A transcription of Nest Opportunity Fund Founder & CEO Clint Edgington on the Conquering Columbus podcast
Conquering Columbus: This is Mike here, and today on the show, we’re joined by Clint Edgington of the Nest Opportunity Fund. Opportunity funds are a type of investment fund that allows people to invest money into communities that are economically distressed, with the hope that it’ll do some good for the communities and the people living in them. Clint gives us a great rundown on opportunity funds, and how the Nest Opportunity Fund came to be.
CC: Hey there, Conquerors. Welcome to another episode of the CC podcast, and today on the show, we have Clint Edgington joining us. Clint is a co-founder of Nest Opportunity Fund and Beacon Hill Investment Advisory. Nest Opportunity Fund is a positive-impact investment fund that allows you reduce capital gain taxes while helping to rebuild American communities with great potential that need strategic long-term investments, and Beacon Hill Investment Advisory is an independent investment advisor serving Central Ohio clients’ financial and business planning needs. We’re really excited to have Clint on the show to talk today about the goals of the Nest Opportunity Fund and how it came to be. Welcome to Conquering Columbus!
Clint Edgington: Thanks, I appreciate you guys having me!
CC: Yeah, it’s great to have you here as well. One of the first places, we typically just want to get a little background on yourself, where you came from, how you got to where you are today, so any highlights along the way that stand out to you, from even growing up to college and beyond.
CC: Did you grow up here in Columbus?
CE: Yeah, I grew up out in Plain City. My family was always kind of a family of tinkers and hustlers, and have always been involved in small-scale real estate, amongst some other things, and I hope to instill that in my kids as well. So I grew up in Plain City, graduated, and then went to Miami of Ohio, where I met my current business partner, Mark Fissel, who’s the brains of the operation. We were roommates there. Moved to Chicago for about eight or nine years, worked for a securities litigation firm, and I knew I didn’t want to do that forever; getting cross-examined every week is not my idea of a great time. So in ’08, just right before the teeth of the Great Recession, we went ahead and started Beacon Hill Investment Advisory. So not maybe the best time to go out? As I think my father said, “Who’s gonna want to give money to a 30-year-old to run when all the banks are going under?” So we did it, persevered, and here we are.
CC: And your degree was in what?
CC: So talking about the ’08 situation, that’s a pretty interesting story. Talk about a lot of people that lost their jobs and created a company because of that, but not many around financial services. So, what was it like for you guys?
CE: Yeah, I wish I could say I saw some sort of opportunity and pounced on it, but the opposite is true. I was under contract at the last firm, and my contract— I could get out of it once per year, then they could keep me for another year, so I put my notice in at the end of ’07, and in September of ’08, they said, “OK, you can go” and I said, “Oh, OK.” You know, I always knew I wanted to do it. We basically defended brokerage firms and investment advisors, and I liked the business model of the investment advisory. It’s usually kind of fee-based instead of commission-oriented. So I liked that we were sitting on the same side of the table as our clients. So my wife and I picked up roots, and we moved to Columbus and started the RIA. In hindsight, the timing was tough, but in a time like this, when we’re dealing with COVID and our shutdown of the economy, I think it does give us a calmness that we wouldn’t have had otherwise. Hopefully, it’s not false hope that we have, but we’ve been through tough times, so we’ll get through it again.
CC: How did you get people to give you money when you’re 30 while in the middle of one of the biggest recessions of all time? I guess, in those early years, that’s one of the key starting points in you’re kind of getting thrust into a very challenging environment for any business to function, no less an initial business. So, what were some of those things you were doing early on, and how did that all play out?
CE: I guess the way we brought on clients was … slowly (laughs). Our niche now is business owners, and I’m from a family of business owners, so is my business partner Mark, and he was running his father’s company at the time. So when you kind of speak that language, the way to get into business owners’ hearts from the finance side is a little more with tax and the planning side of things, so we would be able to do that. Like, if we were talking to someone who inherited money, we probably would’ve had a harder time. But even that said, it was very slow. It was maybe 2011 when we broke even, maybe 2013 when we started contributing to our households’ incomes. So it was a slow, trying time, but like I said, now we see and feel bumps in the road. This is part of the game.
CC: What is Opportunity Zone investing?
