Shohei Ohtani is an LA Dodger: 10 years/$700 million

PedroKsBambino

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I made the point in the Judge discussion that deferrals matter and one can't just take the headline and compare different offers---this is a very extreme example of why.

It's a well-executed contract, in that the NPV is a reasonable number; the 'reported' number is a record number for all sports and generated a ton of headlines; and the actual level of deferrals does a number of useful things for Dodgers. At this level of deferral I wouldn't be at all surprised if there's some other components to it---if Ohtani is really bearing the risk the Dodgers can't pay that 20 years from now that's a pretty major discount even on the reported AAV...so an annuity, insurance, etc. is likely also part of the structure. All to say, a really interesting one. And clearly an offer that has been under construction for a while.

Relatedly: does this make Ohtani a knock-off of Bobby Bonilla?
 

radsoxfan

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When you account for the deferrals and current interest rates, I would bet the present day value of this contract is under 400M. Strong work by LA
 

radsoxfan

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Came here to post exactly this. What changed to cause this deal to be approved I wonder.
ARod tried to change an existing contract to take less $.

Ohtani is a FA and this is the contract he is choosing to sign. Huge difference.
 

Ed Hillel

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He is, but that doesn’t mean the value of the contract is anything close to 700M.

If someone wins the lottery and chooses the lump sum 1 time payout, that will be far less than the publicized total jackpot paid out over many years.
Sure, factoring in inflation and all that, but for competitive balance, I don’t understand why baseball would calculate it this way. They don’t do it for the 10th year on a 10-year contract, do they? Obviously inflation factors into that, as well. And the 9th, and the 8th, and the 7th, and so on.
 

BigSoxFan

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Obviously not a primary concern at all but does anyone know how CAA would get paid their commission? Do agent fees get paid on cash or accrual basis?
 

PedroKsBambino

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ARod tried to change an existing contract to take less $.

Ohtani is a FA and this is the contract he is choosing to sign. Huge difference.
As someone who argued vehemently at the time the union was confusing its mission---what's best for players---- with what generates the most money for players, I would still agree with above. This is a very different situation.
 

JM3

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When you account for the deferrals and current interest rates, I would bet the present day value of this contract is under 400M. Strong work by LA
Yeah, I ran it through a present value calculator at 4% & got about $375m PV.
 

gammoseditor

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Sure, factoring in inflation and all that, but for competitive balance, I don’t understand why baseball would calculate it this way. They don’t do it for the 10th year on a 10-year contract, do they? Obviously inflation factors into that, as well. And the 9th, and the 8th, and the 7th, and so on.
You have a good point. Why aren’t all contracts values this way for CBT purposes and not just ones with deferred money. I think the simple reason is because that’s how the agreed to do it in the CBA. From the owner’s perspective there’s a benefit that they get to pay out money well into the future. From a union’s perspective there’s a benefit that it enables teams like the Dodgers to spend more money.
 

Ed Hillel

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Yeah, I ran it through a present value calculator at 4% & got about $375m PV.
Pardon my ignorance, but I’m still trying to figure out where the 460 comes from. Does MLB have an official inflation number they have to use?
 

VORP Speed

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Ahhh -- makes sense. In which case deferring compensation could make a lot of sense -- if the CA franchise board and the IRS are really willing to forego taxes on deferred comp.
I'd love to hear a CA tax expert weigh in on this. There is a whole body of work around deferred compensation related to stock options, with start-up founders trying to get out of Dodge before an exit to avoid CA tax. CA is super aggressive in going after people around this, with all kinds of lookbacks and calculations around where the value was created, etc.
 

nattysez

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I'd love to hear a CA tax expert weigh in on this. There is a whole body of work around deferred compensation related to stock options, with start-up founders trying to get out of Dodge before an exit to avoid CA tax. CA is super aggressive in going after people around this, with all kinds of lookbacks and calculations around where the value was created, etc.
Never mind California - what about every other state? When the Dodgers play the Mets and Yankees, is Shohei only going to have to pay taxes on a portion of the $2m?
 

