Dodgers' deal of the century: Buy now, pay later on Shohei Ohtani

There's never been a contract like the one Shohei Ohtani and the Los Angeles Dodgers recently agreed to, and it could have ripple effects throughout the industry for years to come.

On Saturday, MLB's most sought-after free agent in history agreed to a record 10-year, $700-million deal, an amount that blew away the expected value of around $500 million. It was also reported that the deal included an unprecedented amount of deferred payment.

As if the value wasn't jaw-dropping enough, it was revealed Monday that the amount of deferred income was $680 million, or 97% of the contract. There is no limit on the amount of income that can be deferred in MLB's collective bargaining agreement because the players' union wants to put as few restrictions as possible on players' earning power.

Buy-now, pay-later approaches have picked up in popularity among some club owners in recent years. No club is employing the approach as aggressively as the Dodgers. It can be argued they have created a loophole and are skirting the spirit of competitive balance - to the degree that it even exists in baseball.

Ohtani is not the first pay-later contract this ownership has signed. The Dodgers also included deferred income in Mookie Betts' and Freddie Freeman's deals. In total, the three players are owed $852 million in deferred payments from 2033 to 2044. But the Ohtani deal is of a different magnitude.

Ohtani will be paid $2 million in each season of his 10-year contract and then receive 10 annual payments of $68 million from 2034 to 2043.

Few contracts this side of Bobby Bonilla's deferred deal with the Mets have stretched so far into the future.

So why do this?

To be clear, the Dodgers are still unlikely to avoid the luxury tax.

Cot's Baseball Contracts estimates the club is only $15.5 million below the $237-million luxury-tax level after the Ohtani deal.

But they are gaining payroll flexibility and reducing their overall payroll-plus-tax bill. Plus, a dollar earned in the future is less valuable than a dollar earned today because of inflation.

While he is guaranteed $700 million, the actual adjusted value of the deal over its 10 years is $460 million, as calculated by MLB and the MLBPA for luxury-tax accounting purposes. To reach that number, a discount rate is applied to reduce the value of deferred dollars.

Ohtani's annual luxury-tax number is then the annual average value of that net present value ($460 million), or $46 million for each of the next 10 seasons.

But the Dodgers are, of course, only paying $2 million of that $46-million tax calculation this season.

That creates payroll flexibility. Ohtani has basically given the club a $44-million loan in each of the next 10 seasons, for which he'll be paid $68 million per year from 2034-43.

The Dodgers can also plan now for that future expenditure. The CBA stipulates the team must place the net present value of the deferred money ($44 million, after deducting his $2-million salary) in an escrow account within two years of each owed season, where it will accumulate interest. That essentially means his 2033 payment must be in an escrow account by the summer of 2026.

But the contract also allows the Dodgers to use time and compounding interest to their advantage.

The Dodgers are owned by Guggenheim Baseball Management, a consortium of billionaires, which reportedly has more than $300 billion in assets under management. They are very rich and very financially savvy.

So if Dodgers ownership sets aside $340 million today, at 5% interest for 10 years, they'd have $552 million in the account by 2034.

Why does that matter?

Starting at $552 million then subtracting Ohtani's $68-million annual deferral each year while continuing to accumulate interest from 2034-43 on what's left would cover his entire deferred salary.

Why Ohtani has decided to let the Dodgers play the compound-interest game instead of doing it himself is another question. There's a reason many choose to take the lump sum when winning the lottery instead of the annual payout.

Ohtani reportedly wanted to play for a competitive team, particularly the Dodgers, so that likely explains part of these unusual parameters.

And by taking just $2 million in salary over the next 10 years, Ohtani is giving the club more salary flexibility to add other stars around him.

Perhaps just as important are reported tax benefits when Ohtani begins taking deferral payments. He could avoid significant taxes by moving to an income-tax-free state at that time, according to Sportico.

While Ohtani doesn't have to worry about not meeting his mortgage payments - it's estimated he makes $50 million from outside endorsements - some on the players' side believe this sets a poor precedent: that the Dodgers are simply delaying payment to pay him less in adjusted dollars.

Although he was being humorous, the Oakland Athletics' Brent Rooker highlighted an underlying issue regarding the contract: It's very difficult to predict the future. The 2030s are quite a ways away.

Ohtani is inviting more unknowns with deferrals. What does the future interest-rate environment look like? While extremely unlikely, one source expressed this concern: What if the Dodgers declared bankruptcy? What guarantees are there to obtain payment?

Others, like former MLB pitcher Brandon McCarthy, believe too much is being made of when and how Ohtani collects his money.

Could other teams do this with massive deals?

While the Guggenheim group likely has no issues in making such future guarantees, other clubs like the Twins, Guardians, and Padres face revenue uncertainty because of the abrupt recent change in their local TV revenues. Those teams are cutting payroll. They don't seem eager to make significant deferred guarantees.

The Dodgers might not be immune from cord-cutting either.

They're in the middle of a 25-year, $8.35-billion deal with SportsNet LA, the largest local TV deal in the game. Their RSN deal is intact for now because it is independent of the ongoing bankruptcy of Bally Sports' parent. But just down Interstate 5 in southern California, we saw the Padres' $1.2-billion, 20-year deal vanish in the middle of last season.

While the Dodgers would certainly have deep enough pockets to absorb the losses, few owners like running any business - including a baseball team - at slim or negative operating margins.

For the individual consumer, buying now and paying later is popular. Companies have built a lucrative business model around it. But the great pitfall might be what plagues larger groups, too: You can't predict the future, and it's easy to overextend.

Travis Sawchik is theScore's senior baseball writer.