BACK IN THE ZONE:

New Opportunity Zone Incentives Under the One Big Beautiful Bill

November 3, 2025 By: Dustin Sher, Esq.

The Opportunity Zone (OZ) program, created under the 2017 Tax Cuts and Jobs Act, has undergone a major transformation with the passage of the One Big Beautiful Bill Act (OBBBA). For investors, developers, and sponsors in the mixed-use and hospitality sectors, these changes are both sweeping and highly favorable, creating new certainty, expanded incentives, and improved structuring flexibility. Understanding what has changed requires first recalling the original framework and its limitations, and then appreciating how the OBBBA reforms make OZ investing—especially in hotels and mixed-use properties—more predictable and financially attractive.

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Under the original OZ regime, investors could defer tax on eligible capital gains by reinvesting them into a self-certified Qualified Opportunity Fund (QOF) within 180 days. The QOF, in turn, had to hold at least 90% of its assets in qualified OZ property, whether directly owned real estate or equity in a Qualified Opportunity Zone Business (QOZB). If the investor held the QOF interest for at least 10 years, they could step up their basis to fair market value upon exit, effectively eliminating tax on post-investment appreciation. For property to qualify, it had to meet the “original use” test—being first placed into service in the zone by the QOF—or the “substantial improvement” test, which required the fund to double the building’s basis (excluding land) within 30 months. Safe harbor provisions allowed 31 months, or up to 62 months for phased projects, to deploy working capital in accordance with a written plan. Certain “sin businesses” such as casinos were excluded, but hotels and most mixed-use assets were always eligible so long as they were operated as active trades or businesses. The main drawback was timing: the investment window closed at the end of 2026, and the deferral of original gains ended that same year, regardless of when the investment was made.

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The OBBBA changes all of that. Most importantly, the OZ program is now permanent. The old sunset date is gone, replaced by a system of rolling redesignations every 10 years. Governors will have the opportunity to nominate new qualifying tracts starting July 1, 2026, with changes taking effect January 1, 2027. This shift means that sponsors and investors no longer need to rush to meet arbitrary federal deadlines, and can instead underwrite multi-cycle pipelines of projects with long-term policy certainty. For those building or acquiring mixed-use towers, hotels, or phased urban developments, this stability is game-changing.

The deferral and basis step-up mechanics have also been streamlined. Under the old rules, an investor needed to time their investment years in advance to capture a 10% or 15% basis increase after holding periods of five or seven years. Those thresholds were tied to the hard 2026 deadline, creating a complex and inflexible calendar. Now, for investments made after December 31, 2026, capital gains are deferred for five years from the investment date, with a permanent 10% basis increase at that point. For Qualified Rural Opportunity Funds (QROFs), which invest in smaller, non-adjacent rural markets, the step-up is 30%. The gain exclusion after a 10-year hold remains, but the OBBBA adds a 30-year cap: the basis will be frozen at fair market value on the 30th anniversary. This provision encourages investors to recycle capital through sales, recapitalizations, or refinancings well before that date to preserve efficiency.

The criteria for designating OZ census tracts are now stricter, eliminating the controversial “contiguous tract” rule and the blanket designation of Puerto Rico. Future zones must be more economically distressed, based on median family income thresholds, which will make qualifying sites in prime urban locations more scarce and therefore more valuable. For mixed-use and hotel sponsors, this tightening of the map means that existing eligible parcels may become even more sought after post-2026, while some current projects could fall outside the new boundaries and require alternative financing strategies.

One of the most notable improvements is the creation of QROFs for rural projects. These funds offer significant advantages for hospitality and mixed-use developments in smaller markets—such as national park gateway towns, drive-to leisure destinations, and secondary resort communities—where large-scale capital improvements may not be feasible. In QROFs, the substantial improvement requirement is reduced from 100% to 50% of the building’s adjusted basis, dramatically lowering the renovation or conversion threshold. Paired with the enhanced 30% basis step-up at year five, this change materially improves underwriting for rural hotel conversions, flag upgrades, or repositioning of older mixed-use properties.

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For hotels and mixed-use developments in both rural and urban settings, the OBBBA preserves their eligibility and keeps the operational flexibility of the original program. The working capital safe harbors remain in place, allowing large-phased developments to proceed with planned infusions of capital over extended timelines. The rules allowing de minimis leasing to prohibited-use tenants are unchanged, meaning that retail spaces within a mixed-use project can accommodate a small percentage of ineligible uses without jeopardizing the OZ status of the entire property.

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Compliance, however, is becoming more rigorous. New Internal Revenue Code sections require QOFs and QOZBs to report detailed data on assets, property values, NAICS codes, job creation, residential unit counts, and tract identifiers, along with investor-level disposition reporting. Penalties for noncompliance are substantial. This will push sponsors to adopt more sophisticated accounting and project tracking systems from the outset, effectively making OZ compliance a data management function as much as a legal one.