CE: Basically, coming out of the Great Recession, we’ve had fewer businesses that have formed since prior to the Great Recession. From what we’ve seen is, I think in 2016, there were 60% fewer business filings than in ’07. And in particular, when you looked at distressed areas, you can see that that’s even exemplified further. So that was a way, I think in about 2015, a group called the Economic Innovation Group started to bring this up; it was a bi-partisan, bi-cameral piece of legislation that kind of got pushed through, and it became codified with the Tax Cuts and Jobs Act that passed in 2017. And basically, what it says is that if you’ve got capital gain, you can invest it in a Qualified Opportunity Zone Fund, and then you don’t have to pay taxes on that capital gain until 2027. And when you do pay that capital gains tax, it’s going to be reduced 10%. And then what you invested in that Qualified Opportunity Zone Fund is tax-free if you hold it for 10 years. Now, those funds that can only invest in businesses or real estate, it’s in what they call a “Qualified Opportunity Zone,”, and those zones are just census tracts, meaning they’re in the bottom 20% of the state’s income, and the governors basically got to select what census tracts those were. So in Columbus, ones that you would notice that would be obvious would be like Franklinton and Olde Towne East, but also ones that the governors are doing from an economic development standpoint, like down by Rickenbacker is one because they really wanted to boost the logistics side of Central Ohio.
CC: So 10% reduced from the point of where taxes were invested, or from the point where you’re pulling it out at that stage?
CE: Let’s say if the gain was $1 million, you’d have a capital gains tax of $288,000, and then you could instead choose to invest that million dollars in a Qualified Opportunity Zone Fund. Then you don’t have to pay that initial capital gains tax until 2027, and it’s also reduced by 10%. So instead of paying $288,000, you would pay, I don’t know the math, $250,000-ish.
CC: But if tax brackets changed, you would be locked in at what it was when you put the investment in, is that right?
CE: If the capital gains tax brackets change, which they do less frequently than regular income tax – but they are slated to change in 2026 – you would have that capital gains hit in 2026 to be paid in 2027, and it would be at the rate that’s then in practice.
CC: What is the typical return that people are seeing from an investment fund?
CE: So the thing about the Qualified Opportunity Zone Funds is that they can invest in really any business, or every business, but the vast majority of businesses or real estate that’s occurring within those zones. So I was at a presentation once – I think it was someone from NCT Ventures – there were a bunch of real estate guys in the room that maybe were having a 6% or 12% annualized rate of return, and after this QOZ benefit, it maybe moves up to 9% or even 15%. And NCT Ventures guy said, “Well, that’s cute! But on the ventures side, if we have a 30% annualized return, it moves it up to like 50% after that benefit.” So really anything, it’s kind of a wrapper; any sort of business or investment can be in it, it just depends on what business or real estate you have in it for the returns, and then you get the benefits based on the QOZ wrapper, which is the tax side. So you can invest in almost any sort of private business that’s located in one of these zones, and then you kind of get that tax alpha overlay.
CC: Outside of that, I mean really, it sounds like any sort of fund: The goal is to return to achieve capital gains and return money to the investors, but at the same time, there’s kind of this added benefit of helping and investing in Opportunity Zone that is currently less well off than areas around it, so it has the added benefit of providing more of a community initiative. Am I reading that right? In layman’s terms, if you had to explain it to someone like they were 5, does that kind of capture how you would do that?
CE: Absolutely, yeah, so generally, people who have larger capital gains are probably going to be living in more affluent areas, so it’s going to be kind of a movement of capital and skills from an affluent area to less affluent areas. And that’s kind of what we’re seeing: The real-estate is kind of the easier play. There are some rules to make sure we’re not just buying vacant land and holding it for ten years and hoping that it works out – we have to substantially improve those properties – and so you’re seeing economic activity occurring because of that. So for our fund, we’re hiring local people and we’re putting that money into those properties are located in those distressed areas, but that’s exactly right.
CC: So talk a little about the Nest Fund, because earlier we talked about founding your firm, but when did the Nest Fund come into play, and how did that get off the ground, just the early days of that entire operation?
CE: Yeah, just kind of like Beacon Hill, I would say “slowly.” It was a bit of a confluence of events; you know, I had my real first capital gain, we sold an interest in a local HVAC company towards the end of 2017. So popping out there was that regulation that was coming in at the end of 2017: the Tax Cuts and Jobs Act. And also we had a real estate operator that we worked with for a long time in Lexington, Kentucky; he had kind of the same thing, he had a capital gain, and he had sold his business, and he was kind of a hammer looking for a nail. So me and my parents basically said, “Listen, let’s do a little Opportunity Zone Fund together.” They don’t need to be huge and institutionalized; it can be just one person creating for it themselves, one building, perhaps. So we bought some properties up. At the time, the legislation was murky about multi-investment, multi-asset and multi-investors coming into one fund, so we just set it amongst the three of us. And then towards the middle of last year, the legislation became clarified a little bit, and then we just said, “Hey, let’s open up to some of our investors who’ve been inquiring about it as well.” So then we started on institutionalizing it and dealing with attorneys, and that took six months to get audit, legal and all that stuff through. So, really, our fund opened in December (2019). So we’re still kind of in what I would consider the opening stages of it.
