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A
Foreign. Hi everyone. I'm Achilles Suarez, Senior Vice President for Government affairs at NAOP and today's guest host. You're listening to the NAOP podcast, Inside cre, featuring interviews with commercial real estate leaders who share industry and career insights. Naop, the Commercial Real Estate Development association, is development industry's leading source for education, advocacy, and connections that drive your business forward. Today we're talking about Opportunity Zones. We'll discuss where the program stands today, how investors and developers are preparing for the second half of 2026 and what the next phase of the program may look like. Joining me are Angel Rice and Dave Sobachan from Cohen Company. They advise clients on real estate tax strategy, Opportunity Zone structuring and investment planning, and have been closely tracking how the market is evolving as the industry prepares for what many are calling Opportunity Zones 2.0. Angel and Dave, welcome to Inside Cre.
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B
Thanks for having us, Achilles.
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A
You bet. Let's begin with an overview of the program for our listeners. What was the original goal of the Opportunity Zone program and why did it become such an important tool for commercial real estate?
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C
So I'll take this one. It was really brought to Congress's attention a number of years ago that taxpayers had millions of dollars sitting in unrealized capital gains that in large part had not been triggered because of a reluctance to pay the associated tax bill. Rather than having those unrealized capital gains not being put to use, Congress wanted to be able to take that money and deploy it actively into low income and economically distressed communities that typically have had difficulty in attracting and gaining access to, to really help spur economic activity, you know, investment and job creation. So the foundation of the program is really built on investors realizing a capital gain from a sale or exchange with an unrelated party and reinvesting those capital gains into a qualified opportunity fund, or you might hear us use the acronym QUA for short, they have to reinvest those capital gain dollars within 180 days from the gain date. The QAF will then deploy those funds into a qualified Opportunity Zone property. In exchange for the investment in the qaf, the taxpayer will receive three main tax benefits. Those benefits are deferral. So gains under the original Opportunity Zone program, or what you might hear us call Opportunity Zone 1.0 or OZ 1.0, those gains are able to be deferred until December 31st of 2026. Under OZ 2.0 or the now permanent program, these capital gains that are rolled into a QOF will be able to be deferred on a rolling five year basis that will be individual or taxpayer investor specific. The second benefit under the program is the reduction benefit. So as long as a five year hold period is met for the QOF interest by the gain recognition date, 10% of that original gain that was deferred will essentially be forgiven. The taxpayer won't have to be taxed on that 10%. And then finally, the last main tax benefit of the program is the exclusion benefit. So upon a sale, there's no tax on the appreciation of the investment over and above that original investment you put in as long as a 10 year holding period for the coif interest is met at the time of the sale.
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A
So this was originally passed in 2017. How would you describe the current state of the opportunity zone market today? Has it been a success? What? Just in terms of telling our listeners
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B
what's going on out there, you know, wildly successful program. Even though it took two years for regulations to come out, there was still a significant amount of investment into the program, even pre reg time span. And we're continuing to see a significant amount of interest in the program right now. Kind of what's happening, you know, 2025 and 2026 is we're in this transitionary phase because we've got, you know, really no Bridge between Oz 1.0 and Oz 2.0. We were hoping that Congress would provide some sort of transitionary bridge between the two programs versus having almost like a cliff effect. So investors that invest in 2025 or 2026, their deferral period ends as of December 31, 2026. So they don't really get a long Runway from a deferral standpoint. And the other kind of unknown is, you know, if you wait until 11 of 27 to get into OZ 2.0, is the project that you were going to invest in, is it going to be in a qualifying census track? Because right now they're going through the nomination process of nominating the 2.0 census tract. So it is the current state is in more of a transitionary phase where investors to a certain degree are deciding whether or not to pull the trigger and thinking through is there alternative structures to potentially get the benefits of both worlds?
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A
It's interesting because you talked about there was a need for clarification the first two years of Opportunity Zones 1.0, but there was still investor interest and activity even though there was a lack of clarity. And now we're talking about a lack of clarity because of the failure to provide a transition, a transparent transition. Are you seeing hesitation from investors because of that? Or I'm trying to compare it to back then.
