Status: implemented

Implemented — this change has shipped.

RFC 0050: Preferred equity with a split coupon

Summary and boundary

Institutional preferred equity can carry a current-pay coupon and an accrued (PIK) coupon on the same principal and seniority position. This RFC adds an optional accrual: "split" mode with cash_rate and accrued_rate fields.

This implementation deliberately supports split only on preferred_equity. A PIK toggle on an amortizing debt tranche needs explicit period, compounding, and principal-schedule semantics and remains deferred.

For a split preferred tranche:

• rate is required and MUST equal cash_rate + accrued_rate;
• cash_rate and accrued_rate are required numeric fractions;
• cash_rate contributes amount × cash_rate to cash coverage;
• accrued_rate contributes zero to cash coverage and does not alter the point-in-time capital-stack balance used by attachment metrics;
• weighted_cost uses the full rate, because it represents the cost of the capital regardless of payment timing.

Existing cash and accrued tranches are unchanged. Documents that do not use split remain byte-compatible and recompute identically.

Motivation

The current capital-stack contract has one rate and one accrual mode. A single preferred-equity row therefore cannot state, for example, an 8% current coupon plus a 4% accrued return on the same $4,000,000 position:

• treating 12% as cash-pay overstates coverage burden;
• treating 12% as accrued hides the current distribution; and
• two rows double-count principal or misstate seniority.

The split representation keeps one principal, one position, and one headline rate while making the coverage treatment explicit.

Normative format change

In UW_FORMAT_SPEC_v1.md §4.24:

• extend accrual from cash | accrued to cash | accrued | split;
• add cash_rate and accrued_rate, both required only when accrual is split and forbidden otherwise;
• require class: "preferred_equity" when accrual is split;
• require rate = cash_rate + accrued_rate for split.

The schema expresses the conditional field and class requirements. The validator emits CS-02b for a split tranche with missing/extra fields, a non-preferred class, or a total-rate mismatch.

The blended_coverage sizing verb continues to mean NOI divided by cash-pay service at or above the selected position. For split preferred equity, the cash-pay service is amount × cash_rate; the accrued portion is zero. debt_yield_through remains debt-only, and weighted_cost continues to use the full rate on every rate-bearing tranche.

Reference implementation

The change is additive and limited to:

• spec/UW_FORMAT_SPEC_v1.md and spec/UW_PROTOCOL_v1.md;
• spec/schemas/section-capital-stack.schema.json;
• @uwmd/core tranche types, verifier, validator remediation, and tests;
• one positive split-coupon conformance case plus negative controls for missing fields, a wrong total, non-preferred use, and overstated cash coverage.

No new calculation-pack formula, waterfall behavior, module manifest, or public function is introduced.

Compatibility and acceptance

Existing capital-stack documents must validate and verify with unchanged results. The positive fixture uses a preferred-equity tranche with cash_rate: 0.08, accrued_rate: 0.04, and rate: 0.12. It states both blended_coverage using only the cash rate and weighted_cost using the full rate. Negative fixtures must emit CS-02b or CS-SIZING-DISAGREES as specified, and the schema, validator, and executable verifier must agree on the accepted shape.

Alternatives considered

• Two tranches sharing one position (pref_cash + pref_pik): violates position uniqueness or misstates seniority, and double-counts capital in attachment metrics and sources_uses. Worse on every axis.
• accrual: "accrued" with a cash_rate side-field only: fewer fields, but rate would then mean "the accrued part" for some tranches and "the total" for others, and a reader could not tell which without this RFC. Keeping rate as the total is the compatibility property worth paying two fields for.
• Encoding the pref in the waterfall section instead: LP/GP distribution lives in the waterfall, but the capital stack is where coverage and attachment are stated and verified, and a pref that pays cash affects coverage. It belongs in §4.24.

Prior art

• RFC 0033 established that the capital stack is one point in time; this extends that section.
• The §4.24 worked example already says the pref tranche is accrued, so it is excluded from combined_dscr. The per-part rule here is that sentence applied to half a tranche.
• ARGUS Enterprise and most institutional models carry current-pay and accrued as two rates on one preferred-equity line. Matching that convention means producers do not have to split principal to describe a common instrument.

Deferred follow-ups

Debt split/PIK toggles, accrued compounding frequency, multi-period accrued balance roll-forward, and waterfall interaction require separate contracts.