OZ Investing In Ohio And Kentucky, With Nest Opportunity Fund

In this webinar, Clint Edgington discusses his conservative approach to OZ investing through a portfolio focused on Midwestern markets with favorable demographics.

Webinar Highlights

  • A history of Clint’s fund, which started as a family operation and has grown in the years since the OZ program was introduced;
  • The rationale for Nest’s conservative approach to investing;
  • History and motivation of the Nest team;
  • The unique value proposition of single family and small multifamily projects;
  • Review of the stable demographic characteristics in Columbus and Lexington;
  • How Lexington’s urban growth boundaries have resulted in a shortage of housing supply;
  • Review of the track record for Nest’s earlier investments;
  • Economic summary of single family rehab and rental;
  • 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

Webinar Transcript

Jimmy: Clint Edgington from Nest Opportunity Funds.

Clint: Hey, Jimmy, how are you? Our fund is a smaller fund and we are a conservative fund. And if that’s of interest to you, buckle up for a couple of minutes. We started our fund in 2019. And wasn’t really a fund at first, it was just simply myself, my parents, and our operator in Lexington that we worked with for a decade. We all had ironically our first kind of capital gain relative to the size of our portfolios that made us pay attention to things. I had an advisory firm that focuses on tax strategies for business owners. And so, flipping through the TJCA got to subchapter Z and thought, “Wow. Wait, I have a capital gain. Wait, we do property rehab.” We looked at it and the areas we did property rehab was in now what we call an Opportunity Zone.

So, we just did it for ourselves. And then in 2019, we had some clients to sell their business and they said, “Hey, well, why don’t we do that too?” And I was like, “Well, because I’m not really an asset manager, and that just sounds like a lot of work to get PPMs and whatnot together.” But we did it. We opened it up to outside folks in 2020. So, we’ve made the soup the way we like it. And if you like it that way as well, that’s great. And if not, 10 years is a long time to be in a partnership you don’t wanna be in. So, some of the things that are a bit quirky about our fund is that we do act and feel like a real partnership and not a product. We’re real people with boots in the ground. In addition, we are very conservative, but we originally for ourselves wanted to have the highest probability of capital gains in 10 years to choose that OZ benefit.

So, unlike a lot of conservative investments, you think usually income-oriented and our fund is not income-oriented. So, if we can continue underwriting at our 15% project-level returns, we will continue reinvesting our capital, except for 2026 we plan to pay back accrued preferreds. So, fortunate, we have an RAA investment advisor firm, previously fee-only until we now have an Opportunity Zone Fund. So, that gives us the nucleus of our kind of core personnel. But then outside of that, we go to Clint Capelle and Jeff Moore. Clint runs our Columbus operations, kind of boots on the ground rehab side, as does Jeff. And they’re really the heartbeats of the fund. And I meet with them on a monthly basis and walk through, on a weekly basis, all the properties.

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And then as far as outside service providers, I’m kind of chief at my core. So, we go with the most confident folks in the Midwest, but we still want those Midwest rates for our legal, our tax, and audit. So, although we’re kind of a quirky, smaller partnership fund, whatever you wanna call it, we do have the institutional chassis of a regular larger fund. Again, the thing I love about the Opportunity Zones is it’s kind of the first time in my life that I wasn’t just a cutthroat capitalist. The benefits are so great that we can share those with other people, including our tenants, including our tenants’ neighbors, and the neighborhoods we’re in. So, we don’t just take a block of houses, knock them down and build multi-family or what we might think of as a project in 10, 15 years. We want just as many front porches there when we leave as when we started.

And my job really for the social impact side is I have a passion for home ownership, giving people the path home ownership, and we’ve got some programs that allow people to do that. But also, I just get out of the way of the operations people. So, Clint Capelle, for example, he hires most of the folks who have graduated from addiction programs. And I was leery on it at first, but it’s actually been a fantastic thing for us to give them their first job. A lot of them will have some sort of…something on their record. So, getting a job out of that would be difficult for them. And it lets them build a skill. The trades are great for that. They can build a skill or they can have a real income and can support family.

And so, he gives them that ability. And it’s actually helped the fund a lot because there’s a little bit higher turnover for people just coming on board, but those are relatively low-skilled and not difficult to replace. But once people have been with us for a few years, they start to get those skills. And the last few years, it has been very difficult to retain and recruit finished carpenters or plumbers. So, it is been actually awesome. The loyalty they have to Clint is amazing. Jeff, he just really likes making cool neighborhoods cooler. So, I’ll let Clint tell you a little bit about what he’s passionate about

Clint Capelle: We’re daily impacting our community. We are providing safe, secure housing for people who have the opportunity to live their best life. We are providing the opportunity for those who transition to utilize their current skill set or develop a new skill set 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 Edgington: Yeah. I wish I could just have Clint give the entire presentation. He’s so passionate about helping folks through the addiction that…it’s odd to see that that’s been really actually helpful to the fund. And he’s got an interesting way of living in life and it’s just been great. It’s fun. Our operators are not part…are not…they’re not employees of the fund. However, they solely operate on behalf of the fund. They don’t do other deals within others. I’ve got some things in chat. Okay. So, everything about our fund can be relatively conservative, our asset class is conservative. If you think OZ, we all have that significant improvement for the original use. And for most things in real estate, especially if you’re gonna go bigger, that basically means you’re gonna probably be original use.

