Dodgers, Shohei Ohtani Got Creative with $700 Million Deal, but Both Sides Still Have Some Risk

AP

12:37 JST, December 17, 2023

PHOENIX (AP) — Once the initial shock wore off on the price tag of Shohei Ohtani’s record-shattering $700 million, 10-year deal with the Los Angeles Dodgers, details about the contract emerged that were nearly as stunning.

A total of $680 million — 97% of the money — was deferred until 2034-43 with no interest.

Had the Dodgers invented some kind of contract voodoo new to Major League Baseball?

Not really. But it appears to be a team-friendly deal that also has benefits for Ohtani as the Japanese superstar departs the Angels, heads 30 miles up Interstate 5 and establishes a new home with the Dodgers in Chavez Ravine.

“Thanks to his endorsements and other off-the-field revenue streams, he has the luxury to defer compensation,” said Michael Rueda, head of the U.S. division of sports and entertainment at Withers law firm. “But there’s always some risk.”

Part of Rueda’s job is giving financial advice to high-profile sports stars and celebrities. He said the Ohtani-Dodgers deal looks like a solid arrangement, even if there are tradeoffs for both sides.

Make no mistake, the 29-year-old Ohtani is a rich man and will be rich long into the foreseeable future, but money promised later is never the same as money in hand.

One example of Ohtani’s risk: Former Pittsburgh Penguins superstar Mario Lemieux was out about $26 million in the 1990s when the franchise was in financial trouble and couldn’t pay the money it owed the hockey legend in a deferred deal.

Things eventually worked out. Lemieux converted his deferred salary into equity with the team, then partnered with Ron Burkle to pull the club out of bankruptcy. They eventually made a windfall after selling part of their stake in 2021 — but it’s a reminder that financial circumstances can change when 20 years pass. The Dodgers were certainly a fan-drawing juggernaut in 2023, but 2043 doesn’t come for a long time. LA, after all, is only 12 years removed from filing for bankruptcy protection itself under former owner Frank McCourt.

There’s also at least some risk for the franchise: The New York Mets famously deferred $5.9 million that slugger Bobby Bonilla was owed in 2000 and — thanks to an 8% interest rate — will end up paying nearly $30 million total in annual installments until 2035. The Mets have leaned into the self-own in recent seasons, with owner Steve Cohen celebrating the July 1 payment that Bonilla is due each year.

Of course, Ohtani’s deferred pay comes with no interest. That’s a potentially monstrous savings — we’re talking billions — on a deal that could have been much more costly. Ohtani’s deal with 8% interest would come out to nearly $3 billion by 2043.

“It’s interesting to me that the deferred money comes with no interest, from what I’ve read” Rueda said. “That’s giving up a lot of money.”

Ohtani’s other potential advantage from the contract is he receives $680 million of the $700 million after he’s done playing, which means he might not be living in California, where taxes are relatively high. Depending on where he lives from 2034-43, that could lead to sizable savings.

Rueda said the issue isn’t black and white and there are lots of variables, particularly if he goes back to Japan.

“Tax is always a big part,” Rueda said. “The concept of moving to a different jurisdiction and avoiding the California state tax — yeah, that could be accurate.”

For purposes of baseball’s luxury tax, the contract is valued as a yearly addition to the Dodgers’ payroll of about $46 million instead of $70 million. Under the collective bargaining agreement, for the calculation of a team’s tax payroll the value of deferred money is discounted at the federal mid-term rate.

Arizona Diamondbacks owner Ken Kendrick — who talked about the contract at length earlier this week — said his understanding is the deal will save the Dodgers somewhere in the neighborhood of $5 million each season because of the competitive balance tax savings — the exact amount depends on how often the Dodgers exceed the tax threshold and by how much.

“They’re playing by the rules,” Kendrick said. “They got a great player, who is going to be an addition that makes them more competitive. But the economics are not so tilted in a way that puts them at an incredible advantage over the rest of us.”

Kendrick said he believes one major misconception of the deal is that the Dodgers are saving $68 million each season from 2024-33 that they can use to pursue other free agents. Baseball’s labor contract calls for the deferred money to be set aside by the second July 1 after the season it is earned, at the then-current present-day value discounted by at least 5% annually.

Rueda agreed.

“They have to demonstrate that they have that money,” Rueda said. “You can’t write checks that you can’t cash.”