EMPOWERING BUSINESS THROUGH CONSERVATION
Nest Funding
THE PRESERVATION GROUP Chris G. Allen, King Howington, Co-Founders
EMPOWERING BUSINESS THROUGH CONSERVATION
Nest Funding
THE PRESERVATION GROUP Chris G. Allen, King Howington, Co-Founders i
About the Authors:
Chris G. Allen has over 30 years of experience in investment strategy, management, structure, and operations in both public and private markets. Primarily working with private taxable investors and entities, he has consistently focused on after tax investment returns. After receiving his MBA from the Wharton School in 1989, he was instrumental in the development of two family offices with assets in excess of $1 billion. He has deep experience in investment policy and strategy, alternative investments, and corporate finance.
King Howington has specialized in the assemblage and acquisition of investment properties, commercial and development sites since 1980. He has extensive rezoning experience and his assemblage record includes the second largest mixed use land acquisition in Gwinnett County, Georgia. As a respected source of investment properties for domestic and foreign clients King’s investment strategies have produced excellent returns. Since 1988 King has closed nearly $1 billion in real estate investments.
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About The Preservation Group:
that there is little funding for it when all the incentives are tax based?
The Preservation Group mission is “Preserving What Matters Most”. For the world at large, we preserve Nature, the habitat for all living things. For Communities, we preserve historical structures and the natural environment which we believe enhances social interaction and communication, and ultimately reflects the connections among all life under God. At the individual level, we preserve financial resources by minimizing tax erosion utilizing government incentives for conservation and historic preservation.
Preservation Group has a strategy that changes that. We have created a plan that shares the financial benefit of tax incentives with the non-taxpaying investor, creating and expanding the available capital for our mission. We have created Nest Funding, a plan for bundling these benefits with other worthy causes, both for-profit and non-profit. Most importantly, we have created a transparent, investor driven, market based business model that captures the best aspects of conservation related investing. These transactions will preserve what matters most; our planet, our communities, and our individual financial resources.
The financial incentives provided by the United States government for conservation and historic preservation come from income tax deductions and income tax credits. While these incentives are significant, they are not often utilized because most American capital does not pay tax. The majority of capital is sheltered from tax within pension and endowment plans which ultimately distribute income subsidies for the retired population. In that conservation and historic preservation require enormous capital assets, is it any wonder
We look forward to saving the planet with you.
Contact for the Preservation Group: www.thepreservationgroup.net
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Cowbirds & Capital
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" This book is a follow-on book to Conservation Easements: From the End to the Beginning.
fied. Financial theory suggests that the best returns are immediate, lack variability, and have little value beyond the next 30 or 40 years. Reality often challenges theory and we believe returns from Nest Funds, while not immediate, even, or long term, will be extraordinary - both in financial and social impact.
" For those unfamiliar with the cowbird, let us explain. The cowbird keeps no nest of its own. When it is ready to produce an egg, it finds a suitable nest, deposits its future offspring there in the care of another, and then observes the development of its offspring from a distance. Cowbirds simply would not survive without the help and support of other birds. Again, life imitates nature. Business incubators are a great example. An idea is spawned, seemingly un-fundable it competes for resources, some succeed, some fail. The value of the incubator is that the “Parents” never know which one will survive so they help them all. In this book we propose Nest Funding as a financing method for good ideas that otherwise might not survive.
" The world of finance has a lot to learn from the world of nature. Intuitively we know not everything can be quantified, and that is what Nest Funding accommodates. With the advent of Nest Funding, advocates for previously “unfundable” projects may have a new, qualified source of capital. Investor advocates also have an improved financial structure accessing the intuitively good, but unquantifiable future. "
" Nest funding is the combination of two or more projects, one of which will be a real estate transaction. The real estate project initially creates stability for the others in the Nest. Its investors/owners believe the combination of the projects in the Nest propagates outcomes with more future value than less.
Nest Funding is for the good of us all.
Chris Allen and King Howington September, 2013
" Real estate projects can be uniquely suited to this task because of their stability. Ventures with low survival rates are inherently unstable. Together, with proper management, better outcomes can be obtained. While the Nest fund’s objective is to optimize its investment return for its investors, sometimes those returns are not easily quantiv
CHAPTER 1
Nest Funding
Our terminology for Nest Funding derives from a desire to maintain examples based in nature. Fundamentally, Preservation Group believes all enterprises need to focus on where they have unnatural impact on our environment, and recognize the potential long term consequences of their actions. Keeping with nature based examples helps remind us of why we pursue what we do. 6
Nest Funding is the provision of capital for at least two worthy but divergent projects in the same funding vehicle. A Nest Fund shares the benefits and the risks of those projects toward a greater purpose and outcome.
some genuine qualitative appeal that is desirable by the investors. " Combining two projects this way allows a sponsor to find capital for a “Project 2” that otherwise would not be fundable. While it dilutes the immediate cash flow of Project 1, the combination can satisfy financial demands as well as allow for the future development of Project 2 (which may someday be more valuable than Project 1).
