Savvy dealmaking or mortgaging the future?
In certain nerdy baseball circles, it is a question that’s been asked about the Washington Nationals for years now because of its prolific use of deferred money in structuring multi-year player contracts. After the team re-signed World Series MVP Stephen Strasburg earlier this week to what was, briefly, the richest deal ever for a pitcher, it’s come to the fore yet again.
On its face, Strasburg’s seven-year, $245 million deal works out to $35 million a year -- just a million dollars less per year than the record-shattering, nine-year, $324 million contract that Gerrit Cole signed with the New York Yankees Tuesday. (Cole, 29, ostensibly got two more years and $1 million more a year because he’s two years younger, and one could argue, better.)
But the Lerner family, which owns the Nationals, won’t actually be paying the 31-year-old righty nearly as much over the life of his contract. A whopping $80 million, equal to one-third of the contract’s total value, won’t be paid until 2027. And that IOU, which will be paid in three annual installments after the actual contract ends, only accrues interest at a paltry rate of 1% a year.
Effectively, that means the Nationals have locked Strasburg up for $23.6 million a year -- a hefty hometown discount to Cole’s $36 million-a-year deal -- for the next seven years, based on figures compiled by Cot’s Baseball Contracts.
Of course, plenty of other teams have deferred contracts on their books -- Bobby Bonilla day is an annual holiday for baseball junkies for good reason -- but when it comes to creative financing, few organizations anywhere in professional sports come close to pushing the envelope like the Nationals.
In 2015, Max Scherzer, the team’s other ace, deferred nearly half of his seven-year, $210 million contract at 0% interest. Pitcher Patrick Corbin’s contract and former second-baseman Daniel Murphy also agreed to zero-interest, deferred deals. Moreover, former star third-baseman Ryan Zimmerman has a personal-services contract -- a practice that has since been banned by Major League Baseball -- that will pay him a total of $10 million over five years once he hangs up his cleats.
And that doesn’t include deals that were rejected. The team reportedly offered outfielder Bryce Harper a $300 million deal that would have deferred a third of that and stretched out the payments until the former MVP hits age 60.
The Nationals have been mum on the issue, but it’s not hard to see why it would make sense, according to Marc Edelman, a law professor at the Zicklin School of Business at Baruch College, who consults extensively on legal and business issues in sports.
By persuading players to take less money upfront, it gives the reigning World Series champs more financial flexibility to keep their team together and win now. (For the purposes of the competitive balance tax, baseball’s version of a soft salary cap, deferred payments without interest can provide relief.)