JM3

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Pardon my ignorance, but I’m still trying to figure out where the 460 comes from. Does MLB have an official inflation number they have to use?
It's because they don't PV contracts generally. Which makes sense, right? Because the salary a player is slated to make in any given year is their actual salary for that year. That seems like it could be gamed by frontloading or backloading the cash, but not sure if they have protections for that.

The PV calculation they do isn't really a true PV calculation but more the difference between the normal PV & the PV after deferrals I think.

Using the same, method, I get a present value of $566m on just a basic 10 year, $70m per year contract. But that would have an AAV of $70m.
 

BaseballJones

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Guy took a discount to play where he wants to play. I don't think that's something that MLB should be involved in. The union or Scott Boras might not like it, but it seems plenty fair. It's a $460 million deal over 10 years and the Dodgers are paying AAV accordingly. I guess I don't really understand why he didn't just sign a 10/460 deal instead. That part is strange. I guess it was for the headline, which probably adds some marketing fuel.
Not quite the same thing but ARod was willing to take a pay cut to facilitate his trade to the Red Sox after the 2003 season and the MLBPA rejected it.

Edit: sorry but I didn’t see that someone else had already made the same point. Carry on.
 

Salem's Lot

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Never mind California - what about every other state? When the Dodgers play the Mets and Yankees, is Shohei only going to have to pay taxes on a portion of the $2m?
And the feds if he’s living back in Japan when he’s done playing. Can they really go after a citizen of a foreign country for evading US taxes?

And yes I’m completely ignorant on how tax collection works. I’m just wondering about the logistics of it.
 

glennhoffmania

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It’s funny that this is legal but the MLBPA balked at ARod taking a haircut on his deal to go to the Red Sox.
ARod already signed a deal that he wanted to redo and the PV would've been significantly reduced. That's not what's happening here.
 

radsoxfan

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Pardon my ignorance, but I’m still trying to figure out where the 460 comes from. Does MLB have an official inflation number they have to use?
If they have calculated the # to use for the tax at 46M per year, presumably they are basically saying the value of this 700M Ohtani's contract is equivalent to a standard 10 year 460M contract at 46M per season x 10.

From there, if you want to do a "present day value" you can factor in interest rates (46M in 2024 is worth less than 46M in 2033) and get a smaller number. I guess that's roughly 375M.

It would make no sense to do 700M/10 and use 70M as the tax number when the money is being paid out over 20 years.
 

JM3

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Ohtani's tax people doing work...

"Generally, deferred compensation is taxable in the state where the employee worked and earned the compensation, regardless of whether the employee moves after retirement," says David Walters of Palisades Hudson Financial Group in Portland, Oregon.

"However, if the employee has elected to take the deferred compensation payments over a period of 10 years or more, the deferred compensation payments are taxed in the state of residence when the payments are made." This can make a big difference if you move to a state that has no state income tax, such as Florida, Washington or Nevada, or at least to one with a lower income tax than where you earned the money.
https://turbotax.intuit.com/tax-tips/tax-payments/strategies-for-managing-your-tax-bill-on-deferred-compensation/L83l5ousH
 

Murderer's Crow

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This is year 2 of teams finding ways around the CBT by either stretching contracts or doing an extreme deferral. The environment won't always lend itself to the latter, but owners are going to have to seriously rethink the CBT if the big markets can now exploit "loopholes." It wasn't on a single person's radar that a deal for Ohtani would be structured this way and at best, some people knew it was possible but still barely understood it.
 

