Deep in Arizona's Yuma Desert, Gil Michel-Garcia has spent the past four years trying to develop one of the first U.S. cobalt processing facilities.

Michel-Garcia, a co-founder of EVelution Energy, has already lined up a major customer to buy $850M of the cobalt products the plant will produce, a critical mineral used in electric vehicle batteries, microchips and jet engines. The $450M project has commitments for $345M of debt financing, but EVelution wants to tap a renewed federal tax incentive to attract equity investors.

So Michel-Garcia and his partners put together a presentation to tout their project to local officials, hoping it would be included in the latest round of nominations for the federal opportunity zone program. 

“We just tried to make presentations and emails to everybody and their mother,” Michel-Garcia told Bisnow. 

His efforts paid off. The Arizona Commerce Authority selected the cobalt plant's census tract this summer as one of 125 OZs submitted to the Treasury Department for approval. Inclusion could allow EVelution to raise up to $50M in equity and kick-start construction of the facility by next year, so the stakes were huge.

“There are hundreds of millions of dollars riding on this,” Michel-Garcia said. 

Across the country, developers are sizing up potential development sites and lobbying their state government to nominate their properties for the next generation of the opportunity zone program. If the Treasury Department gives its blessing, developers like Michel-Garcia can tap a pool of funding that totaled more than $112B in the program's first iteration.

States are in the midst of submitting their nominations — at least seven have already submitted maps — but in many, developers still have time to pitch their projects in the hopes of unlocking tax benefits and a new investor pool. Nominations are due Sept. 28, and states can request a one-month extension. 

Michael Tillman, CEO of Fort Lauderdale-based investor PTM Partners, said developers with projects in mind should work with their state government to get their site selected. Just 25% of qualifying parcels in each state can be nominated as an opportunity zone, and he said being proactive is good business. 

“If someone is working on a census tract, and they're not certain it's going to qualify, they would be foolish to not be working on that,” he said. 

The nomination process varies widely by state. Some have robust public comment periods, while others have none at all, with most input starting at the municipal level and trickling up to state government. 

The opportunity zone program was created during President Donald Trump’s first term and was set to expire this year before the One Big Beautiful Bill Act made it permanent. It allows investors to save on capital gains taxes if they invest their returns into projects or businesses in economically distressed communities. 

While an OZ designation alone is rarely enough to make a project financially viable, state and local governments have funneled incentives to qualified projects. One study cited by Treasury officials estimated OZ designation drove a 13% and 23% uptick in construction activity.

In its first iteration, the tax break lasted 10 years from the date the bill was signed, creating an incentive to deploy cash quickly or otherwise lose some of the program’s advantages. That 10-year deadline expires on Dec. 31, when tax bills totaling tens of billions of dollars will come due.

The update, called OZ 2.0, makes the program permanent by turning that deadline into a rolling, project-based 10-year tax break that lets investors take full advantage of its benefits regardless of when their project breaks ground. Investors can also cash out after five years and receive fewer tax benefits.

The changes are expected to yield steadier, more predictable investment into the program. State governments, which have eight years of familiarity with the program under their belt, are paying extra attention this time around to picking zones that will unlock new developments.

"I would fully expect developers and folks in their communities to advocate for tracts," said Jill Homan, a former opportunity zones fund manager and director at America First Policy Institute. “I don't think the advocacy is just from real estate developers but those who live in the community that would like to see their community receive investment.”

Better Tax Breaks, More Accountability 

The first iteration of the OZ program was established under the Trump administration’s Tax Cuts and Jobs Act of 2017 to incentivize economic development in underinvested parts of the country.

Tens of billions of dollars flooded funds set up to invest in OZs. By the end of 2024, OZ funds held $112B of investments, and 77% of the roughly 8,000 designated census tracts had received some form of investment, according to a Treasury Department report released this summer.

But the rollout wasn't smooth. The program was signed into law in 2017, but tract designations weren’t nominated until 2018, and official Treasury guidelines weren’t published until 2019. Each delay ate away at the program’s time-based tax breaks. 

“We didn’t know what opportunity zones were all about, and they had never been used before,” said FBT Gibbons Managing Director Frances Kern Mennone, a strategic adviser for opportunity zones.

