Abatements and conversion incentives: base case, or upside you don't get to count?

Came from the construction side and I'm learning the capital side, and this is the line I can't get comfortable with.

Every conversion pro forma I've been handed in the last year has a policy line in it somewhere. A tax abatement, a conversion overlay that waives parking, a density bonus, a state program that pays part of the gap for income-restricted units. Sometimes it's a big number. On one 140 unit model I was shown it was worth about $6.4m of present value and the deal did not work without it.

The two positions I hear, both from people who have built more than I have.

Underwrite it in. Policy support for conversions is broad and growing, jurisdictions are actively rewriting zoning and parking and height rules to get housing out of empty offices, and if you refuse to count any of it you will never win a building. Everyone bidding against you is counting it. Pretending the incentive doesn't exist doesn't make you conservative, it makes you absent. And these programs have application windows and criteria you can read, so the risk is knowable rather than mysterious.

Count nothing until it's awarded in writing. Abatements get modified, application windows close, criteria change with a new council, and the ones that survive often carry income restrictions or wage requirements that eat the benefit you underwrote. Also the timeline. An award that lands in month twenty of a twenty-eight month build is worth much less than the model says, and models rarely discount for that. If the deal only works with the incentive, the deal doesn't work, it just has a coupon attached to a political decision.

There's a middle version, which is that you carry it at a probability weight, say fifty or sixty percent of face, and size the loan off the unabated numbers. That sounds sensible and I've also never once seen it in an actual model, which makes me suspect it's something people say rather than something people do.

Program specifics vary a lot by state and by city, so confirm anything you're counting with the actual administering agency and your own counsel before it goes in a model.

How do you carry it?