How Shohei Ohtani’s deferral-heavy $700 million contract could impact baseball industry

If you take a look back at the three most jaw-dropping aspects of the roller coaster saga that ended with Shohei Ohtani signing as a free agent with the Dodgers — feels like forever ago at this point, doesn’t it? — that list might look something like this …

1. Sorry Jays fans, he’s a Dodger
2. Um, $700 million?!?
3. Wait, how much of that is deferred? 

It’s that third one we’re going to talk about today. The total value of Ohtani’s contract is $700 million, for 10 years of playing time. Instead of getting $70 million every season, though, he’s getting $2 million each year from the Dodgers, with $68 million deferred each and every year, without interest. At first, I admit, I thought that was a typo.

It is not. A full 97 percent of Ohtani’s salary every year is being deferred, with payments starting on July 1, 2034, the year after his deal ends. 

— $2 million per year from 2024-33 ($20 million total)
— $68 million per year from 2034-43 ($680 million total)

This isn’t the first time deferred money has been included in a baseball contract, of course. The Nationals made it selling points for guys like Max Scherzer and Stephen Strasburg, to get the total value higher. The Dodgers have it in their long-term deals with Mookie Betts and Freddie Freeman (we’ll come back to those situations in a moment). Lots of big contracts include deferred money, just not nearly on that scale. 

MORE: Biggest contracts in sports history

My reaction to the massive deferment was a bit of shock. Same for you, I’m guessing. I wanted to know what someone who deals in contracts might think, so I asked Michael Rueda, a partner and U.S. Sports & Entertainment practice group head at the international law firm Withers, about his initial reaction. He’s a corporate lawyer who has spent the past decade-plus working with both investors and talent in the entertainment and sports industries. 

“You sort of took home the fact that the player wants to win, wants to help the club build a team around him, is smart enough to identify that between his salary and endorsement earnings, he is able to defer a large portion of this contract,” Rueda said. “I’m someone who represents a lot of individuals across the sports and entertainment space, and this was seeing someone who’s able to look at the bigger picture, and agree to something that benefits them professionally and then personally in the long term.”

Thing is, it wasn’t just a special deal Ohtani and his agent, Nez Balelo, offered to the Dodgers. That was apparently the standard structure Ohtani himself thought of and proposed for every team he considered. Giants president of baseball operations Farhan Zaidi confirmed that his team agreed to everything the Ohtani camp requested. He’s already made enough money through endorsements globally to have enough money for his grandkids’ grandkids to live comfortably. Ohtani wants to win — though including the Angels in the free-agent process shows he still had a bit of sentimentality in the equation — and he’s willing to take his money from this new contract later so he can win now. 

Choosing the Dodgers over the Giants basically just shows he feels like the Dodgers have a much better chance of winning over the next decade, and his new club’s trade for Tyler Glasnow (and subsequent extension) and signing of Yoshinobu Yamamoto showed he probably made the right choice. Those signings were directly impacted by Ohtani deferring all that money. His contract still is a massive luxury tax hit — a record $46 million — but that’s a lot less than it seemed when the 10-year, $700 million terms first broke. And, no, the Dodgers did not “circumvent” the system with this deal. This deal fits snugly within the very defined parameters of the CBA. 

Truth is, not even the Dodgers would have been able to afford a luxury tax hit of $70 million per year, which is why some sort of restructuring/deferral was necessary. We’ll spare you the calculus, but essentially for luxury tax purposes, it’s a 10-year, $460 million deal. Ohtani and Balelo clearly knew the threat of severe luxury tax penalties would put limitations on the total compensation value, which is why they presented the deferral-heavy deal. 

So how does it work? By rule, the Dodgers have to fund the full value of the cap hit (the $46 million) within two years of the money being earned. So in 2024 and 2025, they’ll pay him $2 million a year and that’s it. Starting in 2026, they’ll pay him $2 million and put $44 million into an escrow account, then do that every year for the rest his playing contract (through 2023). Starting in 2034, when the deferrals are paid, the other $24 million per year will be added to the $44 million from the escrow account. 

That’s a lot of time to generate revenue to pay for the entirety of the contract. From Rueda: 

“Between now and then, hopefully the Dodgers can really reap the benefits of having landed a player like this, with increased ticket sales, marketability, merch. Ohtani is a global superstar, as opposed to just an American one. There’s so many other factors that you count on by actually having him in the organization and the increased revenue from having someone like this and from being able to hopefully build a roster and produce a really successful franchise and have some successful years. I think that’s sort of the trade off. If we can defer it and reap the benefits in the interim, it will help us address those future costs. And then you factor in the the aspect of not having to pay interest, that also helps.”

Will Ohtani’s deferral-heavy contract become a trend?

Again, deferring money is not new. But baseball is a copycat-heavy sport, and Ohtani and the Dodgers taking it to a new extreme will make others examine their processes. That goes for both the players and teams. 

From the player side — and I realize this is going to sound silly/dumb/crazy — it doesn’t take much in the way of mental gymnastics to see how Ohtani’s record-breaking $700 million contract almost makes other players look … selfish. Think about it. “Wait, are you telling me that you’re not deferring money to give the team more financial flexibility so they can add better players to the roster? Do you even want to win?”

You can’t expect a player hitting free agency for the first time — a first opportunity to make “real” money — to want to defer a lot of his salary. But veterans? Guys who were stars quickly and made big salaries in the last year or two of arbitration? How important is “money now” vs. “money later” in the scheme of things?