The legislation also didn’t include any reporting requirements or mechanisms to track the program’s success. New reporting standards introduced in OZ 2.0 include annual data releases on fund activity, investment totals and job creation. 

A recent Government Accountability Office survey found that most states were unsure if the first iteration of the OZ program positively impacted their communities. Roughly 20% of states said the program increased jobs and housing opportunities, but most were unsure across a variety of metrics, from income levels to housing prices, and developers frequently complained that the incentives weren’t enough to push projects into feasible territory.  

"There was so much enthusiasm in the beginning, and so much capital that was raised that had to be deployed very, very quickly, that I think the enthusiasm may have outweighed some of the economic analysis of the deals," said Catherine Bazley, a partner at tax advisory firm Cherry Bekaert.

Critics of OZ 1.0 complained that capital was going primarily to urban tracts, many of which were already starting to attract capital or weren’t actually in economically distressed areas. 

The original iteration allowed parcels adjacent to qualifying parcels to also get an OZ designation, a rule that’s stripped out of OZ 2.0, and critics say capital ended up flowing toward projects that didn’t need tax incentives to attract capital.  

OZ 2.0 has tighter income restrictions for urban parcels than its previous iteration, which is expected to lead to a smaller and more focused map. The program puts increased emphasis on rural development, cuts the income restriction to qualify as an OZ tract from 80% of the area median income to 70%, and adds more tax incentives specifically for rural parcels. 

Investors who hold an OZ investment for five years will still be eligible for the 10% step-up in basis, which reduces the gain an investor will eventually owe tax on when the deferral period ends. Under the new program, the step-up in basis increases to 30% in rural tracts.

For example, an investor with $100K in capital gains would normally owe taxes on the full amount. But after the five-year hold, the 10% step-up reduces the taxable gain from $100K to $90K. In rural tracts, the 30% step-up reduces it to $70K.

"I saw the new legislation come out, especially for rural communities, and the light bulb went off, and I knew we had to get ahead of this," said Sean Adkins, executive director of the Rutland Redevelopment Authority in Rutland, Vermont. "I started poking the folks up at Montpelier and the governor's office just to make sure we were going to get our zones renewed."

The state nominated two tracts in the city. Rather than wait for Wall Street to target Rutland, Adkins' team created the Rutland Catalyst Fund, a citywide opportunity zones fund to help encourage more downtown investment, which he said is already paying dividends. 

“I've received a very large uptick in phone calls, specifically about opportunity zones and the fund,” Adkins said. “People from all over the country on an investment-side basis, not just asking questions about opportunity zones, but about our fund and how we're doing it."

Jockeying For Position

The legislation that made opportunity zones a permanent fixture of the tax landscape also shifted the nomination process, which will now occur every 10 years, to allow more public input, including pitches from developers.

Steve Glickman, a real estate consultant who developed the framework for the opportunity zone program, said the government learned from OZ 1.0, which was criticized for a slow uptake and generally anemic impact.

“The data clearly showed that the places that picked only the zones that were the most needy — the highest level of poverty rates or the most economically distressed — and didn't align it with where there was some kind of market for development activity either at the state level or from the private sector didn't get investment,” Glickman said. 

The national map is expected to shrink by roughly 25% under the tighter requirements, down to 6,544 tracts from 8,764 in the first iteration.

The Treasury Department is, however, allowing states to make a case to nominate parcels that don’t qualify based on the government’s data. For states to pursue off-list tracts, they need to make a case to the federal government as to why these properties should be counted.

Arizona was one of the first states to submit its nominations to the Treasury, including three tracts that exceed income levels required to be selected. In Vermont, a draft map includes eight off-list tracts, roughly a third of the 25 tracts the state is set to submit.

"There still has to be demand for development in these census tracts to encourage a state to even bother," Kern Mennone said.

The Michigan Economic Development Corp. has been holding hearings to whittle down the state's 856 potential tracts to a final list of 214. MEDC Senior Vice President Joshua Pugh said he’s seeing more interest from business operators in the hotel and energy sectors compared to the program’s first iteration.