By naming the activity and intentionally making it available, Preservation Group aligns itself with the purpose of achieving a more productive and environmentally sensitive culture on the Earth. " Nest funding can look like vertical integration, or it can look like a community foundation. It can be large or small. It can generate positive cash flow or negative cash flow, depending on the preferences of the Nest Fund investors.
" Prior to the MBA driven culture of business and hyper attention to “strategic focus”, these sorts of project combinations happened regularly. With the current rationalization of financial resources and intense devotion to quarterly profits it is a wonder they happen at all. In the late 1970’s and early 1980’s the market assigned a conglomerate discount to share prices of corporations that managed resources this way. When companies divided up by “strategic focus” share prices rose, and opportunities for “Project 2” type endeavors dwindled. That companies focus on appearing as “pure plays” or “stick to their knitting” is not at issue here, those strategies have their place. The issue is the lack of funding for the hard to value project, and the general avoidance
" The first project in any Nest fund is a real estate investment with excellent free cash flow characteristics. The idea driving a Nest fund is that the return of one project can afford to sponsor the cost of another. By combining the two projects, an acceptable rate of return can be achieved, and the benefits of both are agreeable to the investors. " The second project in a Nest fund will not necessarily have quantifiable financial benefits, but it will have 7
of the non-quantifiable outcome. Nest funding can provide some impetus for these endeavors, allowing the finance disciplinarians an opportunity to support investment in non-quantifiable outcomes.
agement of Coral reefs, paving the way for new revenue sources for the Nest Fund overall. The Nest Fund investors received a smaller return on their investment initially because of Project 2, but the opportunity for future revenues is good, and the value of the community impact of both projects was immeasurable.
" Nest funding is not only about providing capital for the vague outcomes of the “Project 2”. It can help build awareness for the importance of “Project 1”, the real estate investment with free cash flow. Competing for capital for projects is ongoing. Aligning projects by their purpose can attract a broader or different set of investors. Below are some examples: Coral Reef Nest Fund The Nest Fund manager will be responsible to the investors in the fund for the results. The fund is going to invest in two projects, 1) a land transaction sourced by the Preservation Group, and 2) a Coral Reef conservation business. The first year financial projections of the land transaction provide enough cash flow to fund both projects with a small positive flow for the investors. The land transaction may provide cash flow in subsequent years. Project 2’s investment will potentially provide a model for sustainable market based protection and man-
Architecture Nest Fund The Nest Fund manager will be responsible to the investors in the fund for the results. The fund is going to invest in two projects, 1) a land transaction sourced by the Preservation Group, and 2) the relocation and recon-
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struction of an architectural masterpiece of ecclesiastical design. The first year financial projections of the land transaction provide enough cash flow to fund both projects with a small positive flow for the investors. The land transaction may provide cash flow in subsequent years. Project 2’s investment will potentially provide a model for future relocation and reconstruction projects at much lower and predictable costs, paving the way for new revenue sources for the Nest Fund overall. The Nest Fund investors received a smaller return on their investment initially because of Project 2, but the oppor-
tunity for future revenues is good, and the value of the community impact of both projects was immeasurable. Film-maker Nest Fund The Nest Fund manager will be responsible to the investors in the fund for the results. The fund is going to invest in two projects, 1) a land transaction sourced by the Preservation Group, and 2) a film production fund for qualified, new film directors. The first year financial projections of the land transaction provide enough cash flow to fund both projects with a small positive flow for the investors. The land transaction may provide cash flow in subsequent years. The Film investment will potentially produce profits from media sales or licensing. In this Nest fund there is potential for the Film fund to utilize some of the assets in the land transaction. The Nest Fund investors received a smaller return on their investment initially because of the Film fund, but the opportunity for future revenues is good, and the value of the community impact of both projects was immeasurable.
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Musician Nest Fund
Project 2. It is just this step into the unknown, the unforecastable, that makes Nest Funding what it is. Many projects deserve charity, others deserve government support. Nest funding can fill the gap for projects that private citizens believe worthy of the expense but want to give up profits rather than savings to fund them.
