Investors cannot always rely on market valuations increasing. Especially with uncertain market conditions and asset values potentially pulling back in the near-term, it may behoove investors to return to basics, and find other ways to generate alpha.

Clint Edgington, founder of Nest Opportunity Fund, joins the show to discuss how to keep costs low and generate tax alpha with Opportunity Zones, Roth IRA conversions, and other tax-efficient investments.

Episode Highlights

• The importance of focusing on basic tax planning due to upcoming changes in the Tax Cuts and Jobs Act.
• The potential impact of interest rates on the market, including the emergence of distress if rates remain high.
• Background on the Nest Opportunity Fund, which focuses on small residential real estate in Columbus, Ohio, and Lexington, Kentucky.
• Clint’s approach to property development in the Midwest, emphasizing on-site management and stability in the economy.
• Generating tax alpha with Roth IRA conversions and Opportunity Zones for estate tax minimization.

Guest: Clint Edgington, Nest Opportunity Fund

• Clint Edgington on LinkedIn
• Nest Opportunity Fund
• Nest Opportunity Fund presentation at OZ Pitch Day Fall 2023

About The Opportunity Zones Podcast

Hosted by OpportunityDb founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in the Opportunity Zones industry.

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Show Transcript

Jimmy: Welcome to the “Opportunity Zones Podcast.” I’m Jimmy Atkinson. Today, I’m thrilled to be joined by Clint Edgington, founder of Nest Opportunity Fund. Clint joins us today from Columbus, Ohio. Clint, it’s great to see you. How you doing?

Clint: Great, man. As always, I’m thrilled when I get to talk to you, Jimmy.

Jimmy: Oh. That’s too kind. Well, thanks for coming back on. Clint, you’ve been on a lot of my OZ Pitch Day events over the last few years. I don’t know how many of them you’ve been on, maybe four, five, six, seven, eight? It’s hard to keep track now, but… So, a lot of my audience, high-net-worth investors, family offices, advisors, they may already be familiar with you, and with Nest Opportunity Fund, having seen you on my platform, having seen you on OZ Pitch Day in the past. But for those who may be unfamiliar, can you tell us a little bit about yourself, your background, and what is Nest Opportunity Fund?

Clint: Sure. Nest Opportunity Fund is a Opportunity Zone Fund. It was started with, in 2019, when the final regs went in, and that day, we kind of opened up, and prepared for it. And we do small residential real estate in Columbus, Ohio, and Lexington, Kentucky. Heavy rehab. We just take, kind of, the most burnt-down, burnt-out houses on a certain block, in an upcoming area, and we kind of basically rebuild them from the inside, and then hold them and rent them. So, going back, as far as background goes, I, you know, my parents bought their first small residential real estate property in 1990. So, growing up, you know, I mowed their yards, and served my first eviction notice, I think, when I was 16. And, so, kind of, it’s the mom-and-pop land lording is kind of in the blood.

And we’re still kind of in that space, so I, you know, for a while went out to Chicago, did some expert witness work for financial institutions. … And at first, I was just pushing spreadsheets around. But then, continued kind of investing in smaller real estate with my family. And also in Lexington, Kentucky. And then we kind of had a capital gain in 2018. We had started an investment advisory firm, Beacon Hill. And we started our own OZ Fund, and we called it a fund, but it was just the three of us, me, my mom, and Jeff in Lexington. And we were doing, we’ve been funding his deals for a while, so we basically just started doing what we’ve been doing in the past. He already had about a couple hundred single-families there that he had rehabbed, and they were in OZ census tracts, which we didn’t know what that word meant at the time. And it was just kind of, like, “Gosh, I have a cap gain, and you have a cap gain, and we’ve got people who are doing this exact work in this exact neighborhood. Let’s, you know, let’s not pay the tax.”

