April 24, 2024

There is an old saying in business that you need to have money to make money. Thanks to the highly unusual structure of their contract with Shohei Ohtani, the Dodgers are about to have — and potentially make — a whole lot more than they already do.

In the week since Ohtani inked his heavily-deferred 10-year, $700 million pact with the Dodgers, the unprecedented deal has been viewed around Major League Baseball in a number of ways.

As a record-breaking contract with the biggest guarantee in sports history. As the selfless act of a superstar player hellbent on winning. As a relative steal for the Dodgers, keeping payroll free for other impact personnel acquisitions.

“You get the player, and you’ve got the freedom to do whatever you want around him,” said one person with knowledge of the situation, who was granted anonymity to speak freely. “The upside is endless. Because this has never been done.”

Never done before, and likely to never be replicated again.

That’s because, for the uniqueness of his on-field talent as MLB’s only two-way star, Ohtani’s contract presents an equally unprecedented business opportunity for the Dodgers, according to industry and financial experts.

He could very easily net the club something in the range of $50 million annually in additional marketing and advertising revenues. He is making a reported $50 million himself in endorsements, contributing to his apparent indifference for maximizing his playing salary.

Most of all, he is giving the Dodgers and their owners the ultimate financial gifts: 1) The ability to save money in the near-term by deferring $680 million of his salary until after the contract is complete; and 2) the potential to profit off the income that money will generate in the meantime, a dynamic that could transform an already big-spending franchise into perhaps MLB’s biggest financial behemoth.

“They’re getting a huge financial windfall for this contract,” said finance expert Morrie Aaron, founder and president of MCA Financial Group. “They’ll make a lot of money — a lot of money — on this thing.”

One rival agent offered up a jaw-dropping estimate.

“This may be close to an $800 million to $1 billion gain for the Dodgers over a decade,” the agent said, noting that if the team were to simply take the $680 million in deferrals and invest it — say, with an asset management firm like Guggenheim Partners, which is run by Dodgers owner Mark Walter — then the money could more than double in a decade’s time.

“They may be able to make $1 billion extra,” the agent reiterated.

One billion. Potentially.

Shohei Ohtani stands between Dodgers owner Mark Walter, left, and Dodgers president of baseball operations Andrew Friedman.

Shohei Ohtani stands between Dodgers owner Mark Walter, left, and Dodgers president of baseball operations Andrew Friedman during a news conference at Dodger Stadium on Dec. 14.

(Wally Skalij/Los Angeles Times)

At this stage, exactly how much the Dodgers will capitalize off their arrangement with Ohtani — one that the player presented to the team during his free agency process — remains to be seen.

For the next two years, the club’s only obligations will be to pay Ohtani $2 million annually in salary, the relatively miniscule amount of non-deferred money included in his deal.

Starting in 2026, the Dodgers will have to start setting aside about $46 million per year, at least, to fund Ohtani’s future deferral payments, a stipulation under MLB’s collective bargaining agreement.

Club officials have been adamant about their intentions to take any new financial fortunes, and use it to make good on their promise to Ohtani to invest it back in the team.

“This was about making our team better,” Dodgers president Stan Kasten told The Times this week. “Both on the field, and for our fans off the field. This accomplished both. So it was a good move for us.”

Still, what has become clear in the days since Ohtani’s signing: He offered the Dodgers an exceedingly club-friendly structure, one that could present a money-making opportunity even with its record-breaking price tag.

“Cash in hand, this is a huge benefit for the Dodgers,” said Pepperdine University law professor Maureen Arellano Weston, who is the director of the school’s entertainment, media & sports dispute resolution project. “Deion Sanders paid for his contract at Colorado in the first couple of games (thanks to revenue increases driven by his celebrity) … There may be some similar effects that can happen here.”

While Ohtani’s rationale for taking such a deal continues to confound the industry — some have noted there were more traditional contract structures that would have still helped his new team win — the money he is deferring could work significantly to the Dodgers’ advantage.

It will keep payroll clear in the present. It will provide financial flexibility in the future. And, depending upon how the Dodgers manage the increased revenues he will generate — plus the deferred salary that won’t come due for a decade — they could explore ways to net profitable investments.

“What he’s really doing is financing the ballclub, and providing a cheap and very inexpensive loan,” Aaron said.

The question now?

“Are [the Dodgers] going to take the money and invest it in players?” Aaron added. “Or are they going to take the money and invest it in their own pockets, as the owners?”

Depending on the team’s actions the rest of this winter, the answer might soon become clear.

Shohei Ohtani hits an RBI triple for the Angels against the New York Yankees at Angel Stadium on July 18.

Shohei Ohtani hits an RBI triple for the Angels against the New York Yankees at Angel Stadium on July 18.