Pugh said it was important for the agency to meet in person in every region of the state. He wasn’t surprised to be hearing from developers with ideas. 

“Real estate developers are going to be natural and more experienced and inclined to access these funds,” he said. 

This year, Texas' economic development and tourism office received more than 1,200 census tract nominations for consideration from more than 175 economic development organizations. 

The program allows a state to select up to 25% of eligible parcels for designation, effectively shrinking the map. Texas submitted its map of 605 census tracts — the maximum amount — in 105 counties earlier this month, after nominating 628 in OZ 1.0.

The vast majority of investment in the program to date has focused on multifamily development, but experts expect a wider variety of projects in OZ 2.0. 

Malls have emerged as an early contender for designation and potential redevelopment. In Citrus Heights, California, officials submitted a tract that includes the local Sunrise Mall, which opened its doors in 1972, and in Charlotte, the city council chose an area that included Northlake Mall in its recommendations to the state. 

But rules favoring rural projects have opened up tax break eligibility for some data center projects, which has led to community pushback against those zones being nominated.

More than 100 residents showed up at a county commissioners meeting in Camden County, Missouri, to voice concerns about designating a site that owner MO Lake Development said could potentially host a mixed-use project with a data center component, the local CBS affiliate reported. The county commission ultimately rejected the proposal to recommend the site. 

For Arizona, nominating the right tracts this time around is critical, said Shawn Neidorf, the chief opportunity and research officer with the Arizona Commerce Authority, which was tasked with selecting the 125 tracts that will ultimately be nominated for OZ 2.0. 

Arizona relied on counties and tribal authorities to vet potential projects, and other states have similarly made a push to bring community engagement to the site selection process. State officials made clear to Arizona's 15 counties and 23 Native American tribes that a project has to be planned for a parcel to get nominated, Neidorf said. 

“We didn’t go as far as shovel-ready. But the shovel had to be in sight,” Neidorf said. “It had to be something that was ready for investment.”

Times, And Markets, Change

The tone in real estate circles around OZ 2.0 is one of cautious optimism, but there’s little certainty that the program will be a success. 

OZ 1.0 had mixed results, and fund managers are having a harder time pitching OZ investment right now. Still, early movers are already trying to pull capital together for when the project kicks in, despite the parcels not yet being chosen or certified by the U.S. Treasury Department. 

Some investors made OZ 1.0 investments that didn’t have the same strong returns that they had expected, but most investors see better opportunities this time around to put their cash to work.

For all the details that the One Big Beautiful Bill Act and subsequent guidance have offered investors on OZ 2.0, significant questions remain unanswered, according to the Novogradac Opportunity Zones Working Group.

The group in August put out a call for additional guidance from the Treasury Department and the IRS to help clear up details around the review process for parcel selection and to get more information about the tax incentives. 

The second iteration of OZs is also coming online in a vastly different macroeconomic backdrop compared to the program’s original 2018 launch.

Debt is no longer cheap, and the Federal Reserve’s pledge to tame inflation has shifted investors’ expectations toward rate hikes instead of the cuts that were predicted at the start of the year. The rising price of raw materials and labor, driven up by Trump’s tariff regime and mass deportation campaign, has forced some developers to abandon projects. 

All of those factors make development incentives even more crucial for shovel-ready projects. Michel-Garcia said he hopes to raise up to $50M for EVelution's cobalt facility, which will give it a stronger negotiating position with banks providing construction debt.

“We are a small startup. But we’re playing, if you like, in the big leagues of the mining industry,” he said. “If we can raise $10M, $20M, $30M, that would give us a lot of leverage and negotiating power that will allow us to reject the wrong deals and accept the right deals on the institutional level.”

Heavy industrial development was uncommon in OZ 1.0. But with deeper incentives in rural areas and trillions of dollars already committed to building out artificial intelligence infrastructure, OZ funding is more likely to be used on the most polarizing project type in real estate today: data centers.

"The power plants, energy side of things, it's already kind of a frothy subsector of the market,” PTM Partners’ Tillman said. “To have those types of investors get the OZ tax benefits for doing data centers in rural communities — I think that's already kind of being met with a bit of reticence.”