I’m not singling out Justin Verlander, just using him as an example. He signed a 5-year, $80 million contract in 2010, then a 7-year, $180 million deal in 2013 and a 2-year, $66 million extension in 2019. His 2-year, $86 million deal with the Mets for 2023-24 included zero deferred money. Nobody batted an eye, because why would they? You sign a contract and get paid while you perform. That’s how it’s mostly always been.

But now, does that change? It’s not like a player like Verlander immediately needed that infusion of Mets cash, right? Ohtani has set the bar, and while it’s mildly insane to expect any player to defer 97 percent of his salary, might it become more common to see 15 to 25 percent deferred? Maybe 50 percent? Include opt-outs in the contract that kick in if a team doesn’t use those budget savings to add talent to the roster (worded carefully, of course)?

And what about from the team perspective? Might we see more deferrals offered? 

“I mean, you could, if we want to speculate. Talent is expensive across all sports, right? It’s increasingly difficult to own teams and fund operations and inject capital so that you can be competitive, whether it’s facility-wise or player-wise,” Rueda said. “So, yeah, to the extent that you can get players to agree to terms that allow you to be competitive and still pay them their market rates? Yeah, you could absolutely see it being a trend.” 

It’s already happening elsewhere in the sports world. 

“I think how we pay talent, specifically athletes, has gotten more creative over time,” Rueda said. “Look what Major League Soccer did just to land Lionel Messi, right? There are so many different elements to that deal that made it attractive to him, from a financial perspective, not just the personal elements that may have been attractive to him and his family.

“The teams that have the resources to do it, are creative enough to pull it off, I think there’s no reason why we won’t see it. The Messi deal is a really a prime example. With the amount of money he was being offered in other places, the league was forced to get creative.”

Getting Messi to the United States wasn’t just the goal of Inter Miami, his new club. His presence would also greatly benefit Major League Soccer and its sponsors, and offering him the amount of money that would fit in an MLS team’s cap space wasn’t going to cut it, not when trying to convince him to forego returning to his soccer roots with FC Barcelona or turn down insane amounts of money being offered if he’d play in Saudi Arabia.

So Messi’s deal includes a significant revenue-sharing agreement with Apple, the broadcast partner with the league, and adidas, along with an option to purchase a minority stake in the club. The salary cap went out the window completely — he’s making more than the payroll of all but three clubs — and estimates peg his total compensation for the 2 1/2-year contract at up to $150 million. 

Obviously, MLB isn’t going to help any team pay for free agents, but that agreement shows the type of creativity, the ability to think outside the box, that could be necessary.  

So, which teams have those types of resources, plus the willingness/motivation to make creative deals involving deferred money happen? Obviously, the Dodgers. The Giants agreed to the same Ohtani deal, so count them in. Both New York clubs are on that list. You’d think the Cubs would fit that bill, along with the Phillies, Rangers and probably Blue Jays. The Red Sox absolutely should be there, but they haven’t acted like a “big-market” club for a while now. 

And the mid-market clubs that realize the opportunity, they could absolutely make it happen, too.  

A look at Dodgers deferrals

As mentioned earlier, the Dodgers worked deferred money into the long-term contracts for both Mookie Betts and Freddie Freeman, though not nearly at the Ohtani level. Probably worth noting that neither Glasnow nor Yamamoto have deferred money in the mix, and that makes sense, considering this is the first truly significant contract for either player. 

Here’s a look at the deferral amounts, courtesy of the ever-essential Cot’s Contracts … 

Ohtani’s deferrals of $68 million per year kick in starting July 1, 2034, through 2043.

Betts’ deferrals kick in starting July 1, 2033. He gets $8 million each year in 2033-37, $10 million each year in 2038-39 and $11 million each year from 2040-44.

Freeman’s deferrals start July 1, 2028. He gets $4 million each year from 2028-35 and $5 million per year from 2036-40. 

Now, for fun, let’s take a look at the year-by-year deferral payments — all three players agreed to defer without interest — to the trio. 

2028: $4 million
2029: $4 million
2030: $4 million
2031: $4 million
2032: $4 million
2033: $12 million
2034: $80 million
2035: $80 million
2036: $81 million
2037: $81 million
2038: $83 million
2039: $83 million
2040: $84 million
2041: $79 million
2042: $79 million
2043: $79 million
2044: $11 million

That’s a total of $852 million the Dodgers will be paying to the trio over 17 years, after they’re done playing for the Dodgers (extensions are certainly possible, of course). Even for a franchise like the Dodgers, that’s a ton of money to be spent on players who will no longer be actively helping them win on the playing field. 

MORE: Dodgers projected 2024 payroll after offseason spending spree

We talked about the benefits, but that sort of money ups the ante.

“But it’s also the risk, right? If you don’t win and you’re stuck with this really large bill in the future, if something doesn’t go well during his time with the team, then it doesn’t look like a great calculation,” Rueda said. “If all goes well, maybe you come out looking like it was a brilliant decision. But there are some risks there. Not every team can do it. Not every team may have the resources or the marketability, or whatever the case may be, to ensure they capitalize fully on an opportunity like this, to leverage having a star like that on your roster and being able to build a good club around him. There’s a lot that goes into it.”

No doubt, it will be pretty fascinating to see how the Ohtani contract and all that deferred money impact the way franchises — and players — operate going forward. 

Source : ESPN.com

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