(Allen J. Schaben / Los Angeles Times)

Ironically, the Dodgers’ greatest concern entering the Ohtani sweepstakes was that signing him would strain their payroll situation.

While the club’s ownership group had signaled a commitment to spend lavishly on the Japanese star, the threat of another club effectively offering a blank check still loomed. Even someone like Walter, whose Guggenheim Partners manages $325 billion in assets, had limits for how much could be spent on Ohtani.

That’s why, as Dodgers officials prepared to meet with Ohtani earlier this month, they took a curated approach to wooing the two-time American League MVP.

The team sent only a small contingent of officials — and, notably, no active players — into its meeting with Ohtani, which occurred at Dodger Stadium on the first day of December.

They leaned into one of the more comedic subplots to the superstar’s free agency, as the Wall Street Journal first reported, by fetching some Dodger-themed dog toys from their gift shop to give to the player’s pup, Decoy (before the dog’s name became public knowledge).

They even dug through their archives for something they’d been saving for six years, from when they pursued Ohtani during his transition to from Japan MLB in 2017.

That year, the Dodgers had commissioned a recruiting video from Kobe Bryant to sell the perks of playing in Los Angeles. They never got the chance to show it to Ohtani then, stashing it for a second meeting that never came.

This time, though, nearly four years removed from his death, Bryant’s face flashed on a screen and his voice filled the air. Multiple people with knowledge of the video, which was first reported by ESPN, believe it captivated Ohtani.

“He was just locked in on it,” said one person.

“It was a special video,” said another.

A week later, Ohtani brought the Dodgers his own surprise offering.

Even as other teams were preparing $500 million offers featuring significantly less deferred money, according to people with knowledge of the situation but unauthorized to speak publicly, and rival agents were predicting a traditional bidding war upwards of $600 million in present-day value for Ohtani’s services, the 29-year-old star approached his list of finalists with the same contract offer.

Ten years. $700 million. Almost all of it deferred.

Even with the gaudy total guarantee, Dodgers brass immediately recognized the financial advantages. The team’s ownership — like all other suitors besides Arte Moreno and the Angels — gave the deal its instant approval.

“What do you think?” one person with knowledge of the situation but unauthorized to speak publicly quipped rhetorically, when asked how long it took for ownership to green light the offer.

The league calculated its true worth to be $460 million, since money in the future is less valuable than in the present. The union pegged it even lower, at just $437.8 million. For purposes of MLB’s qualifying offer calculations (which average the top 125 salaries in the game), it was worth only about $28 million next year, as The Athletic first reported.

Aaron ran numbers (using a less conservative “discount rate” on the level of returns Ohtani could have made by investing his salary himself over the next decade) that valued the contract as little as $233 million.

“I personally think that’s in the ballpark of what he’s getting on a present-value basis,” Aaron said. “The opportunity cost to him is significant, because he could be reinvesting.”

Instead, it is the Dodgers — who have practiced a level of financial constraint in recent years, even as they’ve paid luxury tax penalties in the last three seasons — who are positioned to capitalize upon the dream proposition.

“I wouldn’t have had the guts to propose it,” Friedman said at Ohtani’s introductory news conference.

A “roller-coaster” of emotions, as Friedman described it, followed on Dec. 8, when false reports of Ohtani traveling to Toronto to sign with the Blue Jays circulated on social media.

However, Dodgers officials woke up the next morning confident in their chances. Then, that afternoon, Friedman got a call from Ohtani’s agent, Nez Balelo of CAA Sports, informing him of Ohtani’s decision.

The superstar was coming to L.A. And doing it, in the Dodgers’ eyes, on a relative discount enabling ample fiscal possibilities.

“It definitely took some time off my life,” Friedman joked of the process.

The Dodgers’ new reality should more than help compensate.

New York Mets outfielders (from left) Vince Coleman, Bobby Bonilla and infielder Howard Johnson pose.

New York Mets outfielders (from left) Vince Coleman, Bobby Bonilla and infielder Howard Johnson pose during spring training in February 1993.

(Kathy Willens / Associated Press)

Before this offseason, the most famous deferred contract in baseball history belonged to Bobby Bonilla.

In 2000, the aging slugger was owed $5.9 million by the New York Mets. Rather than pay his salary, the team’s owner, Fred Wilpon, negotiated a buyout with Bonilla’s agent, Dennis Gilbert, that resulted instead in annual deferral payments of about $1.2 million (which, unlike Ohtan’s deal, included interest of 8%) from 2011 to 2035.

Technically, the Mets were quintupling the amount of money they would pay Bonilla. But, by deferring the payments down the line, Wilpon believed he could make more investing Bonilla’s salary in the interim.

