New Census Data Points to Decline in Opportunity Zone Eligibility
What do the revised criteria mean for the future of the program?
Most states will have fewer Opportunity Zone census tracts in in the next designation cycle due to the more stringent eligibility criteria outlined in the One Big Beautiful Bill Act, according to a new analysis from the Economic Innovation Group.
EIG analyzed American Community Survey Five-Year Estimates for 2020 through 2024, which will likely determine census tract eligibility for future OZ designations. Current OZ designations will expire at the end of this year, and a new round will begin in January 2027.
While the OBBA made OZs a permanent tax incentive, the law also required that census tracts must record a median family income of 70 percent of the area’s benchmark—either the metropolitan area or the state figure—down from 80 percent in the original OZ program.
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For the 50 states and Washington, D.C., EIG forecasts that 6,293 census tracts will be designated as OZs in the next cycle, a 25 percent decline from the 2018 figure of 7,826. The data is preliminary, pending refined guidance from the Treasury.
The firm expects California and Texas to have the most OZ designations with over 600 each, followed by New York with 426, Florida with 340 and Ohio with 258. Louisiana, Mississippi and New Mexico are expected to designate more OZs this year than the previous cycle, which EIG attributes to the “growing economic distress experienced by communities in these states.”
Catherine Lyons, senior director of policy and coalitions at EIG, told Multi-Housing News that because governors will likely have fewer census tracts to nominate for OZs, “the stakes are higher” this cycle.
“That means they need to be more judicious with their nominations than last time around, because the opportunity cost of nominating a bad tract, or one that can’t attract much investment, is greater,” she explained.
Because of the stricter median income requirements, “We’ll likely see development in more truly blighted areas than we did during OZ version 1.0,” Brad Butler, co-chair of the Multifamily Housing Industry Sub-Team at FBT Gibbons LLP, told MHN. “Our country is experiencing a housing shortage, and the reduced number of OZs presents a great opportunity to create housing in areas that truly need it by leveraging OZ benefits.”
According to another EIG report, OZ projects generated 313,000 residential units between the third quarter of 2019 and the third quarter of 2024, though a smaller figure is likely in the future as development becomes more limited to lower-income areas.
Other changes in OZ 2.0
Besides the adjusted median family income requirements, OZ 2.0 contains a number of other modifications to the incentive that could impact multifamily construction in the designated areas.
Additions include new designations and a more rural focus, which come paired with enhanced incentives for rural zones, as well as a stabilization of gain deferrals alongside stricter reporting and compliance processes.
The new version of the program comes with significant economic incentives to invest in rural projects. While general Qualified Opportunity Fund investments deferred gains are reduced by 10 percent, the figure for rural projects a is threefold increase from the older program, up to 30 percent. Additionally, at least 25 percent of all designated Opportunity Zones in each state or territory must be rural.