So, it started in 2018, and some of our investment advisory clients had an interest, but the initial language is kind of murky on multi-asset funds, and raising capital for them, so we didn’t launch until, you know, the final regs went through. So, yeah. 2019, we launched, and now, you know, we’re still a small fund. We’re very kind of mom-and-popish feeling. You see our marketing investor letters, to our investors, that we send. It’s, they see the sausage factory. It’s not glittery. It’s not that glossy. But, you know, we do what we say we’re gonna do, and we kind of keep on plodding.

Jimmy: No, it’s great. … And it started because you and your family, your partner, had had this capital gain, and had this need to defer it into projects that you were already working on, that happened to be in Opportunity Zones, and then you saw a need from your RIA clients. They’re like, “Hey, I want in on this,” and now you’re raising capital from new outside investors as well. I think that’s why you like to join us on our OZ Pitch Day events. What would you say is your main approach to Opportunity Zones? You mentioned you’re doing some developments in the Midwest, but can you unpack that a little bit more? What exactly is it that you’re doing in your Opportunity Zone projects?

Clint: Yeah. Basically, we purchased properties. So, some single-families, duplexes, and our largest is a small 31-unit. But mostly, you’re gonna be duplexes, quads, eight-units. And we purchase usually, you know, pretty beat-up properties. And we’re going in… What we’ve seen is, is that, you know, to get that substantial improvement that’s required for the OZ rules, generally speaking, we’re replacing mechanical. So, once you replace mechanicals, you’re kind of replacing all the cosmetics in the envelope as well. So, heavy, heavy rehab. Which, you know, creates operational, you know, issues, for sure, but also kind of decreases the pool of competing buyers, especially in Lexington. You know, it’s a little smaller than Columbus. So, yeah, we work on that, and it takes, you know, it takes a good amount of time. We buy them with cash. We rehab them with cash. And then once we’re done, we’ll go and we’ll get financing, and do it again.

Jimmy: That’s great. And is it just in those two cities? Is it just in Columbus and Lexington where you’re developing, and what do you like about that part of the country, and those two cities in particular?

Clint: Yeah. Just in Columbus, and just in Lexington. I mean, the main thing that I like is that, you know, I’m in Columbus. And so, I think real estate’s a ground game, where it’s so easy to let costs start to move up on you, especially when you’re not there, or one of your partners isn’t there. And in Lexington, we have the same thing, where the guy who’s doing the rehab work there, he’s a partner in our GP, he’s an investor in the LP. Twenty percent of his fees being a GC gets reinvested as an LP. So, you know, we’re kind of as lined as I think we can be. But you gotta be there. I mean, I think, especially in times like this, where you’re not just gonna get returns based on market multiples increasing, you know, you kind of need to pay attention to the blocking and tackling.

Jimmy: Yeah, you gotta pay attention to those costs. Those costs creep up. By the way, older, former business partner of mine, he would use the saying, “Hey, you’re gonna have people stealing from you if you don’t have your eye on them.” And I think he meant that kind of tongue-in-cheek. People stealing from you, right, Clint? Like, they’re not oftentimes literally stealing from you, but if you don’t have your eye on everything, and all the costs that are happening, boots on the ground, like you said, it’s such a ground game, like, you’re gonna let those costs soar up one way or another, just because your attention turns elsewhere. So, I think that…

Clint: Yeah. And, you know, not even just, not even stealing. I mean, I don’t… I mean, for example, in Columbus, we hire folks who’ve graduated from some sort of addiction program for the actual rehab work. And I was concerned about that at first, certainly. But haven’t had an issue, you know, with that. We had some break-ins in some of our, kind of, properties, because we are in kind of up-and-coming-but-not-there-yet-type neighborhoods. But also, just, like, you know, incentives are never completely aligned, with different people doing different things. So, you know, you kind of, you gotta just be there, and, like, if they know that you’re gonna be there looking at things, then things move at a little different pace. But, you know, not just us being in the areas. I mean, so, we looked at, you know, anywhere within kind of a five-hour drive of Columbus. And if you know the Midwest well, kind of, if you draw a line from Chicago to Cleveland to Pittsburgh, there’s kind of some Rust Belt there, and, like, up north. When you start to go south, and in the cities, like, Columbus is, you know, the fastest-growing large city in the Midwest. Lexington is smaller. It’s about a third the size. But they don’t grow as fast, because they have some kind of constraints on the city size, but the areas around it are growing at a pretty decent pace.

