Reposting here since /r/baseball's auto-mod ate my post and I didn't want it to go to waste.

Part 1: Statement of Facts and Necessary Explanation

1) Regardless of conversations about "fair market value", "depreciated value", "competitive balance tax value", Shohei Ohtani will be getting paid 700 million very real dollars from the Dodgers over the next 20 years.

2) Money tomorrow is worth less than money today. There's many ways to quantify this, depending on whether we think of the recipient as a spender or an investor. A spender is different than an investor in that their goal is to spend it rather than use it as leverage to make more money. Both spenders and investors are impacted by inflation: Money in the future is worth less to them than money today because money loses value over time due to inflation. Investors are impacted by an additional time-value of money called "opportunity cost", which includes the gains that those investors would have realized on money in their pocket today compared to money in their pocket tomorrow. For the simplicity of analysis, we'll be treating Shohei Ohtani as a spender rather than an investor, and therefore only looking at the inflation component of the time-value of money.

3) When calculating the Competitive Balance Tax ("luxury tax") impact of a contract, deferred money is treated the same as a loan with an interest rate set at the federal mid-term rate (4.43% at the time Ohtani signed his contract) and only counts the principal of that loan towards the CBT. This is the opening of the luxury tax loophole.

4) In each year where money is being deferred, the team must pay the principal of that "loan" into an escrow account held aside for the player. As we'll discuss later, this significantly reduces the size of the loophole from a cashflow standpoint.

Part 2: Data and Interpretation

Please see here for the data to be discussed.

There's a lot of numbers there, so let's walk through them:

Ohtani Actual: This is the actual money to be paid to Shohei Ohtani over the next 20 years. He'll be receiving $2 million per year for 10 years, and then $68 million per year for the following 10 years. As said above, whatever hypothetical values we talk about from here on don't change the fact that Shohei will be paid 700 million very real dollars over the next 20 years. That is an astronomical amount of money to pay a single athlete going into his age 29 season and following his second elbow surgery on his throwing arm. Any conversations about whether he got "screwed" by the contract structure can simply be squashed by this figure alone. Deferred timing or no, Shohei will receive every penny of nearly three quarters of a billion dollars.

Ohtani CBT value calc/Ohtani CBT actual: This is where things start to get complicated. This spells out how the luxury tax hit of $46.1 million/year is constructed. His first 10 years are straightforward: Money paid during the contract term is pooled, divided by the number of years (to create an "average annual value", and then applied to the CBT for each year dollar-for-dollar. Importantly, money paid during the term of the contract is treated the same regardless of whether it is in year 1 or year 10 (more on how this creates the loophole later). Deferred money is treated the same as a loan with an interest rate set at the federal mid-term rate (4.43% at the time Ohtani signed his contract) and only counts the principal of that loan towards the CBT. Ohtani has 10 deferred payments of $68 million each, and each is deferred by 10 years from when that money would've otherwise been originally due on a flat 10/$700m contract. Reverse engineering the principal of a 10 year loan at 4.43% interest that accrued $68 million of value gives us an original principal amount of $44,081,476. Adding that together with Ohtani's $2,000,000 annual salary gives us $46.1 million, the actual amount then applied to the CBT for each of the 10 years of Ohtani's contract.

Dodger cashflow: So, the Dodgers are only on the hook for $2 million of cash outlay per year during the course of his contract, giving them massive payroll flexibility right? Unfortunately for them, that's not entirely the case. There's an escrow requirement that turns what would have been a gaping loophole into a much smaller one. This is also a big point that a lot of the reporting on Ohtani's contract missed. The CBA requires the Dodgers to contribute the present day value of the deferred money (i.e. that "principal" on the "loan") into an escrow account in each of the years that a deferral begins. That means that in addition to paying Ohtani $2 million in cash each year, they also need to contribute $44.1 million into the escrow account. They'll also need to pay him the $23.9 million per year remainder of the $68 million per year due in years 11-20 that isn't covered by the $44.1 million per year escrow amount.

Ohtani PDV (3.3%): This looks at what the present day value (PDV) of his current contract is if we assume that inflation will average out to 3.3% per year for the next 20 years, in line with historical total inflation in the US from 1910 to today. This reduces the $700 million paid to him to $443.9 million. "Boy, that sounds like less money than he was originally projected to get paid" you're preparing to comment.

10/$510m contract, 10/$510m contract PDV: This looks at what a flat 10 year contract for $510 million would look like. As we see, when we apply the same 3.3% inflation rate to this contract it arrives at roughly the same (slightly less) present day value as Ohtani's contract. This is important, as this is in line with many of the projections/predictions of Ohtani's contract before the media hype train fully left the station.

We'll cover the last two columns in the next section...

Part 3: Conclusions

1) The Dodgers and Shohei worked together to build the most luxury tax-efficient contract possible within the current rules by exploiting the loophole that the Competitive Balance Tax calculation depreciates the value of deferred money, but doesn't depreciate money paid during the contract term. This is especially important for long term contracts, as money paid near the end of the long term contract (in a real, not-just-luxury-tax way) is already worth less than money paid at the start, but the CBT doesn't treat it that way. Money paid in year 10 of a 10 year contract is worth dollar-for-dollar in the luxury tax, but money paid in year 11 gets tax preferred treatment. With the way that the CBT is structured, teams are strongly incentivized to defer as much money in long term contracts as a player will agree to.

2) The escrow requirement makes a big tax loophole into a small one. The Dodgers are still spending $46.1 million/year on Shohei Ohtani over the next 10 years, even if only $2 million of that is going to Ohtani's bank account. The remainder is very real money going into a very real escrow account, not just hypothetical dollars being listed on the Competitive Balance Tax ledger for the Dodgers. The Dodgers are still saving money, but not nearly as much as Ohtani's $2 million per year paycheck would suggest. Compared to a traditional 10/$510 million contract without deferrals, the Dodgers are saving about $5 million per year each in cashflow and luxury tax impact. $5 million per year in savings isn't nothing, but it isn't the $68 million per year that some poorly written/researched reports are trying to lead you to believe.

3) Regardless of how you slice it, this is the richest contract ever paid to a professional athlete in history. Backloaded or not, $700 million in total cash and $444 million in present day value are both astronomical amounts of money to pay to a single player. While the Dodgers and Shohei did structure this contract in a way to make it as tax efficient as possible, overall they really only reduced the tax impact by about 10%. That's impactful, but not system-breaking.

4) It would be silly for teams not to push for heavily deferred contracts in the current system which treats that money in a tax-preferred way, and that has been the case now in most of the mega contracts in recent years (not just Ohtani). It is a hole in the CBT, whether intentional or not, but the hole is not that big and does require two to tango as players are not obligated to accept deferred compensation structures if they don't want to.

5) LFGM