Significant improvement where we have to double the cost basis of the properties that we purchased. So, that means it’s gonna be heavy, heavy rehab, which is slightly less risky than dirt deals. So, we are in that heavy, heavy rehab. We are in the infill, in the city cores and that’s where we are, and even in 2009 when we think the great recession housing went down, when you look at it, even compared to multi-family, which is generally considered pretty conservative real estate, single-family really went down less. There are fewer transactions in multifamily.

But I just think of it like when…if I close my eyes and think of what happens if another COVID hits, what does the office look like in 10 years? With the changes in retail that have been occurring, what does that look like in 10 years? And that’s difficult for me. And I’m sure with our single-family houses, in 10 years I’ll look back on the counters we chose or the paint colors for when we need to do a refresh. But I can close my eyes and I feel pretty comfortable that people are gonna still wanna live in homes.

So, we’ve got a mix of single-family and small multifamily. In our markets, once we start to go into multifamily that institutional investors get involved in, it starts to get pricey and the numbers that don’t really work for me, and it’s just not our competency. Continuing on the conservative side, our employment base in Columbus and Lexington is very stable and strong. I won’t get into that too much. And that’s what we want. We want a stable asset class because we have the relatively more risky strategy of heavy rehab stable asset class. We wanna have good demographic growth and we want good workforces that are stable. And we’ve got those in both Columbus and Lexington.

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They are kind of the core growth engines of their states. I won’t talk much about Columbus. Its growth story is pretty well known by most folks. We got Intel moving in, but our growth will always be relatively decent in Columbus in the near term. It will never be like in San Francisco 2009 to 2019, but we’re not gonna have that huge giveback either, which is what we want for a 10-year horizon.

Lexington has what’s somewhat unique in the Midwest and they have a real supply constraint. Forget about Columbus’ supply constraint, this is just sprawl and most Midwest growing cities have it. But Lexington implemented the first urban growth boundary in the nation in the ’50s. And basically, if you’ve ever driven between Louisville and Lexington, it’s a beautiful drive. Picturesque horse farms, it looks like the outtakes from the Derby. And they wanna keep it that way. So, basically outside of their outer belt, the city has really restrictive lot split requirements where you can’t split a lot more than once and it can’t be less than 20 acres. So, you basically take a ring around Lexington and you just don’t allow growth there.

And if you look back at the previous slides I did back there… Okay. When we look at Columbus, the little star with the numbers popping up to the highest script cities, they’re all kind of right around Columbus. But when you look at Lexington, it’s actually not that fast. It’s not in the top 10 growth cities. But all of the other growth cities are in a ring. It’s like a donut around Lexington where they’re going. And those are basically the bedroom community, becomes the suburb of Lexington because we can’t have really more housing development come in. So, there’s still…but there’s still pressure on, on the houses in there as well.

So, the yellow part is where that urban growth boundary cuts it off. And then everything you see that little yellow squiggles are conservation easement. That’s where grandpa had a farm or somebody from Saudi Arabia has a farm and they don’t want their grandkids to sell it when they die. So, they basically donate their development rights so that it is a horse farm in perpetuity. But people don’t like living in stables, so we need to improve a lot of the housing within Lexington.

So, in Lexington, our asset breakdown is we’ve got…the vast majority of our properties are single family, and they’re relatively small, generally speaking. And we’ve got one multifamily that’s 31 units and a couple of duplexes. And when we zoom in a little bit on that, we can see a very faint blue line that kind of goes up and to the right, and that is North Limestone. And then it goes and touches the purple line we have there. And that’s basically what you think of as like the downtown downtown.

Just above it is Transylvania University, which is a really high-end private university. Everything to the south, southeast of that North Limestone is generally neighborhoods that have been pretty distressed. But once you get close to Transylvania, it starts to become pretty high-end. And those areas are transitioning pretty quickly. In addition, we think the transition is gonna continue. In the downtown area near Rupp Arena, they basically have taken what is just a stream that runs under the city sidewalks and culverts and have created a town branch trail. And that’s gonna connect the two neighborhoods to downtown.