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B
No, not really hesitation. It's more deeper discussions around planning because you have, you know, different dynamics. If every investor had their wish, they'd be in 2.0 with 1.0 census tracts. And we'll get into that a little bit later. That could be an option. But obviously they're still waiting, waiting on guidance, you know, from that perspective. But we're still seeing projects moving forward, you know, and remember, this is an incentive. So the deal has to work on its own merits in order to attract investor attention. This becomes the icing on the cake, you know, to really get the benefit of the program itself.
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A
So, I mean, this is what you do for your clients. And you mentioned that there's a lot more talk about planning, but what exactly how are they preparing?
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B
Yeah, so. And we'll talk about investors that are interested in making an investment into, you know, a new OZ project. So right now, the big uncertainty is, relates to the existing zones. So statutorily, the existing zones are set to expire on December 31, 2028. When the OZ 2.0 language came out, they didn't strike the existing statute relating to the Oz 1.0 census tracts. So there's a theory out there that those census tracts will survive in 27 and 28. And if you make an investment as of 11 of 27, you could be in the 2.0 program, but potentially investing in the 1.0 census tracts. There's an alternative opinion out there that statutorily, only 25% of the census tracts are eligible census tracts. And so by its very nature, when the new census tracts get announced, it cancels out the old census tract. So that is an area where there's some guidance needed. So a lot of, like what we're doing from a planning perspective is trying to plan into, you know, the first theory and also keeping our eyes on where the census tracts are migrating to, to to provide both the sponsors and the investors the best possible structure utilizing all the information we have today.
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A
Well, you raised the issue of census tracts, and I'll get to the second question on that in terms of timing of IRS guidance. But in terms of the census tracts and opportunity zones 2.0, are they more targeted? How has the law changed from prior census tracts?
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C
So as part of the OZ program being made permanent now, new opportunities on census tracts will now be certified every 10 years. So with OZ 2.0 beginning 11 of 27, the nomination and certification process for this round of OZs will actually kick off on July 1st of this year. So the governors of each state will have 90 days to submit, you know, which of their eligible low income census tracts that they would like treasury to ultimately certify as opportunity zones. They, you know, as with a lot of things, have an extension. So they'll have their first 90 days and then they'll have a 30 day extension that they could use. But ultimately they have to make their picks by no later than October 28th of this year. From there, the treasury secretary will have 30 days to certify the submissions from all the governors from each of the states in US territories. So from there, treasury, just like with the governors, also has a 30 day extension. So really ultimately, when it's all said and done by December 27 or December 28, we should know what the official map is. The reason I kind of gave two dates was if you actually do the math, December 27th would be the last date eligible. But in some guidance that the IRS recently released, they actually mentioned the December 28th date. So we're going off that date. But once the map is certified, those census tracts are going to be locked in as opportunity zones for the full 10 year period. There was a question with another census coming in 2030 whether there could be a shifting of the map at that point. And the answer is there won't be. The new tracks are in place starting 11 of 27. They'll be in place through 11 of 37. And really we'll go through the same nomination and certification process again come July of 2036. But you know, you asked if there was going to be a tightening of the zones and there is. So under the one big beautiful Bill act, they did revise the eligibility criteria for what will be considered an eligible census tract. So the census tract will now either have to have a median family income that doesn't exceed 6, 70% of the statewide median family income. This is down from 80% under Oz 1.0 or it'll need to have a poverty rate of at least 20% and a median family income that doesn't exceed 125% of the statewide median family income. Dave already mentioned that, you know, a governor is only going to be able to nominate a maximum up to 25% of their eligible census tracts for certification as an OZ. So there will be some census tracts that get left out simply because of, you know, a numbers game, not necessarily because they weren't eligible or not worthy of investment. It's just, you know, at that point we're going to be capped. I think there is two points that are worth mentioning, you know, kind of a difference in, you know, coming from Oz 1.0 to 2.0. And that one, the first point is on Puerto rico. So under Oz 1.0, all low income census tracts were just deemed certified and designated as qualified opportunity zones effective back in 2017. For Puerto Rico, the one big beautiful bill act actually terminated that designation and it terminates that as of December 31st of 27, which is actually one year earlier than the general map that, you know, we've been working off of going forward. Under Oz 2.0, Puerto Rico's census tracts will be