In a groundbreaking deal, Shohei Ohtani has signed a record-shattering $700 million, 10-year contract with the Los Angeles Dodgers. While the initial shock of the price tag subsided, the contract's details emerged and were nearly as stunning. A whopping $680 million, which accounts for 97% of the total money, will be deferred until 2034-43, and with no interest. This unique aspect of the deal has raised questions about the Dodgers' contract strategy and its benefits for Ohtani.

According to Michael Rueda, head of the U.S. division of sports and entertainment at Withers law firm, Ohtani's ability to defer compensation is due to his endorsements and other off-the-field revenue streams. Rueda also acknowledged the inherent risks involved in such arrangements. As a sports star and celebrity financial advisor, he considers the Ohtani-Dodgers deal to be a solid arrangement, albeit with tradeoffs for both parties.

While Ohtani's future financial security is assured, it is important to note that money promised later is not the same as money in hand. Former Pittsburgh Penguins superstar Mario Lemieux serves as an example of the risks involved in deferred payments. Lemieux lost approximately $26 million in the 1990s due to the franchise's financial troubles, which prevented them from fulfilling their deferred payment obligations. Eventually, Lemieux converted his deferred salary into equity and partnered with Ron Burkle to save the team from bankruptcy. They made a significant profit after selling part of their stake in 2021. However, this example serves as a reminder that financial circumstances can change over the course of two decades.

Despite being a fan-drawing juggernaut in 2023, the Dodgers' financial stability in 2043 is uncertain. The franchise filed for bankruptcy protection in 2011 under former owner Frank McCourt. Additionally, the New York Mets' deferral of $5.9 million owed to Bobby Bonilla in 2000, with an 8% interest rate, will result in the team paying nearly $30 million in annual installments until 2035. The Mets have even embraced this self-inflicted financial burden, with owner Steve Cohen celebrating the yearly payment to Bonilla.

In contrast, Ohtani's deferred pay comes with no interest, potentially saving the Dodgers billions. If the contract had an 8% interest rate, the total payout by 2043 would amount to nearly $3 billion. Rueda finds it interesting that the deferred money is interest-free, considering the significant amount of money being given up.

Another advantage for Ohtani is that $680 million of the $700 million will be paid to him after he finishes playing. This arrangement could allow Ohtani to avoid California's relatively high taxes by residing elsewhere. Rueda emphasizes that the tax issue is not straightforward, with various variables to consider, especially if Ohtani returns to Japan.

From a baseball perspective, the Dodgers' luxury tax calculation will consider the contract as a yearly addition of about $46 million to their payroll instead of $70 million. This calculation is in accordance with the collective bargaining agreement, which discounts the value of deferred money at the federal mid-term rate.

Arizona Diamondbacks owner Ken Kendrick, who discussed the contract at length, believes that the Dodgers will save approximately $5 million each season due to the competitive balance tax savings. However, the exact amount depends on how frequently the Dodgers surpass the tax threshold and by how much. Kendrick also dispels the misconception that the Dodgers will have an additional $68 million each season to pursue other free agents. Under baseball's labor contract, the deferred money must be set aside by the second July 1 after the season it is earned, at the present-day value discounted by at least 5% annually.

In conclusion, Shohei Ohtani's historic contract with the Los Angeles Dodgers has sparked intrigue and raised questions about the team's financial strategy. While the deferred payments provide Ohtani with long-term financial security and potential tax advantages, there are inherent risks involved in such arrangements. Only time will tell if this groundbreaking contract proves to be a successful venture for both parties involved.