The Nest Fund manager will be responsible to the investors in the fund for the results. The fund is going to invest in two projects, 1) a land transaction sourced by the Preservation Group, and 2) a musician development fund for qualified, gifted musicians. The first year financial projections of the land transaction provide enough cash flow to fund both projects with a small positive flow for the investors. The land transaction may provide cash flow in subsequent years. The musician development investment will potentially produce profits from royalties or licensing of content. It will also provide visible evidence to communities of the value of great musicians, beyond their commercial impact. Music is something that has to be experienced to be valued, and it needs support. The Nest Fund investors received a smaller return on their investment initially because of the Musician fund, but the opportunity for future revenues is good, and the value of the community impact of both projects was immeasurable. " Clearly each of these funds could have better financial performance projections without their respective “Project 2�. What is unclear is the future value of each 10
CHAPTER 2
Backing Giving, Giving Back
It is important to support efforts to give back to our communities. While capacity to give varies by individual, ability to give back does not. Everyone has the ability to do something positive for others. Supporting the culture of giving is embodied in Preservation Group’s Nest Funding strategy. A Nest fund builds in support for worthy projects from its inception. Backing giving is a great way to give back. 11
" Modern philanthropy in America is unique in the world. Most other countries do not provide income tax deductions for charity, and achieving goals for communities in education and culture are left to the government. The wealth of America is also unique in the world. Our nation’s wealth and related philanthropy are directly correlated to our culture of support for the underdog, and our belief in personal freedom. The U.S. Congressional support of the charitable deduction protects our independence from government, and promotes the freedoms we all cherish. While America is regularly admonished for protecting its self interests, it remains the only super power in the world, and the best hope for our planet’s future because of our belief in individual freedom.
governments, and it cannot be legislated. Fostering such behavior can only come from supporting and celebrating its existence. Nest funding is a novel example to encourage others to give back.
" We need to do more to export the American ideals for charity and independent, private support for worthy causes. The good of America, as well as its longevity, is rooted in respect for others and everyone’s right to liberty and the pursuit of happiness. This good comes freely from individuals - not from
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CHAPTER 3
Knowing and Rowing
“The Lord loves the Sailor, but occasionally he must row himself.” The obvious benefits of Nest funding are not achieved without work. While the benefits of a “Project 1” provide some wind to the venture’s back , it (Project 2) will still have to row to meet its objectives and responsibilities to its investors. 13
The efficiency of Nest funding is not proposed as a free ride. Those who take advantage of the tool without regard to the responsibility it imposes should take caution. While a project may not generate positive cash flow sufficient to sustain itself, it will generate other valuable assets, and these should be collected with care. A significant product of any project is insight. While an idea may be “before its time”, the collective knowledge from its creation should not go unrecognized. In every Nest fund a lot of important knowledge will be developed that can provide insight and transferable skills for other projects. Those efforts will provide insight into new and better ways to improve community, and it is the responsibility of the Nest funding beneficiaries to collect and share those insights. If they don’t engage this responsibility, they hurt the opportunity for others in the future.
through strong cultural norms of giving back, and gracefully remembering the underdog. " Maintaining and expanding our knowledge base is key to our future success. Providing others opportunities to grow within a nest supported by successful activities is also key to our future success. This form of knowing and rowing within Nest Funds serves a great and needed public good. " Equally important in learning from the unsuccessful projects will be the celebration of the successful ones. Success breeds hope, and hope is essential for a healthy growing community. " A wise venture capitalist was asked how he made so many successful investments - how did he choose them? His response was simple, “they ALL look good at the beginning. There are 3 important factors in successful venture investing; the management, the management, and the management.” "
" In some ways, our culture has so supported success through focus and singular effort we have nearly forgotten the broad interconnectivity we must have for any single success. Over simplification of success denies the community its due, as well as the honor of great team work. Compiling more success is fostered
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CHAPTER 4
Conclusion
The point of Nest funding is to be intentional about opportunity. Few if any of the greatest enterprises on earth came from an intuitive source. Kodak did not invent the copier. The railroads did not invent the automobile. The printing companies did not invent the typewriter. The radio industry did not invent the cell phone. Microsoft did not invent the web browser. Apple did not invent social media. The wireless industry did not invent location based mapping services. 15
The list goes on and on. Nest funding can enable this sort of counter intuitive activity more easily than any other funding source. It takes one great real estate transaction, one great idea that needs funding, and one great investor willing to accept a lower return on his capital. It does not require a permanent impairment of capital or a long term commitment to future funding needs. It works best for the opportunity whose future value can’t be quantified, but the purpose and impact are very good.
" Why does this make any sense at all? Why wouldn’t investors just allocate capital to project 2 out of their venture capital budget or their charitable budget? Allocating capital does not include a strategy for unpredictable investing. In our overly quantified investment environment, if the investment does not fit into a a particular asset class, have a track record, have an exit strategy, and a Wall street perspective or a business editor opinion, it simply won’t get any serious attention. With a Nest fund, all kinds of good ideas can be championed without having to fit into an institutional mandate.
" In this period of significant financial turbulence, while Governments around the globe struggle to pay their bills, while investors remain quietly conservative, and hope seems in decline, Nest Funding will be good for the future.
" Preservation Group looks forward to its Nestmates of the future!
" Preservation Group land transactions have a wide array of returns. Its model transaction returns approximately 70% over its first 3 years. Nesting such a “Project 1” with a “Project 2”, (essentially using the cash flow from project 1 to fund Project 2); reduces that return accordingly. While the investor still receives a positive cash flow, the return is reduced in favor of the merits of Project 2. 16
Preserving income is in our nature...and history.
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