nominated and certified just like any other jurisdiction. So they just essentially just don't get that special treatment they did under the original program. The second point I think is worth mentioning is on the contiguous tracts. So under Oz 1.0, governors can nominate a certain percentage of census tracts that were contiguous to low income census tracts that qualified and were certified despite this contiguous track not actually meeting the definition of being an eligible track. Now under Oz 2.0, each census tract will have to stand on its own and meet the median income or poverty thresholds in order to be eligible and be certified. The IRS did release recently in the last few weeks a RevProc Revenue Procedure 2026-14 that confirms the list of census tracts that will be eligible to be nominated for each state. So if you look up the census tracts, it goes through all of them by each state and it lists essentially this is going to be the list that the governor is going to work off of. And it also names, you know, that the census tract data was actually pulling this list from. We usually don't think of the word flexibility when it comes to the irs, but in the rev proc they actually mentioned that essentially acknowledge, you know, this data isn't perfect, this data set we're using. And so if there is a census tract that's not enlisted in the RevProc, but the state feels like it should, the governor feels like it should qualify, there is going to be a process that they can actually submit that census tract as one of their ones to be nominated. Now, of course they're going to have to submit some supporting data for that, but you know, that is going to be an interesting element. At least that option is out there, you know, for those that, you know, don't see their census track on the list to start.
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A
Right. But it sounds like the treasury list is going to be more larger than anything that governors choose from. Two questions on that one you talked about the dates and so by the end of the year we'll know what the new census tracts for opportunity zones 2.0 will be. What happens to projects underway in the old zones and the old in the old census tracts that were.
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C
So that's part of the transition guidance that Dave had mentioned earlier. That's going to be really critical, I think, to, you know, having some of these projects that are under development, you know, continue to move forward. Because we all know that realist doesn't happen overnight. It's, you know, you have to start the process and it takes time. And so there are going to be a bunch of projects that are in some sort of state of development under construction. And at this point in time, we really don't know how that's going to work if that construction deadline goes out beyond the 123128 date. So that's part of the guidance that we requested from, from treasury on that
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A
element and that you guys have experience with Treasury. What is your guess that they would have guidance issued concurrent with these dates? In other words, will folks know by the end of the year what is happening with their projects in the older census tracts?
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B
Yeah, I would just say the hope would be that as the year goes on we get guidance, but there's a volume of guidance needed and the concern is will they be able to get to everything that's needed. Number of the trade associations, including naop, has requested guidance on a number of different areas. The hope would be that in concert with the announcement of, or hopefully earlier than the announcement of the census tracts, we at least have some transitionary guidance that we can rely on. That's the hope.
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A
Yeah, you're right. That's the hope. It will be the rational thing to expect. Well, let's hope that they do that. Let's talk about the deal making that you're seeing out there. Are developers becoming more creative with tax structures as this market has evolved? Are there any tax structures that they're utilizing more in 2026?
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B
Yeah, I think so. I'll give you a couple of examples of some things that we're talking with clients about. One of the interesting topics is that there's a wave of interest in creating an inclusion event prior to 1231 of 26 that would create a capital gain recognition to the OZ fund and the OZ investors and then it would allow the OZ investors to potentially roll that gain into a new qualified opportunity fund in 2027 to try to take advantage of the Oz 2.0. So there's, if you just wait until 1231 of 26. That income recognition event is not a qualifying event that would allow you to roll that gain into. You just have to, you know, pay tax on that gain. But there is interest in certain types of projects to where they're trying to trigger inclusion events to try to take advantage of, of the 2.0 program. There's also a wave of, I'll just call it secondary offerings. So under the program, a, an Aussie investor can buy an existing OZ investor's interest in a qualified opportunity fund and that's a good Opportunity Zone fund interest and they can make a deferral election on those. So think of underwater projects where the investors are just looking to get out. There's a wave of new investors looking to come in to potentially restabilize that project, buy OZ fund interest at a discount and then potentially depending on the timing of that, could potentially structure it so that they could get into the Oz 2.0 program as well. So there's a number of interest in at least trying to structure into those as well.
