RFC 0051: Distribution waterfall dual-hurdle "any" mode

Summary and boundary

Standard real-estate limited partnership agreements (LPAs) often hurdle a promote split on achieving either an equity multiple or an internal rate of return, whichever occurs first ("until 1.5x MOIC or 12% IRR, whichever occurs first"). RFC 0036 shipped IRR hurdles with "both must be met" semantics and reserved hurdle_mode: "any" for future adoption.

This RFC lifts hurdle_mode into the normative contract for distribution_waterfall (§4.27, Protocol §VIII.10):

• hurdle_mode?: "both" | "any" | null on split tiers;
• when omitted, defaults to "both" (the larger capacity governs, preserving complete backward compatibility);
• when set to "any", the tier ends as soon as either hurdle is satisfied (the smaller capacity governs);
• stating hurdle_mode on a tier that does not state both until_lp_em and until_lp_irr is rejected as a grammar error (WF-01).

Clawback, crystallization, and GP-side hurdles remain outside this scope.

Motivation

Under RFC 0035 and RFC 0036, a tier stating both until_lp_em and until_lp_irr unconditionally required both hurdles to be met:

{ "type": "split", "lp_share": 0.8, "gp_share": 0.2, "until_lp_em": 1.5, "until_lp_irr": 0.12 }

In a fast exit (e.g. year 1), a 12% IRR hurdle requires only $120,000 profit on $1,000,000 capital, whereas a 1.5x EM hurdle requires $500,000 profit. Under "both" semantics, the 1.5x multiple binds ($500,000 LP distribution). If the LPA specified "or whichever is achieved first", the tier should have ended at $120,000 LP distribution, stepping up the GP promote split earlier. Without hurdle_mode: "any", modeling this partnership agreement required manual tier munging or was unrepresentable.

Normative format change

In UW_FORMAT_SPEC_v1.md §4.27:

Add hurdle_mode as an optional field on split tiers:

• Type: "both" | "any" | null. Default: "both".
• Grammar rule (WF-01): hurdle_mode MAY only appear on a split tier where both until_lp_em and until_lp_irr are non-null. A document that states hurdle_mode on a tier without both hurdles MUST be refused with WF-01.
• Final tier rule: The final tier MUST be an uncapped split (no hurdles, and therefore no hurdle_mode).

Normative protocol change

In UW_PROTOCOL_v1.md §VIII.10 (Step 3: Hurdle balance and tier capacity):

For a split tier at row date $t$: Let $C_{\text{EM}} = \max(0, \text{until_lp_em} \times \text{contributions} - \text{distributions}) / \text{lp_share}$. Let $C_{\text{IRR}} = \text{hurdleBalance}(\text{flows}, \text{until_lp_irr}, t) / \text{lp_share}$.

1. If only until_lp_em is stated: $\text{cap} = C_{\text{EM}}$.
2. If only until_lp_irr is stated: $\text{cap} = C_{\text{IRR}}$.
3. If both are stated:
   • If hurdle_mode is "any": $\text{cap} = \min(C_{\text{EM}}, C_{\text{IRR}})$.
   • If hurdle_mode is "both" or omitted: $\text{cap} = \max(C_{\text{EM}}, C_{\text{IRR}})$.

Both capacities floor at zero, so the resulting capacity is always non-negative. When $\text{cap} = 0$, the tier is exhausted and pays nothing at this row.

Schema changes

In spec/schemas/section-distribution-waterfall.schema.json, add hurdle_mode to the split tier item schema:

"hurdle_mode": {
  "type": ["string", "null"],
  "enum": ["both", "any", null],
  "description": "When both until_lp_em and until_lp_irr are stated, selects whether the tier ends when both hurdles are met ('both', default) or whichever is met first ('any'). Stating hurdle_mode without both hurdles is an error (WF-01)."
}

Compatibility

1. Additive and opt-in: Existing documents omit hurdle_mode and evaluate identically under the default "both" semantics.
2. Byte preservation: Tier-2 editors preserve bytes outside modified tiers.
3. No solver iterations: Hurdle balances remain closed-form via $\text{hurdleBalance}$, ensuring IEEE-754 bit-exactness across runtimes.