CC: So within those opening stages of the fund, what are some of the things that you guys have started to do as you’re picking up activity, other than pulling together the funds that you just talked about? What do the initial processes look like? Were you looking at particular Opportunity Zones throughout Columbus, or were you looking broader than that? Could you talk us through that thought process?
CE: Initially, we were just looking into Lexington, Ky. Like I said, we had done lending for a real estate development down there: small stuff, single families and smaller multi-family. In particular, for this operator – as you know, with real estate, you can have a good deal and a bad operator, and the operator will win. You can have a bad deal and a good operator, and you might come out OK. So we stuck with someone that we kind of knew, liked and trusted. And then, once we started opening up for Columbus, we started looking for operators here, and we’ve got a good one here as well. We’re in the affordable housing space, so really not looking for larger affordable housing projects. Me, I live here in Grandview, I like walkable communities, so we really want to maintain the character of the neighborhood – or maybe even the character of the neighborhood before the freeways came in and things got diced up. So we try to take vacant and uninhabitable properties, and we’ll rehab them back to their former glory.
CC: You mentioned that folks can be outside of real estate. So if you were to just to focus and put in back into some startup company, as long as they have a footprint in that area, what terminology did you use earlier to describe that?
CE: So for businesses, there are some regulations just to make sure that people aren’t putting one foot in an Opp Zone and then trying to get those tax benefits. So they have to have significant operations that actually are in the Opportunity Zone Fund. And there’s quite a few regulations with how we measure that, whether it can be “how many hours they have employees working from the different locations.” But yeah, you could absolutely do a small startup there. I almost don’t understand why any incubator would not start in an Opportunity Zone. That’s not our space; we’re focused on the real estate side. It’s quite a bit different process with compliance and testing procedures for it. I think we’ll start to see more Opp Zone Funds that focus on the business side here in the next couple years.
CC: Speaking to that focus, you talked a little bit about it, but focus on single-family and multi-family homes: Was that more of a choice from, “Hey, this is what we’re more experienced with,” or were there other particular driving (forces) behind that?
CE: It’s what we’re more experienced with. And then, also, when I think about affordable housing that comes in 300-unit properties, I feel like 20 years from now, that’s what we’re bulldozing and calling projects and putting up new affordable housing. So for us, it’s important on the community side – let’s create homes that people want to live in. And we’ve actually worked quite a bit with the city of Lexington, creating some programs that let people who are renters end up becoming homeowners. And the issue with that is the down payment is kind of the big hurdle. So we have some programs with the city of Lexington, they’ve given us some grant money. And in fact, if they rent and are good renters from us over so many years, we reduce their purchase price of the house, and it counts as their down payment. We’re partnering with a few local banks as well to help with that. So effectively, in my mind, for someone who works at Walmart for $15 an hour, it’s going to be really hard for them to someday save up for a house. But in this case, if they pay their rent on time and are good renters, they will be able to buy a house with some equity already embedded in. And then maybe in a few years, if they want to start a little business, then they have some home equity, and then that path to the middle class that I was fortunate to have.
CC: So what are some of the other goals that you and the team have laid out for the next five to ten years, or whatever the foreseeable future is for you guys?
CE: Yeah, so it’s like any small business, there’s quite a few, but right now, we’re raising capital in order to get more of those homes up and operating. We’re working hard right now. Our Lexington operations are pretty set – our processes, our procedures, what our finished product ends up looking like. In Columbus, we really started that in January this year, so we’ve just dipped our toe in here, and we’re looking to build that out. So that’s going to be our focus for 2020. We’ll be fundraising until probably 2026, unless the legislation changes some. So we’ll be working on that, building out Columbus, getting good rehab procedures and policies in place, so we can scale up some.
CC: OK, and then after 2026, you mentioned scaling up a little bit, what does that look like? You mentioned that the strategy might change long-term. How did your strategy shift over time with this type of fund, and what does that look like?