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A
So we're moving from opportunity zones 1.0 to 2.0 and you've talked about some of these questions with the transition, but it's permanent now, as angel mentioned. And how do you see this evolving over the next decade or so as this comes more a predictable way of doing business for commercial real estate? Is this going to grow in importance in your opinion?
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B
Yeah, I absolutely think it's going to grow because there's a certain subset of investors that didn't want to allocate the resources needed. I mean, this is a very technical program that has a lot of rules and a lot of testing that you have to tests that you have to perform both at the qualified Opportunity Zone business and the qualified Opportunity Fund levels. And so there's a certain subsection of investors that, you know, because it was a short term like program, we're not going to allocate resources. I think now that it's permanent, you're going to see a wave of new, you know, investors specifically on the institutional side of the fence that will allocate the appropriate level of resources. And I think that's going to make these projects a lot more competitive from a, you know, from, you know, from a pricing standpoint. So I do think that there's going to be a lot more interest that, that should drive, you know, significant amount of, of of, you know, higher level of interest in getting into the OZ program.
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A
Well, Cohen Co. Is a National company and you give advice across A number of areas. You're traveling quite a bit, angel is traveling quite a bit. And these are questions that you may not be able to answer. But the states have to basically have their a game going in the next couple of months in terms of identifying these things. Are there states that you feel more comfortable are going to be better equipped to move forward and are there states that you are maybe a little bit more worried about, not to get you in trouble, but you know, just to get into.
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B
I won't name states, but I'll just describe different approaches that states took in OZ 1.0 program. Certain states looked at census tracts and factored in the interest to develop in those census tracts in determining which census tracts were qualifying census tracts. Other states took the approach of trying to find the most poverty stricken areas, but not really taking into account will developers want to develop in these areas. Obviously the states that took the first approach had a much more success in their OZ program than the other states. So I think states learned from the very first process and I would bet that as they're going through their nomination process, there's going to be a lot more discussions with developers to get their input. I know in my area a lot of the chamber of commerce have direct discussions with developers and are seeking feedback from them in terms of projects that they're thinking about doing, where they're thinking about doing them, and if they are in alignment with, you know, a qualified OZ census track under the 2.0 program. So I think getting developer feedback actually leads to a much more successful process and drives that much more development because you at least have done the groundwork of understanding that if you nominate, you know, this census tract, there's going to be a lot of interest and means to actually develop.
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A
Got it. So there are some states that are basically looking at these areas and saying where are, where is a developer more likely to undertake a project that could pencil out for that developer? And then there are other states that really are, to put it bluntly, are saying if you're going to get this incentive, we want you to do it here. And yeah, depending on the state that might work or it might really hinder, you know, a take up of these opportunity zones, wouldn't you say?
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C
Yep.
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B
Yeah, I've been, I've been shocked. Especially certain states in close proximity of each other where we see a lot of OZ activity and others where we just don't see a lot of activity. And you know, when, like I said, when we started digging into the why it seemed like there wasn't A lot of interaction between the development community, you know, and, and the state itself before they decided to nominate the census TR but like I said, I do think there's been a lot of education about how you go about doing this in which states, obviously we're more successful and we're leading the nation in OZ investing and I do think that there's going to. There's almost always a copycat style arrangement where if one state sees another state doing a certain activity in a certain manner, they'll copy the best practices. So I do think that that's going to happen this time around.
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A
Are the states adding any sort of incentives to this program to help things along in certain areas?
