The original Opportunity Zone program is set to expire at the end of 2026, but that doesn’t mean it’s too late for the initiative to receive an upgrade.

The program, introduced during President Trump’s first term as part of the Tax Cuts and Jobs Act of 2017, will now see more than one-third of its designated areas classified as “rural.” That makes them eligible for a set of perks passed into law with this summer’s sweeping federal tax and spending legislation.

The Internal Revenue Service said in a notice released at the end of September that 3,309 of the 8,764 qualified opportunity zones that exist under the current program now qualify as “rural,” and the amount investors have to make to “substantially” improve a property is lowered from 100% of the investor’s investment in the property to 50%. Investors have 30 months to make the investment.

The IRS notice made it clear the new guidelines did not apply to the forthcoming and revamped Opportunity Zone program. 

A list of all the zones that are now considered rural can be found here.

“It’s a pretty good deal,” said Dan Ryan, a partner at law firm Sullivan & Worcester who specializes in the Opportunity Zone program. “Hopefully it will help drive development in the rural areas.”

Even though the current program is winding down, Ryan stressed that organizations were still doing deals in designated opportunity zones even if they haven’t received all the benefits. 

The benefits for investors putting their money into rural areas will carry forward into the new version of the program. In addition to existing Opportunity Zone benefits, investments are done on a rolling five-year deferral process. The new legislation retains the 10% step-up for five-year holdings but introduces a 30% step-up for investments in Qualified Rural Opportunity Funds.

That is in addition to the rule that would lower the “substantial improvement” threshold of existing structures from 100% to 50% in rural areas. Ryan said that could make these areas attractive to investors and developers that are interested in building new data centers.

“The need for new data centers are substantial and continue to go up,” Ryan said. “And they need space for those, and rural areas have space.”

More competition expected

The new program is set to go into motion soon. State governors are expected to name new opportunity zone areas by July 1, and the program would officially open for investment on January 1, 2027.

Experts have said business owners, landowners, investors and local governments should be preparing to engage with the new version of the program now, since the sunup to designating new zones is likely to be a time of intense lobbying.

That’s in large part because fewer areas will meet the qualifying criteria of the program in its second iteration. Congress narrowed the definition of “low-income community” to Census tracts with a poverty rate of at least 20% or a median household income that does not exceed 70% of the area median income. The current rules designate a low-income community as one with a poverty rate of at least 20% or a median household income of no more than 80% of an area’s median income.

States also previously were able to nominate a limited number of non-low-income tracts if they were contiguous to nominated low-income tracts and their median household income doesn’t exceed 125% of that neighboring low-income community’s median income. Under the new program, the term “low-income community” would not include any Census tract where the median household income is 125% or greater of the area median income.

The federal government has not yet published an official list of eligible tracts under the new law, but according to an analysis by The Business Journals of census tracts and the most recently available poverty data, about 26,000 tracts could meet the eligibility criteria for an Opportunity Zone designation under the parameters of the revamped program.

If governors were to then pick the maximum-allowed 25% of those sites to be Opportunity Zones, that would mean about 6,500 zones in the program — a nearly 26% drop from the number of available sites in the program’s first iteration. The original program found 42,176 census tracts eligible to be opportunity zones, with governors ultimately picking 8,764.

The projected figure is in line with other estimates that have found the number of eligible opportunity zones could fall by more than 20% under the new law. The Business Journals mapped out the potential census tracts that could be eligible.

Another key difference will be enhanced transparency, Ryan said, with the new law requiring more reporting and more data. That will help build trust and visibility in a program that had less openness the first time around.

“It’s going to make the whole process more transparent and by doing so it will build public support,” Ryan said. “This has overall been a net benefit to low-income areas.”