And we’ve got, kind of, vibrant, diversified economies, so… You know, even in Columbus, you kind of think the financial sector is usually, like, one of the riskier sectors. Well, ours is all insurance. Like, it’s Nationwide, Allstate, are all headquartered here, so, you know, when you’re in kind of the play where you’re gonna be doing, whatever you wanna call it, like, workforce-level, or maybe even some affordable housing, you know, you want a good, stable, diversified employer mix. So, you know, Columbus and Lexington are never gonna have the property price appreciation of, you know, Austin, earlier this decade, or San Francisco last decade. But we’re also not gonna have, kind of, the drops that they have as well, so, it works for us.

Jimmy: Yeah. Might not experience the same level of boom, but unlikely to experience a bust either. Seems like it’s a fairly stable, conservative play, if you go into your fund. Let me ask you, how is the fund structured? Is it just one big fund?

Clint: But now, Jimmy, stable is starting to get sexy. I mean, all the data centers wanna come to Columbus, because you open up the paper and we’re never in it, because we don’t have fires, or earthquakes, or, you know. So, you know, Intel’s chip development’s moving here. So, I don’t know. Now that it’s no longer boring, we might have to leave.

Jimmy: I never said the word boring. I think you used the word boring. It’s stable. Stable is good.

Clint: Stable.

Jimmy: Sick of volatility? Try stable. Try stability. Welcome to Columbus. But again, like, my other question, how is are the investments you make in these structured? Is it just one big Nest Opportunity Fund, one Qualified Opportunity Fund, that invests in all of these different assets, or do you have different funds for each city, or different funds for each asset? Or how does it all work?

Clint: Yeah. As we’re set up right now, we’ve got one Opportunity Zone Fund, and then two series within that fund. So, basically, we broke it up based on timeframe, where folks who came in before, I think May of ’21 are in our Series A. And they have the economic rights and benefits to our Series A subsidiary. So, we have one subsidiary in Columbus, that holds the Columbus assets, one in Lexington, that holds the Lexington assets. We didn’t capital raise for a while, and didn’t reopen the next series, I think, until end of ’21. Just, numbers were not penciling that well. And then those came in afterwards are in the Series B, which owns two different subsidiaries, Nest Columbus B and Nest Lexington B, which own different properties.

Jimmy: Got it.

Clint: But, you know, one bombed-out house being rehabbed next to another one, they all look the same, both kind of financially and when we’re done with them.

Jimmy: Sure. No, understood. Well, across that entire fund, both series, how many properties, roughly, do you currently have in your portfolio? What’s the total project cost or value size, as well? Just trying to get a sense of the scale.

Clint: Yeah. So, we’ve got about 75 properties. And don’t quote me on this exact number. We’re doing our partner letter right now. I should know it, but I’ve been looking at the details more than, like, zooming out. You know, I’m probably, like, 110 units.

Jimmy: Okay.

Clint: So, relatively small, you know. I would say we’ve got, kind of, a good chunk of single-families. And then, relatively the same amount, from an asset size perspective, of multifamily, you know, from a dollar amount. On the smaller side. So, you know, in Lexington, we do more of the single-families, and so that, you know, we can purchase single-families there, relatively inexpensive, $50 grand. And, you know, but there are gonna be heavier rehab costs. So then, you know, we’ll get out the door at $150 a square foot there, probably. And we think neighborhoods that are, you know, doing pretty well. And we also kind of build them to a level that we wanna hold them, rather than just to sell them. So, some things, they don’t, like, kind of instantly pay back. You know, we spray-foam our crawl spaces, and have tankless hot water, those types of things. Easy to maintain.