Yelling At Clouds

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I do find it interesting that you might agree if it were the Reds or Marlins who won a "fluke" title. Both played over .500 baseball and both made the playoffs.
Fair observation! My reasoning here is that those teams missed the playoffs in 2019 and 2021, so one could conceivably argue that they'd collapse over the course of the full 162 and miss a "normal" playoff field and it would be at least defensible. Similarly, if one of the 7 or 8 seeds had won the whole thing, I might be able to buy that as a "less than" championship. Neither argument really works in a discussion of the 2020 Dodgers, since that came in the midst of an 11-season postseason streak for the franchise, and they had the best record in all of MLB for the abbreviated season.

(Although, now that I look at it, the 2020 Reds were pretty good on paper at least, too bad about that one guy...)
 

DJnVa

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He makes $50m a year in endorsements. He's kind of taking the Gronk approach - bank your salary and live on your endorsement money.
He should reverse that. Live on the $2M and bank the $50M
 

DJnVa

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He makes $50m a year in endorsements. He's kind of taking the Gronk approach - bank your salary and live on your endorsement money.
He should reverse that. Live on the $2M and bank the $50M
 

glennhoffmania

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This is year 2 of teams finding ways around the CBT by either stretching contracts or doing an extreme deferral. The environment won't always lend itself to the latter, but owners are going to have to seriously rethink the CBT if the big markets can now exploit "loopholes." It wasn't on a single person's radar that a deal for Ohtani would be structured this way and at best, some people knew it was possible but still barely understood it.
But it's not a loophole. If a player wants a deal worth 100m he has to sign a deal that either pays him 100m during the deal or pays him a lot more in deferrals.


Conversely if a team values a player at 100m they'll either pay him 100m or pay him more in the future. Unless the player's agent is an idiot, if he's worth 100m he won't sign a deal for 100m with a lot of deferrals.


The only thing this deal does is it lets people say he's the highest paid athlete in the world because of the face value. It doesn't change the actual value.
 

Murderer's Crow

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But it's not a loophole. If a player wants a deal worth 100m he has to sign a deal that either pays him 100m during the deal or pays him a lot more in deferrals.


Conversely if a team values a player at 100m they'll either pay him 100m or pay him more in the future. Unless the player's agent is an idiot, if he's worth 100m he won't sign a deal for 100m with a lot of deferrals.


The only thing this deal does is it lets people say he's the highest paid athlete in the world because of the face value. It doesn't change the actual value.
I'm not speaking about the value to the player though, I'm talking about the CBT implications. You can't tell me the CBT and deferral clause was designed with the intent for teams to abuse it this way.
 

AlNipper49

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Between this completely redundant post, the site going down, and his post suggesting that Japan has lower taxes than the US, I think Nip might be having a stroke. Can someone do a wellness check?
Japan does not have lower taxes (they might but I presume they don’t). There are a lot that do though.
 

Cellar-Door

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And the feds if he’s living back in Japan when he’s done playing. Can they really go after a citizen of a foreign country for evading US taxes?

And yes I’m completely ignorant on how tax collection works. I’m just wondering about the logistics of it.
They wouldn't need to... the Dodgers will withold it
 

Tokyo Sox

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Pardon my ignorance, but I’m still trying to figure out where the 460 comes from. Does MLB have an official inflation number they have to use?
It's because they don't PV contracts generally. Which makes sense, right? Because the salary a player is slated to make in any given year is their actual salary for that year. That seems like it could be gamed by frontloading or backloading the cash, but not sure if they have protections for that.

The PV calculation they do isn't really a true PV calculation but more the difference between the normal PV & the PV after deferrals I think.

Using the same, method, I get a present value of $566m on just a basic 10 year, $70m per year contract. But that would have an AAV of $70m.
If they have calculated the # to use for the tax at 46M per year, presumably they are basically saying the value of this 700M Ohtani's contract is equivalent to a standard 10 year 460M contract at 46M per season x 10.

From there, if you want to do a "present day value" you can factor in interest rates (46M in 2024 is worth less than 46M in 2033) and get a smaller number. I guess that's roughly 375M.