The plan backfired, because Wilpon was investing in Bernie Madoff’s Ponzi scheme.

The logic, however, was reasonable.

And nearly a quarter-century later, the Dodgers might have the ability to benefit off Ohtani’s deferrals similarly.

Historically, the stock market returns 10% annually on investments. Leading investment firms like Guggenheim Partners hope to make even more for their clients.

If you take $680 million, compound it by 10% annually over 10 years, then in a decade you’d have roughly $1.7 billion. In the Dodgers’ case, that could mean making more than $1 billion in profits, even after paying out Ohtani’s $680 million in deferred salary.

In the real world, such high-finance isn’t so simple, especially in the context of baseball. But, to use an oversimplified metaphor, it’s almost like Ohtani went to a bank (in this case, the Dodgers), told them they could keep the majority of his paychecks for the next 10 years, and then didn’t request any interest when the money is eventually paid out to him.

“These guys are gonna write him a check every year for $2 million,” Aaron said. “Then they’re gonna have the benefit of $680 million.”

Ohtani, of course, never cared primarily about the money; or, at least, his ability to maximize it during the life of the contract.

In an interview with USA Today, Balelo defended his client for taking on a contract like this.

“It is the most incredible act of unselfishness and willingness to win that I’ve ever experienced in my life, or ever will,” Balelo said. “He did not care at all about the present value inflation. And you know what, neither did I.”

Still, the decision has stunned experts around the industry, as well as some officials in the Dodgers organization.

It could provide Ohtani some tax benefits down the road, but the San Francisco Chronicle noted the possibility of the California Franchise Tax Board scrutinizing the contract for any potential loopholes.

And although it was advertised as the biggest contract ever, its average annual value using union calculations ($43.8 million) only slightly eclipsed Max Scherzer’s previous MLB record ($43.3 million).

The implicit agreement between Ohtani and the Dodgers: That the club use the financial boost to bolster the team during Ohtani’s tenure in L.A.

That’s part of the reason Friedman and Walter were included in a “key-man” clause, enabling Ohtani to opt out of the deal if either executive is no longer with the organization.

It’s also part of the reason Ohtani has been so involved with the Dodgers’ recruitment of other stars this winter, taking part in a meeting with Japanese free-agent Yoshinobu Yamamoto and sending a video to trade acquisition Tyler Glasnow in the last week.

Shohei Ohtani, left, hugs Yoshinobu Yamamoto after Japan's victory over the U.S.

Shohei Ohtani, left, hugs Yoshinobu Yamamoto after Japan’s victory over the U.S. in the World Baseball Classic in March.

(Rob Tringali / MLB Photos via Getty Images)

He is hoping the Dodgers get even more aggressive when it comes to building a roster.

The question now: Will the team-friendly structure, and new cash flows his presence will create, actually change the way the Dodgers traditionally operate?

So far, there have been some early indications it could.

On Monday, the club introduced Glasnow as their new de facto ace, having signed the talented but injury-prone 30-year-old to a five-year, $136.5 million extension — the most the Dodgers have ever spent on a full-time pitcher under Friedman.

The team is also believed to be considering a bid of $250 million to $300 million for Yamamoto, according to a person with knowledge of their plans but unauthorized to speak publicly, a sign of their intention to compete for a free-agent attracting plenty of other big-market suitors such as the Mets and Yankees.

Whether this is a brief spending spree in the wake of the Ohtani signing, or a true recalibration of how the team plans to spend its money, remains to be seen.

If the Dodgers miss out on Yamamoto, it’s more likely they’ll turn back to the trade market — and not another highly-coveted free agent, such as two-time Cy Young Award winner Blake Snell — in their search for additional pitching. Corbin Burnes of the Milwaukee Brewers and Dylan Cease of the Chicago White Sox remain potential targets.

Shohei Ohtani, center, speaks on the stage during his introductory news conference at Dodger Stadium on Dec. 14.

Shohei Ohtani, center, speaks on the stage during his introductory news conference at Dodger Stadium on Dec. 14.

(Wally Skalij / Los Angeles Times)

Although the team could still use another right-handed bat in its lineup, the biggest-name hitter they’ve been linked with is Teoscar Hernández, and that was back near the start of free agency during last month’s general manager meetings.

Still, one agent surmised that “there should be a definite retooling” of the club’s financial approach.

Where they were once conservative with bids on top free agents, they may now afford to be bolder. Where they were once wary to surpass their internal valuations on players, they should be able to take on more risk.

“Anyone who has watched us operate over the years,” Friedman said, “we’re trying to add great players at every turn.”

Adding Ohtani, and his advantageous contract, should only enhance that capability; creating a pathway for one of MLB’s wealthiest franchises to transform, perhaps, into the sport’s predominant financial king.

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