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B
So certain states have a state based tax credit that's also transferable. That has also been. So Ohio is one of those states that has a 10% transferable tax credit and they've made the transferability of the tax credit easier to do, which has allowed for the syndication marketplace to operate in a more efficient manner manner. So there's, there, there are some states that have their own, you know, their own kind of like mini OZ program like Ohio where, where there's, you know, there's, there's a tax credit up there.
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A
Well, it sounds like this is a program that is not going to go away and then in fact is probably going to grow and really be impactful in a lot of states. Angel Dave, are there any questions or is there a question that I haven't asked that I should have asked to provide more information to our listeners?
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B
Yeah, it's related to the 2026 income recognition event. So a lot of questions we get around that. So you know, under the 1.0 program, the deferral period ends on December 31, 2026. So whoever is in the program and deferred gain, that's your gain recognition event date and the amount of gain you're going to recognize is the lesser of two items, either the fair market value of your qualified opportunity fund interest or the original gain that you deferred. So a lot of what we're doing right now is working with clients on a process to one, identify, you know, opportunity zone fund interests that potentially the gain recognition amount might be less than the original gain deferred. And you know, if you're deciding to go down that path, our firm's opinion is that you need to have a business valuation qualified business evaluation that would also include an appraisal under other areas of tax law where taxpayers have tried to utilize just an appraisal to value real estate that might be held in an entity, they've seen unfavorable results under audit. Which is why we're recommending going forward with a full qualified appraisal. But we kind of have a three stage process. The first stage is we have a qualified appraiser on staff and they will do a high level assessment of value to determine if it even makes sense to go forward with the business valuation. That provides a nice off ramp for those that were, you know, where the project has had, you know, significant appreciation. Phase two is where we would do an unissued business valuation report, but also takes into account there's additional calculations that you have to do under the OZ regulations to determine the actual fair market value of your interest. So phase two kind of does mid year a business valuation that folds in discounts for lack of marketability, lack of control that you normally find within a valuation. But it also takes that step further of calculating each OZ fund interest holder's individual gain that gives taxpayers the ability to plan for that gain recognition date. And then phase three is the roll forward of that because you have to value the interest as of 12, 31 and 26. In addition to that, we're also working with typically it's investment advisors to try to make sure that if the taxpayer is sitting on unrecognized losses in their portfolio that they're triggering those losses and going through loss harvesting to try to also defer or essentially offset the gain that they're going to recognize at the end of the year as well. So there's a lot of planning that that needs to be done and you can't really wait until 4Q26 to do that because it's almost too late. I mean, it does take a decent chunk of time to do an actual business valuation. So we have been, you know, kind of working with clients at the beginning of this year really to you know, start that process and really pre plan. The second thing and angel can kind of COVID this is just, you know, what are all the things that we're hoping to find to get guidance on from the irs? Angel?
- [28:38]
C
Yeah, so we kind of mentioned Achilles already that, you know, there's projects that are under development. You know, they're obviously right now focused in zones that were certified under Oz 1.0. So you know, what happens if that, you know, construction or development timeline goes past the 12, 31, 28 date? Another question we're getting, you know, quite often now is I've got an existing project right now that's up place in service. But you know, I anticipate potentially needing some capital calls down the road. You know, how. How is that going to work, especially if the project that you know is in a qualified census tract. Now, that census tract doesn't get recertified, you know, for Oz 2.0, how are the capital calls going to work? Are we going to have to keep the same, you know, cap table as I have today, or am I going to be able to add new investors, you know, down the road? So I would say those are two certainly the big issues that we're getting right now on that front.
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A
Well, you guys are right. Those are a whole lot of considerations that you threw at the end there. Dave Sobachan, Angel Rice of Cohen and Company, thanks for a great conversation. I appreciate you both joining us today and helping unpack what's becoming a very important transition period for the Opportunity Zone market. Thank you again or all the information.
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B
Thanks thank you.
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A
Thanks for listening to Inside CRE with your guest host, Achilles Suarez. If you enjoyed this episode and you'd like to help support the podcast, please share it with others and be sure to subscribe. To learn more about NAOP and join our network of over 21,000 commercial real estate professionals, visit NAOP.org
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B
SAM.