It would make no sense to do 700M/10 and use 70M as the tax number when the money is being paid out over 20 years.
I think you guys may be conflating a couple different things here -- PV'ing the deferrals, and PV'ing the (an) entire contract. The latter is basically never done as JM3 notes, but the bolded from radsoxfan is I think, irrelevant to this conversation. @mikcou had a great post about deferrals and PV'ing earlier in the thread:
It didnt. I think I had posted a while back with the old CBA through 2021 because the MLBPA hadnt posted the 2022-2027 version. They now have. All deferrals are discounted if they are not paid with interest that is at least 150 bps within the mid-term AFR for the first contract year. Applicable text is below. The midterm rates have been running around 4.5%, including notably 4.4% in October so I think we are looking at 4.4% per year discount for any payments deferred until after the contract ends if no interest is paid (or, e.g., 3% if the contract calls for 1.5% interest).

Realistically, I think Cots is just wrong here and just pulls the nominal amounts.

(6) Deferred Compensation
(a) Definition
“Deferred Compensation” shall mean any Salary payable to a Player pursuant to a Uniform Player’s Contract in a Contract Year after the last championship season for which the Contract requires services as a baseball player to be rendered.
(b) Attribution
(i) Deferred Compensation shall be included in a Player’s Salary as if paid in the championship season to which it is attributed under a Uniform Player’s Contract. If a Contract does not attribute Deferred Compensation, the Contract shall be treated as
if the Deferred Compensation was attributed equally to each of the Guaranteed Years in the Contract.
(ii) If the Deferred Compensation is to be paid with interest at an effective rate that is within one and one-half percentage points of the Imputed Loan Interest Rate for the first Contract Year covered by the Contract, then the Deferred Compensation shall be included at its stated value. Otherwise, the Deferred Compensation shall be included at its present value in the season to which it is attributed, said present value to be calculated by increasing any such payments by the Contract’s stated interest rate, if any,
and then reducing such payments back to their present value by applying as a discount rate the Imputed Loan Interest Rate for the first Contract Year covered by the Contract. If the terms of a Contract are confirmed by the Association and the Office of the Commissioner before the Imputed Loan Interest Rate for the first Contract Year covered by the contract is available, the Imputed Loan Interest Rate shall be the annual “Federal mid-term rate” as defined in section 1274(d) of the Internal Revenue Code for the
month preceding the month in which terms are confirmed. If a Uniform Player’s Contract uses the date or year in which a Player retires as a triggering event for the commencement of payment of the Deferred Compensation, it will be assumed for purposes of calculating Salary under this Article only that the Player retires on the day that he reaches age 40 or at the end of the Contract, whichever is later.


(4) “Imputed Loan Interest Rate” for each Contract Year shall mean the annual “Federal mid-term rate” as defined in Section 1274(d) of the Internal Revenue Code for the October preceding that Contract Year.

If people would like to look themselves, its available at https://www.mlbplayers.com/cba

The above language on deferrals is on page 135/136
 

axx

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Yeah, that's one question I have. Will the Dodgers be able to afford paying the $68M deferrals?
 

jon abbey

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So does this mean LA will have yearly $68m hits to the CBT starting in 2034?
No, the hit will be something like $46M from 2024-2033, nothing after that. The Mets don't get charged current AAV on Bobby Bonilla's deal which they are still paying out annually.
 

glennhoffmania

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I'm not speaking about the value to the player though, I'm talking about the CBT implications. You can't tell me the CBT and deferral clause was designed with the intent for teams to abuse it this way.
But that assumes a player will sign for less than he's worth. The present value is what it is. If it's way too low for CBT purposes then he signed a bad deal.
 

Tokyo Sox

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So does this mean LA will have yearly $68m hits to the CBT starting in 2034?
No, for the same reason they aren't taking hits of $2m only from 2024-2033. The entire notional amount of the contract is being valued in current dollars, and being charged during the life of the contract only.