Columbus, you know, we are all multifamily. So, our asset, each individual asset generally costs more here. So, our duplex would be probably $200, that we buy, and we’ll have, you know, $350, $400 into it by the time we’re done. And a lot of it depends on the… We’ve got one monster of a duplex. It’s a super cool brick… I mean, some judge used to live in it or something. So, we’ve gonna be careful not to fall in love with it though, but, you know, we’ll have more into that one, versus we’ve got some, literally, you know, properties that were burnt, which I think is what I walked folks through in the Pitch Day two times ago. It was a burnout. And so, it would be less. Because it’s never gonna be a $600,000 duplex. It’s…

Jimmy: No, that was a great walkthrough you did for our OZ Pitch Day Summer 2023 event. I’ll make sure to link to that in the show notes for today’s episode, at opportunitydb.com/podcast. But yeah, Clint showed us the before picture. He actually did a walk-through of one of these rather beat-up properties that he had just acquired. There was some burn damage. It was torn down to the studs in, I think, in a lot of locations. And you took us down into the basement. You talked about the tankless. You took us upstairs. I think you talked about…

Clint: Basement’s the first place you gotta go. The basement’s the first place you gotta go. All the secrets are in the basement.

Jimmy: You gotta go to the basement. You gotta see how much water damage there is, right?

Clint: Mechanicals, all the stuff. Yeah.

Jimmy: Yeah, yeah.

Clint: And the star of that show was Oscar.

Jimmy: That’s right.

Clint: Who was working on …

Jimmy: That’s right. Oscar was the star of that show. I remember. Hey, what was I asking? Oh, the total value of your entire portfolio, at current moment. So, you’re at about $10 million, more or less, it sounds like?

Clint: In net assets, about $10 million. And then, kind of gross, we’re, like, about $15 million.

Jimmy: Got it. Good. Where are you finding value these days? And is it a tougher market? Transaction volume’s down. Are you still buying up as many properties this year, in ’23, as you had been in previous years? Where are you finding value?

Clint: Yeah. No, we’ve slowed our purchasing, for sure. You know, there’s kind of a dichotomy right now, and a lot of times, when real estate starts to slow, you know, like now, you see it first in transactions slowing. You don’t necessarily see prices dropping as much, because, you know, would-be sellers kind of get used to what they think the price will be. Would-be buyers, you know, their financing costs have increased, and they’re kind of re-penciling their numbers, and there seems to be a gap for a while, usually. And so, we’re not seeing a ton of transactional volume. And we’re also not seeing, you know, prices slide across the board. I’m not seeing distress. Certainly not in Columbus.

But there are some pockets, you know. And I would say, you know, prior to this year, when people start talking about their pipeline, their acquisition pipeline, and it’s proprietary, I don’t know. Maybe for other people in Lexington, we’re kind of one of only three groups, they can take down a package of five houses, that, we’ll do something that small, right, that’s heavy rehab. And so, I would say we maybe had the closest thing I’ve seen to actually kind of proprietary pipeline. But if we said no, they’re calling one of the other two people. But I am seeing a little bit now how, kind of, the certainty of close is starting to matter to folks. So, if, you know, if you’ve done deals and you’ve been doing them, and you’ve closed… So, that’s something we talk about. You know, during COVID, we had offers out there, you know, in February, when we all kind of realized, “Oh, wow. This is a thing,” that, you know, that we came through on, and a lot of folks kind of dropped all their offers at that point in time. So, that certainty to close, I think, is starting to pay a little bit of dividends. But we’re just seeing pockets of decent deals, that have kind of reverted to the new world of, you know, everyone’s finance costs have gone up. So we have to think about that, and not continue just buying away.

