Policy makers have a once-in decades opportunity to bring US capital to Puerto Rico.
Background
The Opportunity Zone (OZ) program was created under the 2017 Tax Cuts & Jobs Act to channel private capital into low-income census tracts through Qualified Opportunity Funds. In the first round (OZ 1.0), governors and territorial leaders selected about 8,764 census tracts across the 50 states, the District of Columbia, and U.S. territories. With roughly 84,400 tracts nationwide, about one in ten were designated.
A tract qualified if its median family income was 80 percent or less of the area median or its poverty rate was 20 percent or higher, and a limited number of adjacent tracts could also qualify. Each governor could nominate up to 25 percent of eligible tracts.
But Puerto Rico was special – In the wake of Hurricane Maria in September 2017, congress authorized the designation of all 863 of Puerto Rico’s 945 low-income census tracts as Opportunity Zones. Puerto Rico’s government didn’t need to apply — the designation was automatic. This map (courtesy Novogradac) shows how pervasive OZs have been for Puerto Rico - The tracts in dark green are designated as Opportunity Zones.
2026 Redesignation
In July of this year, the One Big Beautiful Bill Act (OBBBA) made the incentive permanent and adjusted its targeting. Beginning July 1, 2026, governors will again nominate up to 25 percent of their eligible tracts for OZ 2.0 designation. The definition of “low income” tightens slightly to 70 percent of area median household income, and the contiguous-tract exception is removed. Researchers expect these changes to shrink the eligible pool by roughly 20 percent in the 50 states, cutting national eligibility from about 41 percent of tracts to around 30 percent. Because only a quarter of those may be nominated, total designations will likely fall from roughly 10 percent of all tracts to perhaps 7–8 percent.
The Rural Opportunity
OBBBA also created a new subclass of Qualified Opportunity Funds—the Qualified Rural Opportunity Fund (QROF)—to channel investment into genuinely rural OZs. “Rural” generally means communities under 50,000 population that are not adjacent to larger urbanized areas.
QROFs enjoy distinct advantages: investors receive a 30 percent basis step-up after five years instead of 10 percent, and qualifying projects face a 50 percent “substantial improvement” threshold rather than 100 percent. These enhancements are designed to push capital into places that struggled to attract it during OZ 1.0—small towns, micropolitan regions, and rural counties that saw little benefit from urban OZs.
For policymakers, the new rules signal Washington’s intent to favor rural revitalization within the broader OZ framework. For investors, they create a tier of projects with measurably stronger economics—especially where rural property values and construction costs make the old 100 percent improvement test prohibitive.
For Investors, the QROF angle could lead to not just the standard 5-year deferral of the tax liability, but also a 30% reduction in the ultimate tax bill. We fully expect funds and project to be structured to return capital quickly enough to cover that tax bill without any out-of-pocket cash for many investors. That is going to become a significant differentiator between urban and rural zones. The map below (courtesy Novogradac) shows the likely “rural” zones of Puerto Rico in green.
Our rural island has important implications for Puerto Rico, where large portions of the island’s interior, western municipalities, and large swaths of our coastline will likely qualify under the federal definition.
Puerto Rico Is Still Special – But Not Exempt
In 2018 Puerto Rico was granted a special exemption allowing all of its low-income tracts (863 out of 945) to be designated as OZs—about 91 percent of the island. That exception ends in 2026.
Under OZ 2.0, Puerto Rico’s governor is subject to the same 25 percent cap as other states. Even so, since most census tracts on the island remain low-income under the new definition, Puerto Rico’s eligible pool will still be unusually large. Assuming roughly 90 percent of its current tracts remain eligible, almost 800 tracts would qualify, and the governor could designate about 200 zones—likely still over 21 percent of the island (compared to 7-8 percent for the mainland).
That marks a steep drop from the “all-island” map of OZ 1.0 but still leaves Puerto Rico with the highest density of Opportunity Zones in the United States and a remarkable opportunity to draw investment dollars if we understand what worked in OZ 1.0.
The Goldilocks Opportunity
Recent research from the Urban Institute, summarized by Next City in “The Next Round of Opportunity Zones Is Coming. New Data Shows How Cities Can Help Get Them Right,” offers a critical insight for OZ 2.0. Analyzing 444 projects in Ohio, researchers found that most OZ capital flowed into tracts that were already improving before designation—the “too hot” markets—while the most distressed tracts didn’t attract OZ projects and were “too cold” to attract any capital at all.
The Urban Institute classified tracts into three groups: those unlikely to attract investment, those that would attract it even without OZ designation, and those in between—areas with some market activity but still needing help to unlock investment. These middle-ground areas are the “Goldilocks” tracts: not so cold that capital avoids them entirely, and not so hot that public incentives are redundant (and therefore a waste of taxpayer funding).
The researchers urged governors and local governments to focus designations on these “just right” areas, where OZ capital can tip the balance for long-term development rather than simply subsidizing projects that were already penciled. The lesson is straightforward: zone selection is not a symbolic exercise. It determines whether a multi-billion-dollar incentive drives meaningful change or merely rewards what the market would have done anyway.
Conclusions and Call to Action
The 2026 redesignation is both a reset and a test. For the mainland, the tighter criteria and new QROF rules could refocus OZ investment toward smaller communities and genuinely rural areas; the number of eligible tracts is going to shrink by design. For Puerto Rico, losing its all-island status means its policymakers must be deliberate.
The island will have about 200 slots to fill. It should use them wisely—by blending the Urban Institute’s Goldilocks framework with the federal “Rural” designation. Puerto Rico’s economic map is full of mid-sized municipalities and rural zones that are neither too cold nor too hot: they have emerging industries, natural wonder, access to labor, and community need, but limited capital. These are the tracts that can deliver real impact for the people who live there by attracting investors.
This approach aligns with a long tradition in Puerto Rico’s economic strategy. Since the enactment of Section 936 in 1976, the island has used federal tax policy to attract U.S. and foreign investment. OZ 2.0, paired with QROFs, is the next chapter in that story—an opportunity to focus on zones that are both strategic and equitable. If Puerto Rico chooses its 200 tracts with the same discipline that has guided its best tax initiatives over the past half century, the island can prove once again that well-targeted incentives don’t just move money—they build momentum.
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Jose A. Torres, Managing Partner Shawn L. Hanson, Managing Partner
jtorres@monllorcapitalpartners.com shanson@monllorcapitalpartners.com
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