Rupp Arena is expanding by a factor of 10. At the bottom about where our houses start, we have this artist village coming in and they’ve built probably six or seven of these houses with glass garage doors, which I question, but it seems pretty cool. And then finally, there was an old abandoned bus station and it’s become a hub on the north end and it’s huge and it’s a very cool area now, but previously it just was a dump. What you see is a lot of our properties, just kind of right in between those and they’re kind of sandwiching in between where we think the improvements of the neighborhoods will be. The green properties are properties in our open fund and the blue ones are ones that we already have in rehab.

I’m gonna talk some about properties that we’ve already rehabbed so you can see what we do because a $50,000 bombed-up single family about two years ago is pretty much the same as the one today. I’m not gonna walk too much through Columbus because I’m running short on time already, but this is where our properties are. Properties in Columbus are generally more expensive. Obviously, a little bit higher rents. We have an eight-unit in Columbus and then duplexes.

Walking through the execution, real estate is a ground game. Great PowerPoint slides, at the end of the day, don’t really mean a lot. It’s about having these constant meetings with my operators, being there, seeing what’s happening, their work on the ground, making good decisions, not over-improving. So, the execution, in my mind, is where the rubber meets the road.

So, when we opened up to our RAA clients, we started with 23 units and we had put a half million in. The sponsors had put a half million in beforehand. Cut to last fall, we had 82 units. We had put 775 in of our own money. And then today, we’ve got 800 grand of our own money in 95 units. And what you can see, the bottom left graph how we are constantly progressing and moving, buying more properties, moving them into the inventory stage and then through initial rehab and then final rehab, which for us is when the drywall goes on and then ones we’ve completed. And then on the right side, you can see this is for our Series A funds. So, new investments, we go to our Series B. But our Series A, which has now been open two years, three years, we’re starting to see those properties coming online and our rent growth has increased by a factor of three and a half times in the past year. Not gonna continue at that rate, of course, but 85% of those properties are online right now.

Just to give you an idea of what a single-family, like, you know, economic…what the economics of a single-family look like. When we originally purchased this particular property, 456 Chestnut, we bought it for 40 and we thought we’d have all in about 105. COVID hit, lumber went up three times as much. I kind of freaked out there for a while. There was a period of time where we didn’t raise new capital because I couldn’t underwrite anything. But it came out that the prices moved for us and costs came back in line. So, our costs were obviously much higher, but then when we got the appraisal, the appraisal came back in quite a bit higher than we initially estimated.

Looking on the right, that just gives you an idea of cash flow. That rent is old. It’s been increased, but the vast majority of the rent is gonna go to expenses and we need to reserve money for in 10 years when we need to get them ready to sell or refinance. The majority of it comes through debt paid out. Now, we do have the multifamilies give us a good income. But in my mind, the single-families, you know, my dad told me, he is like, “Hey, listen, as long as you get to decide when you sell a single-family house and you take care of it, you’ll make money.” But with multifamily, even our multifamily, interest rates move up like they have. Cap rates move against you. Your capital appreciation could be gone in a year for an entire 10 years. So, single families give us a capital appreciation. So, the multifamily gives us some income. And we like to mix.

We’ll send a link with this deck. Very quickly, our target leverage [inaudible 00:15:52] above 65%. Currently, we’re at 42% in our Series A. We don’t have any debt yet in our Series B. We’ve raised about $10.8 million in capital, gotten some grants. Our management fees are normal but very, very, very plain. So, for example, all the Beacon Hill employees that do work on the fund, we don’t charge back to the fund. There’s no cost overhead for the office I’m in right now, those types of things. But 1.5% of net assets, we do a pref distribution of 4%. And then our carry is a 15% carry. So, I’ll leave you with one final slide with some general resources and just some pictures of before and afters. And feel free to reach out to me. I will hop on the happy hour. Jimmy, I appreciate your time and I apologize for running over.

Jimmy: No. That’s okay. Clint, always a pleasure seeing you and partnering with Nest Opportunity Fund on OZ Pitch Day. Thank you for your time today. Please do reach out to Clint. You can reach out to him, [email protected] to learn more, or if you have any questions for him that we didn’t get to in the Q&A here. I’m gonna cut you loose there, Clint, and bring our next presenter on. [crosstalk 00:17:00]

Clint: One more thing, Jimmy. I’m sorry to interrupt you, but if you’re kinda considering, “Gosh, do I do an OZ fund or not 10 years into that?” We do have a personalized calculator that, you know, if you don’t invest in that, it’s fine, but I recommend you also try to download and take a look at…because for me, I had to step through. I had to create an Excel spreadsheet. But I just wanted to throw that out there as a resource I should have mentioned. Thanks, Jimmy.

Jimmy: It’s a great resource to have. Thank you, Clint. We’ll see you at the happy hour soon. Thank you.