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The practical impact of these reforms is clear. A developer of a large urban mixed-use tower no longer has to race to break ground before an arbitrary sunset date but can stage capital contributions to align with construction milestones and leasing schedules, confident that investors can achieve deferral and basis step-ups regardless of the calendar year. Similarly, an investor converting an aging motel in a rural market into a branded limited-service hotel can meet the lower improvement threshold and provide investors with an enhanced step-up benefit at year five, mitigating downside risk if ramp-up is slower than expected.

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The OBBBA shifts Opportunity Zones from a one-time, deadline-driven tax incentive into a permanent, flexible development and investment framework. For hotels and mixed-use projects, the core benefits—tax-deferred investment, partial basis step-ups, and tax-free appreciation after a long hold—remain intact, but are now coupled with a more predictable timeline, stronger rural incentives, and better alignment between construction cycles and tax milestones. The trade-offs are more targeted geographic eligibility, increased compliance obligations, and the long-term basis cap. Sponsors and investors who adapt quickly to the new cadence—tracking map changes, structuring for rolling deferral, leveraging rural advantages where applicable, and investing in robust compliance systems—will be well positioned to capitalize on what has effectively become a permanent pillar of U.S. tax and community development policy.

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OBBBA Opportunity Zone Changes

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·      Program Permanency – The OZ program is now permanent, with new census tract designations every 10 years starting in 2027. Eliminates the 2026 sunset and creates long-term certainty.

·      Rolling Deferral – Post-2026 investments defer capital gains for five years from the investment date (not a fixed deadline), with a 10% basis step-up at year five.

·      Rural Incentives (QROFs)– Rural OZ projects get a 30% basis step-up at year five and only need to improve property by 50% of adjusted basis (vs. 100% in standard OZs).

·      30-Year Basis Cap – The 10-year FMV step-up remains, but basis freezes at year 30. Encourages exits, recapitalizations, or refinancings before that point.

·      Map Tightening – Stricter tract eligibility and removal of the contiguous tract rule. Some current OZ parcels may lose status in 2027; surviving parcels may gain value.

·      Hospitality & Mixed-Use Eligibility– Hotels and mixed-use projects remain fully eligible under the rules, with working capital safe harbors and de minimis leasing to prohibited tenants still permitted.

·      Compliance Requirements – New IRS reporting on assets, NAICS codes, job creation, unit counts, and tract data, with penalties for noncompliance.

·      Key Opportunity – Sponsors and investors now have a predictable, permanent platform for tax-efficient hospitality and mixed-use development, with expanded flexibility for rural projects and more realistic alignment of construction cycles to tax milestones.

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Purpose of Reform

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The OBBBA transforms the Opportunity Zone (OZ) program from a temporary, deadline-driven incentive into a permanent, rolling framework. The aim is to give investors and developers long-term certainty, improve rural feasibility, and align tax benefits with real-world project timelines—especially important for large, phased developments like hotels and mixed-use complexes.

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Hotels & Mixed-Use – Big Benefits

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• Permanent Program: Enables multi-phase, multi-asset strategies without racing to meet arbitrary federal cut-offs.

• Rolling Deferral: Tax benefits align naturally with construction schedules, lease-up periods, and staged closings.

• Rural Upside: 30% basis boost and lighter improvement requirements improve ROI in smaller, leisure-driven markets.

• Phased Development Friendly: Safe harbors remain, allowing multiple cash infusions and staggered building completions without jeopardizing compliance.

• Stronger Scarcity Premiums: Tighter zone eligibility post-2026 may elevate land values in tracts that survive redesignation.

• Investor Exit Planning: 30-year basis cap encourages recycling capital before long-term IRR erosion sets in.

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Strategic Action Points:

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1. Map Audit – Identify current OZ holdings and assess redesignation survival odds before 2027.

2. Fund Choice – Use standard QOFs for urban cores; QROFs for rural hospitality and mixed-use to leverage 50% improvement rule.

3. Capital Timing – Stage contributions to maximize 5-year deferral and basis boosts without over-committing early.

4. Tenant Mix Oversight – Keep any prohibited users under de minimis thresholds to safeguard OZ status.

5. Data Infrastructure – Build systems to track required metrics from day one; avoid compliance penalties.

6. Exit Modeling – Target sales, recapitalizations, or partial dispositions well before year 30 to preserve tax efficiency.

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Bottom Line

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The OBBBA makes OZs more predictable, more adaptable, and—in rural cases—more lucrative. For investors in hotels and mixed-use projects, the blend of permanency, rolling benefits, and improved rural economics outweighs the added compliance obligations. Those who position early, secure prime tracts, and align their capital cycles with the new rules will enjoy an enduring competitive advantage.

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