May 22, 2025
By Jonathan Goldstein, Managing Director

The Opportunity Zone (OZ) investment program, passed as part of the Tax Cuts and Jobs Act in 2017, has by almost any measure been one of the most significant and widely used economic development programs in recent history. Published estimates suggest more than $100 billion has been invested in these underserved communities throughout the country, and experts suspect the number to be closer to $200 billion. This is an extraordinary record, especially considering the implementing regulations did not go final until December 2019.  Slated to close to new investments at the end of 2026, the program received significant endorsement for renewal in the House’s draft reconciliation bill that came out earlier this month.

Much of OZ’s success can be attributed to the structure and philosophy of the original program. With trillions of dollars trapped in appreciated investments by a looming tax bill, OZs allow investors to move those funds into new and productive uses in some of our nation’s most underserved communities, deferring and to some degree forgiving that original tax bill. By delegating OZ selection to governors, Congress pushed accountability for areas needing support to leadership on the ground. And by linking additional investor rewards to achieving real growth in the OZ, the program incents long-term behavior, while creating a new investment asset class that recognizes opportunities in these communities, not challenges.

A Transformative Economic Tool Where Real Estate Shines

The track record of Opportunity Zone 1.0 is rife with successes. Among the $200 billion in investments are projects answering the dire need for workforce housing, like the Tappan in Cleveland’s Tremont neighborhood that created 59 housing units affordable to teachers, police, and industrial workers. Other OZ projects are bringing entertainment and economic activity to underserved communities, like the Woodlawn Theater in Birmingham, Ala., adding both a music venue and affordable music instruction to this historic neighborhood. Still others are creating real estate spaces to draw businesses and nonprofits to OZs, such as the Beehive development, a four-acre office campus in Los Angeles offering attractive rents and networking synergies.

Underutilized Economic Tool for Job Growth

But these successes should not distract us from an even wider range of impact OZs might have on Main Street small businesses throughout the country, particularly in rural communities, with just a few minor tweaks. All observers agree that to date OZ financing has overwhelmingly gone to real estate and project development, with the vast majority of that to multifamily housing. One researcher was able to track less than two-percent of OZ investments flowing to operating businesses. Separately, only 8-percent of tracked OZ investments have been in rural communities, despite the fact that 23-percent of OZs are rural, according to another study. 

Unlocking OZs for Mainstreet America

Modifying two structural elements of the original OZ statute may hold the key to unlocking additional OZ investments in manufacturers and other small businesses: investment duration and business qualification.

  1. Allow for Fund Reinvestments Without Losing Forgiveness: Industry observers agree the most valuable investor incentive among OZ program benefits is its forgiveness of gain on OZ fund investments held for 10 years or more. This emphasis on maintaining capital in OZs is laudable, but the current statute disregards the reality of operating business investment duration. OZ funds that exit their business investments before 10 years must pass through any interim gain to the taxpayer, regardless of whether the fund reinvests the capital in new OZ businesses for the balance of the 10-year period and beyond. Other place-based investment programs like New Markets Tax Credits explicitly permit investors to reinvest in the target markets in order to maintain the taxpayer incentive (on an even shorter 7-year program). Forcing OZ funds to stay in any single operating business investment for 10 years or more to achieve basis step-up has discouraged operating business fund managers and private investors alike. A simple tweak to permit recycling of OZ fund dollars while maintaining the 10-year tax benefit should be a part of any OZ 2.0.
  2. Eliminate the “Asset Test” for Qualified Small Businesses: The asset test set out in the statute (and as interpreted in regulations) disqualifies many existing operating businesses that all would agree deserve funding. Among the qualifications the current statute requires, an operating business must show that 70% of its assets were purchased recently and saw their first use within the OZ by this business. This standard presents no obstacle to brand new facilities whose construction is funded by OZ dollars. But the program should be a boon for existing Main Street businesses as well, many of whom have existing assets that prevent qualification. Any renewal of the program should consider eliminating this good asset/bad asset test entirely for operating businesses, or at least reducing the burden of “curing” these assets, so that established manufacturers can tap OZ investments to grow jobs without the burden of tripling their asset base.

Expanding OZs to Increase Impact

These modifications would go a long way to creating a new class of investors and fund managers, focused on job-producing businesses primed for growth in OZs. And such improvements would disproportionately help our rural communities, where small businesses make up an even greater share of local economic activity.

The last seven years have shown us that a well-designed economic incentive can overcome investor biases and redirect capital to the underserved communities we hope to revitalize. The renewal of this program should include these minor modifications, so that investor enthusiasm for this incentive can be directed at job production and Main Street businesses.