CE: So right now, the Opportunity Zones in general have had some negative headlines. You can have a mix of potential gentrification, and then there’s also some census tracts that are just real questionable, like a census tract close to Aspen, Colorado. So there’s negative headline risk for it, but I think probably what we’ll see in three to four years is that people will start to see the development and the ecosystems growing more naturally, and there won’t be that headline risk anymore. So my guess would be that legislation will probably extend out the ability to invest in an Opportunity Zone Fund beyond 2026, and we’ll just keep doing it.
CC: How have current situations or COVID-19 affected the fund and the strategy and the team?
CE: You know, I hate to just say it, because I know there’s people out there that are really hurting, even at Beacon Hill, our business owning clients, there’s a lot that are kind of struggling right now. But frankly, it’s not really impacting us much. So our operations are mostly all construction, which is considered an essential service right now, so it is slowing down permitting, inspections, those things. It’s also slowing down our process to get a house from completely bombed-out vacant to up and having a renter in it, and we have to stagger different contractors that are coming in, so mechanicals are taking a little bit longer. But all in all, it’s really not that bad. Our biggest issue right now is that we had one project manager who took two crews off of some of our jobs in order to go plant a “prepper” garden in upstate Kentucky. So we’re fortunate right now with that—
CC: Wait, like a doomsday prepper garden?
CC: He’s like, “Yeah, the world’s gonna end, we’re gonna go plant a garden. That’s what we’re doin’.”
CE: Yup. Took a whole crew. And I’m talking to the guy that runs the Lexington side, and he’s like, “Yeah, there’s this one thing…” and I was like, “You gotta be kidding me.”
CC: How long ago did that happen?
CE: That was like…
CC: Like, right when this all started?
CC: Okay, I was going to say, if that happened recently – that would be a little odd if it happened recently. Was it within an Opportunity Zone? Because then that’s fair game.
CE: Good question! I didn’t ask about that.
CC: You could invest in the hedge-your-bets with a doomsday prepper garden.
CE: Let’s put that in the private placement memorandum. “Mostly real estate, but maybe some prepper gardens.”
CC: One prepper garden.
CE: And yeah, honestly, there’s actually some positives for us – not through skill, but more through fortuitous timing. We’re sitting on dry powder. We have as much dry powder right now as we have real estate assets in place being worked on. So this is probably not a bad time to be a buyer. In addition, keeping your contractors busy and on time and part of your team when you have subcontractors can be difficult for that portion of our business that’s subcontractors. Our calls are getting answered faster. They’re really starting to see the value of a long-term partner who does what they say they’re going to do. So we’ve generally not been impacted negatively too much. A few of our houses coming online are getting rented slower. But when we’re spending a couple hundred grand on construction per month, a few $900-a-month properties is not really impact us that negatively.
CC: For our listeners our there –most of them are young professionals, 24-36 years old, aspiring entrepreneurs – there’s a good amount of them. We have some business owners as well. Any advice for the people listening?
CE: Yeah, maybe be careful who you take advice from. Anytime I’ve started something, you do want to ask your mentors for advice and their thoughts. But then you have to try to parse out what advice is good advice, and there’s always a million reasons not to do something. But if you think about: “What’s the downside to do it? What does failure really mean in my life?” A lot of times, when I really ask myself that question, I’ll roll the dice a few more times.
CC: Makes a lot of sense. Well, Clint, I think this is a good place to pivot towards our last question of the show. It’s centered around the theme here on Conquering Columbus, and that is “Live Uncomfortably.” And without telling you too much about why we chose that particular phrase, what do you think of when you hear it, and how does it apply to your life and career?
CE: You know, I’ve got a few ex-military buddies, they have a saying: “If it ain’t raining, it ain’t training.” I just think that the storms our ships have been in makes the smooth seas a little bit easier as well. For us, that happened when we started the business with the Great Recession. Obviously, all of your listeners right now are dealing with the coronavirus and how are they are handling it. And they’ll all come out successful, might be taking some lumps. For us, it would be much easier and more efficient for us to raise money and just put it in a giant 100-unit affordable housing project, but that doesn’t really do what we’re trying to do with maintaining the communities and really using this pretty awesome piece of legislation to benefit both the investors, communities and the actual people who are living in our homes. In my mind, that’s kind of how it relates to this fund.
CC: Absolutely. Well, Clint, thanks so much for taking the time to tell your story and talk about Nest Opportunity Fund here on the show. Any last words for the people of Columbus?
CE: I really appreciate you guys offering to have me on the show.
CC: Thanks so much, and Conquerors, thanks for tuning in. Hope you guys enjoyed the episode and learned a lot.