Dodgers, Ohtani got creative with $700 million deal, but both sides still have some risk

The Los Angeles Dodgers and Shohei Ohtani recently made headlines with a groundbreaking $700 million, 10-year contract. While the initial shock of this record-breaking deal settled, a closer look at the contract’s details revealed some intriguing aspects.

A staggering $680 million, equivalent to 97% of the total contract amount, is deferred until the years 2034-43, and notably, this deferred sum accrues no interest. This arrangement prompted questions about whether the Dodgers had employed some novel financial wizardry within Major League Baseball. In reality, it appears to be a deal that benefits both the team and Ohtani, as the Japanese superstar transitions from the Angels to the Dodgers.

Michael Rueda, the head of the U.S. division of sports and entertainment at Withers law firm, observed that Ohtani’s ability to defer compensation is facilitated by his lucrative endorsements and off-field revenue streams. However, he emphasized that there are inherent risks in such arrangements. While Ohtani is undoubtedly wealthy now and in the foreseeable future, promised future payments cannot replace immediate liquidity.

One potential risk lies in the possibility of financial circumstances changing over time. A historical example is the situation faced by former Pittsburgh Penguins superstar Mario Lemieux, who had approximately $26 million deferred during the 1990s when the franchise encountered financial difficulties. The team couldn’t fulfill its obligations to Lemieux as per their deferred deal. Eventually, Lemieux converted his deferred salary into equity with the team, leading to his involvement in rescuing the franchise from bankruptcy. The Dodgers, despite their current financial prowess, must consider the uncertainties that may arise over the decades. Notably, the franchise itself filed for bankruptcy protection just 12 years ago.

Furthermore, there’s also some risk for the Dodgers, as exemplified by the New York Mets’ experience with deferring payments to Bobby Bonilla. The Mets’ decision to defer $5.9 million to Bonilla in 2000, coupled with an 8% interest rate, has resulted in them paying nearly $30 million in annual installments until 2035. In contrast, Ohtani’s deferred pay comes without interest, offering potential significant savings. An 8% interest on Ohtani’s deal would have amounted to nearly $3 billion by 2043.

Another advantage for Ohtani in this contract is that $680 million of the $700 million will be paid after he finishes playing, potentially allowing him to reside in a location with lower taxes, which could lead to substantial savings, especially if he returns to Japan.

From a baseball luxury tax perspective, the contract is valued as a yearly addition of approximately $46 million to the Dodgers’ payroll, rather than the full $70 million. This calculation follows the federal mid-term rate for discounting the value of deferred money.

While this contract appears to provide some competitive balance tax savings for the Dodgers, it’s important to clarify that they won’t have an extra $68 million per season from 2024-33 to spend on other free agents. Baseball’s labor contract mandates that deferred money must be set aside and demonstrated by the second July 1 after the season it is earned, with a discount of at least 5% annually.

In conclusion, the Dodgers’ deal with Shohei Ohtani is a complex financial arrangement that benefits both the player and the team. It presents opportunities and risks for both sides, and its true impact will only become clear in the years to come.

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