Shohei Ohtani Is Deferring 97% of His Contract

By now, you’ve probably heard that Shohei Ohtani’s $700 million contract will pay him through 2043, with Ohtani deferring an unprecedented $680 million (over 97% of his contract). The structure calls for Ohtani to earn just $2 million each year of the contract, and then $68 million a year for the 10 years following the deal.
Ohtani will inarguably be taking home $700 million via this deal, and I disagree with the notion that the contract should be described as anything other than that big number from a bottom-line perspective. But what matters, especially with regards to the Competitive Balance Tax (CBT), is the present value of the contract.
Article XXIII of the CBA concerns the CBT, and the key component for determining payrolls for CBT purposes is the average annual value (AAV) of contracts. If Ohtani’s contract didn’t contain any deferrals, his AAV would be $70 million, calculated by simply dividing $700 million by the 10 years of his contract. Where things get complicated is with deferrals. When money is deferred in a contract, the value of that money depreciates over time, and it is the depreciated value of the contract that is used as the numerator, or replacement for the $700 million, in the AAV calculation. Ohtani’s deferrals will be paid without interest, which is key for depreciating the value of the payment; interest would have increased the present value of the contract, and as such, the AAV and corresponding CBT hit. Read the rest of this entry »