As the “opportunity zones (OZ)” program enters a new phase, investors, developers and advisors are preparing for what many are calling “opportunity zones 2.0.” In a recent episode of NAIOP’s Inside CRE podcast, Angel Rice and Dave Sobochan of Cohen & Co., one of the top tax and accounting firms in the U.S., discussed how the program is evolving, where uncertainty remains, and what the transition means for commercial real estate.
A Program Designed to Unlock Capital
The original opportunity zone program was created to encourage investment in low-income and economically distressed communities by offering tax incentives to investors who reinvest capital gains into Qualified Opportunity Funds (QOFs).
Rice explained that Congress recognized that taxpayers had millions of dollars sitting in unrealized capital gains that were not being deployed because investors wanted to avoid triggering tax. The OZ program aimed to redirect that capital into communities that historically struggled to attract investment.
The program offers three core tax benefits:
- Deferral of capital gains taxes,
- A potential reduction in taxable gains after a five-year or seven-year hold, and
- Exclusion of appreciation on the OZ investment after 10 years
With OZ 2.0, the program is now permanent, with taxable gains eligible for a rolling five-year deferral period.
The Market is Strong, But in Transition
Despite regulatory uncertainty, the opportunity zone market remains active.
Sobochan described the program as “wildly successful,” noting that investment activity continued even before initial regulations were finalized. However, the market is now facing a complicated transition between OZ 1.0 and OZ 2.0.
“There’s really no bridge between OZ 1.0 and OZ 2.0,” Sobochan said, adding that investors are evaluating alternative structures to potentially get the benefits of both worlds.
Even so, developers are still moving projects forward. As Sobochan emphasized, “This is an incentive, so the deal must work on its own merits to attract investor attention. [The OZ program] becomes the icing on the cake.”
New Census Tracts Will Reshape the Map
One of the biggest changes under OZ 2.0 is the redesignation of opportunity zone census tracts.
Beginning in July 2026, governors will nominate eligible census tracts for certification under the new rules. Once finalized, the map will remain in place for 10 years.
Rice explained that the criteria are becoming more targeted. Median family income thresholds are lower than under OZ 1.0, and contiguous tracts adjacent to qualifying zones – that previously could qualify without meeting income standards themselves – will no longer receive special treatment.
“There will be some census tracts that get left out simply because of the numbers,” Rice said.
She also highlighted that Puerto Rico will lose its blanket OZ designation under the original program and will instead compete for designation under the same rules as every other jurisdiction.
Investors Are Getting More Creative
As the market adapts, sponsors and investors are exploring increasingly sophisticated planning strategies. One emerging trend involves creating taxable “inclusion events” before the end of 2026 so investors can potentially reinvest gains into new OZ 2.0 funds starting in 2027.
Another trend is the rise of secondary offerings, where investors purchase existing OZ fund interests from owners seeking to exit struggling projects.
“There are a wave of new investors looking to come in,” Sobochan said, particularly in projects that may be purchased at a discount and repositioned under the next phase of the program.
IRS Guidance Remains a Critical Unknown
A recurring theme throughout the discussion was the need for additional IRS and Treasury guidance.
Developers are seeking answers to important questions, including:
- What happens to projects still under construction after Dec. 31, 2028?
- Can existing OZ projects raise additional capital if their census tract is no longer redesignated?
- Will existing OZ 1.0 tracts remain viable during the transition period?
Rice noted that these issues are top priorities for the industry right now.
Long-term Outlook Remains Positive
Despite near-term uncertainty, both experts expect Opportunity Zones to become even more important over time. Because the program is now permanent, Sobochan believes more institutional investors will commit resources to understanding and utilizing OZ structures.
“I absolutely think it’s going to grow,” he said. “You’re going to see a wave of new investors, specifically on the institutional side.”
The conversation also highlighted the growing importance of collaboration between states, developers and local business communities when selecting future Opportunity Zone census tracts. States that align OZ designations with real development demand are likely to see stronger investment activity.
As the industry waits for further guidance, one thing is clear: Opportunity zones remain a major force in commercial real estate investment strategy, and the next chapter is already taking shape.
Listen to the full episode of the Inside CRE podcast.
This post was created with the assistance of AI tools; all content was reviewed by the author.