Jimmy: Good. Yeah. Understandable that transaction volume has slowed for you this year as well. Hey, let’s start tax cuts. You wanna talk tax cuts?

Clint: So, we’re waiting, because we’re just, at some point, you know, one group is right and the other becomes kind of wrong.

Jimmy: Yeah.

Clint: And so, I mean, I don’t see the downside to just kind of waiting, and pouncing when, potentially, there’s some distress.

Jimmy: Sure. And eventually you’ll get that price drop, at some point, coming up here.

Clint: Maybe.

Jimmy: Hopefully, if you’re a buyer. Hopefully not, if you’re a seller, right? Depends which side of the equation you’re on, I guess. But let’s talk about tax cuts, Clint, because before we came on, you said, “Hey, I wanna talk about…”

Clint: I want some.

Jimmy: Well, yeah. Who doesn’t like tax cuts? As you know, Clint, and as a lot of my audience knows, I’m sure, Opportunity Zones is a provision of the 2017 Tax Cuts and Jobs Act, signed into law by President Trump. A lot of those TCJA provisions, these tax cuts, are actually expiring at the end of 2025. Some of the provisions are expiring at the end of 2026, including Opportunity Zones. As an investor, as a high-net-worth investor or a family office, someone who’s tax-conscious, in your mind, Clint, what should I keep my eye on? What should I be aware of, or what should I do with regards to knowing that a lot of these provisions in the TCJA are expiring here in the upcoming years? What are you advising your clients to do?

Clint: Yeah. So, kind of the same, you know, theme as, you know, real estate operations, that, you know, it seems like it’s maybe likely we’re in a little bit of a lower-return environment than we’ve been in, or have been used to during a 30-year, kind of, interest rate decline. So, kind of focusing on the basics, the blocking and tackling, I think makes some sense now. So, picking up, kind of, non-market-related returns if you can, like tax alpha, I think becomes a little bit more important. Assuming the, you know, Tax Cuts and Jobs Act tax brackets and structure is not extended, which I think that that should be kind of the basis for it, and it’s a bit of a heads you win, tails you don’t lose by doing the planning now. So, one thing that we’re talking to folks about is Roth conversions. You know, now is the time to start thinking about that. You know, we work with investors, and a lot of them are, they can fill up their, you know, if they’re kind of medium-income folks, they can fill up the 22% tax bracket, and we can show them, like, listen, in two years, that’s gonna be, you know, 33%. So go ahead and, like, fill that bracket out now, and move your IRAs that you still owe taxes on into Roths. So, you’ve got two years to do that.

Jimmy: Yeah, so, basically, pay the tax bill now, at a lower rate, and then you’ve got after-tax Roth assets, as opposed to paying that tax bill down the road at a higher rate, right?

Clint: Yep.

Jimmy: A little bit of a tax arbitrage strategy. And I love the way you put it, like, heads, you win, tails, you don’t lose, right?

Clint: Yeah. I mean, you know there are some folks…

Jimmy: … that way. What else? What else?

Clint: …there are some potential folks who could potentially lose. You know, if you’re middle-income folks, and you’re on the verge of retirement, and your income’s about to drop. Maybe. But for the majority of people with relatively steady income before and after that sunset, it’s not gonna hurt you to go ahead and do that now, even if it doesn’t expire. You know, another thing that I…I see a lot of folks think it’s just for ultra-high-net-worth is the estate tax minimization kind of techniques? Which dovetails nicely in with Opportunity Zone Funds, as a private equity holding. You know, the lifetime gift and estate tax exemption is set to sunset as well. So, right now, it’s, you know, $26 million, $27 million, between you and a spouse that you can pass through your estate tax-free, where it’s gonna drop, you know, basically in half in the end of 2026. So, you know, even if you’re not worth $13 million, you know, but you think that you’re gonna grow into it, now would be the time to kind of do some of that planning, because, you know, you’ll lose a good chunk of that opportunity as soon as the clock strikes 12.

