What are the pros and cons of renovating an existing hotel in an Opportunity Zone versus building from the ground up?
Renovation would be analyzed under substantial improvement, in which you'd have to meet certain investment thresholds to qualify. Demo and ground-up development would be analyzed under original use, which really only requires you erect a bona fide structure used in a trade or business, which shouldn't be a problem with a boutique hotel. From a non-tax standpoint, renovating is probably easier, and ground-up development is probably costlier and riskier.
From an opportunity zone (OZ) perspective, the only pro/con between a boutique hotel renovation in an OZ and a ground-up building relates to the original use requirement under the OZ rules. A ground-up development would satisfy the original use requirement. A hotel acquired for renovation generally would not, so it would have to satisfy the substantial improvement test (i.e., additions are made to the basis of the hotel within a 30-month period that exceed its basis at the start of such period).
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