☀️ Good Morning:
It’s the day before Thanksgiving, I’m sure many of you are traveling (be safe!) or preparing for your guests.
There’s pretty much nothing but conjecture in the Mets world right now. So what better day to dive into the nuance of signing bonuses, tax savings and deferrals!
Blake Snell is signing with the Dodgers. We will use that news to dive into contract structure.
☕️ Grab your coffee for your morning dose of Mets Fix!
⚾️ HAPPENING NOW: Juan Soto is expected to field multiple offers before making his final decision. The initial offers made this past week, reportedly from five teams (Mets, Yankees, Red Sox, Blue Jays, Dodgers), were “preliminary” and meant to gauge the seriousness of teams.
Legitimate contenders: While the Mets and Yankees remain the odds-on favorites to land the perennial All-Star, the Red Sox are “increasingly seen as a legitimate contender,” per the NY Post.
My house is your house: It pays to have fancy real estate in different locations. The only team who hosted Soto during their initial California meeting was the Mets. Instead of meeting at Scott Boras’ office, they supposedly met at Steve Cohen’s Beverly Hills mansion.
Tricked you: Soto ran a promotional ad on his Instagram account that initially appeared as if he was going to announce where he was signing.
💵 PLAYOFF SHARE: The Mets handed out 79 playoff shares worth $179,948 from the 2024 MLB Postseason playoff pool. After reaching the NLCS, the Mets were allotted 12% of the record $129.1 million pool. The pool is made up of 60 percent of gate receipts from the first four games of the World Series and League Championship Series, the first three games of every Division Series, and the first two games of every Wild-Card Series. The Mets had travel expenses deducted for being a road team in the Wild Card Series.
Two-time Cy Young Award winner Blake Snell and the Dodgers have reportedly agreed to a five-year, $182 million contract, pending a physical. Snell posted a picture of himself in a Dodgers uniform on Instagram, before Jeff Passan and others reported the terms of the deal late on Tuesday.
Contract Details: The contract reportedly includes a $52 million signing bonus, along with $62 million in deferrals. Snell does not gain a no-trade clause, but he would reportedly receive $5 million if he is traded.
Before we get into the nuance of this contract, and how it’s informative to the way the Mets might look at structuring free-agent deals, let’s chat a bit about the Dodgers’ decision to sign the Snell.
🔷 Fragile Talent
A year after Snell failed to find a lucrative long-term contract coming off a Cy Young season, forcing him to sign a two-year deal (with an opt-out) with the Giants in March, he turned a hot stretch during the second half of 2024 into renewed confidence he is worth a significant commitment from an organization that spends a lot of money, but is usually risk-averse to these type of deals.
When Snellzilla is on his game, he is one of baseball’s elite hurlers. However, he has surpassed 130 innings only twice in his career. He joins a Dodger rotation that includes a superstar trio of Yoshinobu Yamamoto, Shohei Ohtani, and Tyler Glasnow, along with the likes of Tony Gonsolin, Dustin May, and Bobby Miller, as well as the eventual return of future Hall-of-Famer Clayton Kershaw, among others.
As good as the Dodgers have been in just about everything under the leadership of Andrew Friedman — who drafted Snell during his time in Tampa — they have struggled to find a proper regiment to keep pitchers relatively healthy. We saw the impact in the playoffs when they were forced to throw bullpen games several times.
By signing Snell, they are attempting to mitigate that risk with depth. But not just any depth, quality depth. The Dodgers build for championships. While they danced their way to a parade in 2024, to do it again, they believe they will need a healthier rotation led by talent that can shutdown high-powered offenses.
In short, they want to increase the odds they have healthy top-end starters available in the playoffs. How do they do this?
Basic probability tells us if you have two elite pitchers that each have a 50% chance of eventually getting hurt and missing the playoffs, there is a 25% chance both will miss the playoffs (and conversely, only a 25% chance both would be healthy).
With four elite arms, and using that incredibly high injury factor of 50%, the chances of all four missing the playoffs is only 6.25%. And the chances at least two of the four elite arms would be healthy in October is 68.75%.
Adding Snell, along with Ohtani’s return to the mound, essentially doubles the chances Dave Roberts will have two Aces up his sleeve in the 2025 playoffs.
This is a fancy way of proving why you can never have enough pitching. It’s also a sober reminder of the odds the Mets overcame last season to enter the playoffs with a relatively healthy starting rotation. Sure, Kodai Senga missed the call, but he was at least in the conversation, along with Sean Manaea, Luis Severino and Jose Quintana. As the Mets rebuild their rotation, can they count on that again?
🔷 Luxury Tax Circumvention?
This Blake Snell deal proves owners and players are just as interested in income-tax savings and the time value of money as they are in “circumventing” the Collective Bargaining Agreement by finding clever ways to avoid competitive-balance-tax (CBT) penalties.
The Dodgers will save roughly $4 million in AAV on Snell’s five-year, $182 million deal. Instead of being charged $36.4 million per season on a straight AAV calculation, they will be charged an estimated $32-33 million. The exact amount depends on how the deferrals are structured.