And, you know, OZs are a great option for that estate tax minimization. You know, putting them in a grantor trust. And there’s a ton of ways to do it, to kind of fully optimize it. But effectively, you put a normal asset into a trust like that, and you can freeze the value of it, for the value of your estate, of what it goes in at, and then the appreciation, you know, will be taxed at capital gains for your heirs when they sell, where the OZ kind of can blend it, where you get the freeze on the estate taxes, and then, you know, assuming your heirs hold it for the entire period of time of 10 years, then they get the tax-free exit and depreciation recapture free. So, that can be, that, I see being the right vehicle to fund one of those, which, it’s generally a long-term holdings as well, so it makes some sense. Yeah, those are the kind of, like, the things that we’re looking at and talking about with higher-net-worth investors.

Jimmy: That makes perfect sense to me. I mean, you mentioned earlier, we’re in a lower-return environment right now. How do you find alpha? You can find alpha through higher returns, but that’s no guarantee, especially these days. Asset values seem to be pulling back a little bit, but you can always work on controlling your costs. We talked about that earlier. You can get alpha out of that. And you can also work on tax planning. You can get tax alpha. I love those two strategies, just that basic blocking and tackling. Clint, it’s been a pleasure speaking with you today. We’re kind of winding down our time here. Wanted to know, just zooming out, big picture, what you’re seeing, what you’re keeping an eye on, in terms of trends in the broader private equity real estate landscape. What are you keeping an eye on?

Clint: Yeah. As far as broader real estate, I’m kind of keeping an eye on, you know, who’s gonna be right, buyers, or, kind of, would-be sellers that are on the sideline as far as pricing goes? Of course, you know, people are watching, kind of, the interest rates and whatnot. But at some point in time, transaction numbers will pick up. You know, they have to. And it’ll be interesting to see, you know, which way the prices adjust. You know, on the OZ side, I’m obviously, you know, keeping an eye on some of the legislation coming in place now, the tax extenders, and, you know, the OZ Transparency Act, which, I think we’re not gonna, you know, hear anything about that for a while. But, I mean, that would be another heads you win, tails, you don’t lose. If you’re going to invest in an OZ Fund, and you’re able to do it on December 31 of this year versus January 1 of next year, all else equal, you choose December 31 of this year, because if that bill does go through, then you would get the 10% step-up in cost basis.

Jimmy: Yep.

Clint: Assuming it’s written the way it’s written now. Yeah, those are kind of the things that I’m looking at.

Jimmy: That’s great, Clint. Well, again, been a pleasure speaking with you today. Pleasure, as always, to see you, and continue to work with you and your Nest Opportunity Fund. If anyone in our audience of high-net-worth investors, advisors, family offices, they’re interested in learning more about you, your approach, and your Opportunity Zone Fund at Nest, where can they go to learn more?

Clint: Yeah. You can just reach out to me. My email is [email protected]. Or, call the office at 614-469-4685. And if I don’t return the email, which, sometimes I get, you know, a little bit behind, shoot me a text, 614-905-6233. But, any sort of year-end-type tax planning doesn’t happen the last week of the year. Just, while I give my contact information out, just want everyone to know that.

Jimmy: That’s true. Yeah, hopefully… It’s better done a little bit earlier in the year than the last week of the year. Last week of the year can be a little bit hectic.

Clint: Today is not early.

Jimmy: What’s that?

Clint: Today is not early.

Jimmy: Today is not early. That’s true. And we’re recording this the first week of December, so it’s only gonna get busier, I’m sure. For our listeners out there, I will have show notes for today’s episode available on our website, as always, opportunitydb.com/podcast. There you can go to find all of the resources that Clint and I discussed on today’s show. And please be sure to subscribe to us on YouTube, or your favorite podcast listening app, to always get the latest episodes. Clint, again, it’s been a pleasure. Thanks so much for joining me today.

Clint: Hey, thanks for having me, Jimmy. It was fun.