis, and we’re happy to share this with you. If you’d like to see class partner letter too, and we’re an audited fund. And our target leverage is 65%. So, we’ll kind of build-up to that 65% over the next few years and then slowly pay down. Or depending on if we can continue underwriting above that 15% internal rate of return, we’ll continue redeploying capital.
So, our projections are pretty conservative, not only in the way we calculate them but in our assumptions. We’ve got about a 10% rate of return when we include OZ benefits. There’s some different ways of doing that, but ours is kind of the more conservative way of doing it. We’ve had about a 12% projected post-tax internal rate of return. Seems like we’re on track with our series A fund with that, where we’ve pretty much deployed the assets. But we’ll kinda see how it goes. With the current inflationary environment, it makes the build-out tough in dealing with supply constraints with the different materials. But it could be a good thing going forward for all real estate, including our fund.
So, I appreciate y’all spending some time with me today. I hope it was informative for you. And we have some additional resources, happy to provide to you. You can reach out directly to me with the email address that’s in the presentation, or our phone number is listed as well. We’ve got a lot of resources. Again, appreciate your time. Thanks, Jimmy for having me. And y’all have a great day.
Jimmy: Well, there you go. That was pretty good there. Clint, we got time for a few questions. Here’s a question for you. Clint, can you speak more to the potential impact of inflation and supply chain challenges on your projects, and do you have any solutions to those challenges?
Clint: Yeah. Well, I mean, inflation over the long-term, generally, is a good thing holding, you know, real estate, which is basically one big commodity. It’s just wood strapped together with metal and plastic. Generally, a good thing for real estate, especially when it’s financed with fixed-rate debt over time. Specifically, the inflation with the supply chain interest, the supply chain constraints day-to-day is kind of a giant headache. And that’s what our operators that are kinda in the field are working with, honestly, literally, every day. I’ll set up here and tap dance for a few minutes, but they’re constantly trying to source supplies from different places. It’s a battle that everyone’s fighting, so we’re not disadvantaged from it. But, you know, there was a time where I got literally drove down some electrical equipment from Columbus to Lexington when I was going to do my assets, just because it was just easier than actually getting it delivered.
So, yeah. It’s been certainly a challenge. Fortunately, real state prices have moved up, at the same time that our costs have moved up. I think I had a slide in there. I kind of breezed over it but it’s talking about some of our underwriting criteria that we have. And for, you know, the majority of 2020, our costs were above what we had underwritten those costs on a project-to-be. But, fortunately, kind of our exit appraisals we’re higher than they were as well. So far it’s been a solvable problem for us. And it seems to be getting better, but it’s certainly like a challenge. But, you know, every business has fires to put out.
Jimmy: Very good. Clint, we got time for one more question here. Well, unless we get another one coming in that I like. But Brett asks, and by the way, I just wanna take time out for a second. Brett is on pace to earn the MVP here for OZ Pitch Day today. He’s been prolific with his questions. They’ve all been good questions. And I know I’ve got some that are still outstanding I have to try to answer for you, Brett. So, I’ll try to get to those in a little bit. But Brett asks, isn’t the tax-free exit after 10 years available for all forms of capital, basis, deferred gain, etc.?
Clint: To make sure I understand the… Well, here’s how I understand the question. If you invest in an OZ Fund, to get the tax benefits of the kind of OZ tax rules, you have to have what’s called eligible capital gain. And so you can put after-tax money into an OZ Fund, but you’re not gonna get those OZ benefits. It’s just gonna be kind of a regular partnership. But for your eligible cap gain, there’s some rules for what that is. But it’s gonna include what we generally think of as capital gains, most appreciation recapture. And it’s going to kinda hold that same status of the cap gains forward, even though it’s 10 years. So, if you put a short-term gain in, you know, when you have your taxes to in six, five years now, four years?
Jimmy: Let’s see. About five years from today, is when you’ll owe those taxes, in April of 2027, right?
Clint: It’s gonna have the same characteristic as your original capital gain. However, you know, the eligible cap gain that you invested, assuming it has a gain in 10 years, that gain would be a tax-free exit. The IRS has taken the position that, when you put that eligible cap gain into the OZ Fund, you don’t automatically have a basis. So, you’re not going to…there’s really no delineation, if I’m understanding the question correctly, between basis and the fund unless you’re putting in non-eligible cap gains. Jimmy, am I understanding, I think, the question right?
Jimmy: No, that was a good answer. And you may be missing a little bit of context here though, Clint, because I think I saw Brett ask a similar question a little bit before you got in. And it was, I think his question is getting at, can I invest capital gains money and can I also invest non-capital gains money? I think that’s what he is asking. And the answer there is, you can invest any money into an Opportunity Zone Fund, but only capital gains dollars are eligible for all of the tax treatments, including that 10-year tax-free exit. So, if you put in, let’s say, you have a capital gain of $100,000, all right? You can put in $150,000 into Clint’s Fund or any Qualified Opportunity Fund, but only, what would that be? Only two-thirds of that subsequent OZ gain would be eligible for that tax treatment that $100K worth would be eligible for that tax treatment, whereas the $50K amount would not be. So, let’s say, your $150K investment appreciates to 300K, you get to write off 200K worth of the investment as basically stepping up to 200K, but the other 100K kind of going through that a little bit quick. I think I got the math right there though.
Clint: Yeah. And most funds will have kind of OZ and non-OZ units. And our fund does as well. I think I might be one of the few that have put in non-OZ… units, but when we have… Even a few others put it in, and a lot of it’s just because if they’re not exactly sure what their cap gain is gonna be when they make the investment, it’s nice to have some wiggle room. So, they might put, you know, $600,000 in this eligible cap gain or they think it’s eligible cap gain, but when they deal with the accountants, it might only be $584. And so then, you know, 26 grand in non-OZ units.
Jimmy: Well said, Clint. Well, I think I’m gonna cut you loose there, Clint. Really appreciate your time today. You’re internet connection actually worked out pretty well, but the video was great too. Thanks for providing that for us. Little hiccup there for me at the get-go, but I think we’ll get that cleaned up in post-reduction. If anybody wants to watch the video recording, it’ll look nice.
Clint: Awesome. Thanks. And I apologize I didn’t feel comfortable doing it live, but it was spotty beforehand. Anyone can feel free to reach out. I’ve got my email on the presentation there. Feel free to shoot me an email.