Signing bonus: A signing bonus is treated the same as guaranteed salary in calculating the Average Annual Value (AAV) of a contract. The $52 million is added to the amount Snell is set to earn from the rest of his contract and divided by five years to get his AAV. Where the Dodgers get an AAV discount is from the $62 million that is deferred, which we will talk about in a bit.
Tax savings: Snell’s signing bonus is really designed to save him from paying California state taxes. A structure the Mets must consider in negotiating their own high-value contracts since they also operate in a high-income-tax state.
As a Washington state resident, Snell can receive his signing bonus in a state that only taxes capital gains income. Players owe taxes on their salary based on where it is earned. That means a Dodger earns at least 50% of their salary while playing in California; the rest broken between the states where they play road games.
Instead of paying state taxes on $52 million of annual salary over the course of his deal, with the majority of it taxed at the highest possible state rate of 13.3%, Snell can net himself savings by taking it as as signing bonus. Depending on how tax laws evolve in the future, and the structure of the deal, Snell might also gain tax advantages from the $62 million deferred to when he is no longer playing in California.
While sunny Los Angeles has proven to be a destination competing teams find impossible to match in terms of weather and lifestyle, the tax environment has forced the Dodgers to be creative. The three highest signing bonuses among active contracts are Mookie Betts ($65 million), Snell ($52 million) and Yoshinobu Yamamoto ($50 million). Catcher Will Smith received the fifth-highest signing bonus of $30 million.
You could argue these large signing bonuses haven’t necessarily tipped the scale in LA’s favor, but more so evened the playing field from a tax standpoint. Technically, Seattle should be able to offer more competitive deals in an income-tax-free state — i.e. they can offer the same actual dollar amount as a team that plays their home games in California or New York, but the player would take home more of the money by being taxed less.
Deferrals: By agreeing to pay Snell $52 million up front, the Dodgers gain $62 million in deferrals. With the federal interest rate used to adjust the AAV of deferred contracts close to 4%, there is some savings there, as I highlighted earlier.
This doesn’t only save the Dodgers for luxury-tax purposes, it also gives their ownership group a chance to outperform that 4% figure by wisely investing a portion of Snell’s deferred salary. Some financial experts estimate the Dodgers are gaining a huge financial advantage — as in making the owners more money, not just luxury-tax savings — by taking this route with Ohtani’s deferrals.
🔷 Soto impact
Does this take the Dodgers out of the Juan Soto sweepstakes? Are they truly even in the hunt to sign him? All signs point to them staying on the periphery of negotiations, in case he somehow fell into their laps the way Freddie Freeman did when his negotiations broke down with the Braves. Signing Snell shouldn’t change that reality.
Using the lessons from above to think about how the Mets might structure a contract for Soto, there is a key difference worth mentioning.
Opt-outs: Soto is only 26 years old. He is looking for a huge payday on a long-term deal that also offers him the opportunity to opt out and sign an even bigger deal a few years from now.
That makes an outsized signing bonus a bit more difficult to negotiate. Per the CBA, if a player opts out of a deal, “the difference between the amount paid to the Player and the amount allocated to Actual Club Payroll shall be applied pro rata over the Contract Years that were nullified.”
That means if Soto signs a 12-year, $600 million deal with a $60 million signing bonus, that $60 million will be counted as part of the amount the Mets pay him before he potentially opts out.
In other words, using the 12-year, $600 million example, and for ease of explanation, assuming he is actually paid $50 million per season, if Soto opted out after the third season, the Mets would be forced to carry a tax hit of ~$8.6 million over the next seven years to account for the $60 million signing bonus.
The way teams can get around this is to reduce the salary amount in the first year. For instance, Soto could secure a $60 million signing bonus while living in a tax-friendly state, and then earn $30 million in Year 1 of his new deal. His AAV would still be $50 million on a 12-year, $600 million contract, but instead of back-loading the contract in annual salary, they would be front-loading it in bonus money. And that would only create a $30 million difference for tax accounting purposes if Soto opted out early.
We will see if Soto includes deferrals in his deal. Cohen’s first big signing (Francisco Lindor) received a $21 million signing bonus and $50 million in deferrals. Lindor signed at a time when federal interest rates were insanely low due to the pandemic. Therefore, the Mets netted only a small discount on those deferrals in terms of AAV. They have an opportunity to gain much more with Soto.
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🔗 JAWS and the 2025 Hall of Fame Ballot: Carlos Beltrán, by Jay Jaffe, FanGraphs: “Even given his sins, I think Beltrán’s career merits eventual election, and the ease with which he’s been singled out makes me particularly uncomfortable and concerned about the potential for heavy-handedness among voters. At the same time, I understand that the issue is still fresh enough and the feelings raw enough that not everybody is ready to see Beltrán elected and celebrated so quickly. While it seems likely this will play out in his favor, I suspect it will still take a few years to unfold.”
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Happy Thanksgiving to all! The Soto Sweepstakes is already jumping the shark. Make a decision, Juan.
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