The convergence of Opportunity Zone tax incentives and the defense manufacturing reshoring trend creates one of the most compelling investment strategies of 2026. By locating defense manufacturing facilities in designated Opportunity Zones, investors and manufacturers can achieve significant tax savings while contributing to national security and community economic development.
The Investment Thesis
Why Defense Manufacturing + OZs
Tax Benefits:
Zero capital gains tax on appreciation after 10-year holdDeferral of existing capital gainsPotential step-up in basis on deferred gains
Market Fundamentals:
$400+ billion annual DoD spendingGrowing demand for domestic manufacturingLong-term contracts providing revenue stabilityGovernment-backed demand (recession-resistant)
Community Impact:
High-quality manufacturing jobsSkills development and career pathwaysLocal economic multiplier effectsInfrastructure improvements
Strategic Alignment:
National security priority (reshoring)Bipartisan political supportGrowing regulatory requirements for domestic productionSupply chain resilience imperative
Identifying Target Locations
Criteria for Defense Manufacturing OZs
Essential:
Designated Opportunity ZoneIndustrial zoning (or ability to rezone)Adequate utilities (power, water, gas)Transportation access (highways, rail, ports, airports)Available workforce
Preferred:
HUBZone overlap (for set-aside contracts)Proximity to military installationsExisting manufacturing infrastructureState and local incentive programsCommunity college or trade school nearby
Top Regions for Defense Manufacturing OZs
Southeast:
Alabama (Huntsville area — Army/missile defense)Georgia (Savannah — Army/logistics)Mississippi (shipbuilding corridor)South Carolina (Charleston — military presence)
Southwest:
Texas (San Antonio, Fort Worth — Air Force, defense primes)Arizona (Tucson — missile systems, electronics)New Mexico (Albuquerque — Sandia, Kirtland)
Mid-Atlantic:
Virginia (Hampton Roads — Navy shipbuilding)Maryland (Aberdeen — Army testing)Pennsylvania (Philadelphia — Navy shipyard area)
Midwest:
Ohio (Wright-Patterson area — Air Force)Indiana (Crane — Navy weapons)Michigan (Detroit — Army ground vehicles)
Territories:
Puerto Rico (863 OZs, manufacturing infrastructure)U.S. Virgin Islands (14 OZs, strategic location)
Structuring the Investment
Step 1: Form a Qualified Opportunity Fund
Organize as LLC or corporationSelf-certify by filing IRS Form 8996Maintain 90% asset test complianceEstablish governance and management structure
Step 2: Acquire or Develop Property
For new construction:
Purchase land in OZConstruct manufacturing facilityOriginal use requirement satisfied automatically
For existing buildings:
Purchase existing industrial propertySubstantially improve within 30 monthsInvestment in improvements must exceed purchase price (excluding land)
Step 3: Establish Manufacturing Operations
Install equipment and machineryHire and train workforceObtain certifications (ISO, AS9100D, CMMC)Begin production and contract pursuit
Step 4: Pursue Defense Contracts
Register on SAM.govDevelop capability statementPursue set-aside opportunities (especially HUBZone if applicable)Build relationships with prime contractorsWin and execute contracts
Financial Modeling
Sample Investment: $10M Defense Manufacturing Facility in OZ
Investment Structure:
| Item | Amount |
|------|--------|
| Land acquisition | $500,000 |
| Building construction | $4,000,000 |
| Equipment | $3,500,000 |
| Working capital | $1,500,000 |
| Certifications & compliance | $500,000 |
| Total investment | $10,000,000 |
Projected Returns (10-year hold):
| Year | Revenue | EBITDA | Facility Value |
|------|---------|--------|---------------|
| 1 | $2M | $200K | $10M |
| 3 | $5M | $750K | $12M |
| 5 | $8M | $1.2M | $15M |
| 7 | $12M | $2.0M | $18M |
| 10 | $15M | $2.5M | $22M |
Tax Benefit Analysis:
Appreciation: $12,000,000 ($22M - $10M)Capital gains tax avoided (at 23.8%): $2,856,000Plus deferral benefit on original gain invested
Key Assumptions
Defense manufacturing margins: 10-15% EBITDAFacility appreciation: 8% annuallyRevenue growth: 20%+ in early years, stabilizing at 10%Contract win rate improving over time
Risk Mitigation
Investment Risks
Contract risk — Mitigate with diverse customer base and set-asidesRegulatory risk — Stay current on OZ rules and defense regulationsMarket risk — Defense spending is relatively stable but not immune to cutsOperational risk — Invest in quality systems and experienced managementLocation risk — Thorough due diligence on OZ community and infrastructure
Compliance Risks
90% asset test — Monitor quarterly, maintain complianceSubstantial improvement — Track spending carefully for existing buildingsWorking capital safe harbor — Document plans for deploying cashReporting requirements — File Form 8996 annually
Conclusion
Defense manufacturing in Opportunity Zones represents a rare convergence of tax efficiency, market opportunity, and social impact. The strategy requires careful planning and execution, but for investors and manufacturers willing to commit to a 10-year horizon, the potential returns—both financial and societal—are compelling.
Ready to Take the Next Step?
Whether you're a small manufacturer seeking defense contracts, a government buyer looking for qualified suppliers, or a business owner pursuing CMMC certification, KDM & Associates and the V+KDM Consortium are here to help.
Join the KDM Consortium Platform today:
Schedule a free introductory session to learn how we can accelerate your path to government contracting success.
Whether you're a small manufacturer seeking defense contracts, a government buyer looking for qualified suppliers, or a business owner pursuing CMMC certification, KDM & Associates and the V+KDM Consortium are here to help.
Join the KDM Consortium Platform today:
[Register as a Supplier (SME)](/register?type=sme) — Get matched with government contract opportunities, access capacity-building resources, and connect with prime contractors.[Register as a Government Buyer](/register?type=buyer) — Discover qualified, defense-ready small businesses and streamline your procurement process.
*Schedule a free introductory session to learn how we can accelerate your path to government contracting success.*
