Confirmed Signing with Link: [ANA] F Frank Vatrano signs extension with the Ducks (3 years, $4.57M AAV; $9M deferred salary)

[FlyguyOX]

Very smart deal on his part. Go live in florida during that period.

 

[TGWL]

Curious to see how these negotiations took place . Was there a 3 year deal with no deferred money ? Prob would be around 4-5 million per year . Then a deferred option at 6 million per that he eventually signed . Very interesting approach either way.

If Ducks were able to get 4-5 on 3 years, we wouldn't be seeing this, and if Vatrano wanted deferred money with that offer, the cap would be even lower. That's not what took place here. The cap is at 4.5 because it would have been higher, instead Vatrano took the deferred money, thus lowering the cap.

 

[tucker3434]

If Ducks were able to get 4-5 on 3 years, we wouldn't be seeing this, and if Vatrano wanted deferred money with that offer, the cap would be even lower. That's not what took place here. The cap is at 4.5 because it would have been higher, instead Vatrano took the deferred money, thus lowering the cap.

The ducks are getting $4.5m at 3 years. If they were to establish a sinking fund to pay those future payments, they’d be dropping the $4.5m in there ($1.5x3 over his base salary) and it’d wind up being the $9m.

The Ducks are getting a cheap loan and Vatrano gets a lower tax bill. Those are the big benefits here. I’d bet they were at $4.5 and $5 on a standard contract and this is how they met in the middle.

 

[TGWL]

The ducks are getting $4.5m at 3 years. If they were to establish a sinking fund to pay those future payments, they’d be dropping the $4.5m in there ($1.5x3 over his base salary) and it’d wind up being the $9m.

The Ducks are getting a cheap loan and Vatrano gets a lower tax bill. Those are the big benefits here. I’d bet they were at $4.5 and $5 on a standard contract and this is how they met in the middle.

I don't think the Ducks do this if they were at a 4.5 -5 negotiation and planned to meet in the middle. I think the ask from Vatrano was above 5 before any structure was worked out.

 

[tucker3434]

I don't think the Ducks do this if they were at a 4.5 -5 negotiation and planned to meet in the middle. I think the ask from Vatrano was above 5 before any structure was worked out.

Why not? Keeps the AAV about where they want it and it’s a ~4% loan for them. Nobody is borrowing at that rate right now. They’ll earn more than that over the next decade. Its a win-win.

If I’m Vatrano, I’m not taking much of a discount for my deferred salary. That typically goes the other way but the tax savings in this case would make it make sense.

 

[GAGLine]

URL: Understanding deferred contracts

This is a great breakdown of the pros and cons of this type of contract, and it helps to give a clear understanding of how the cap hits are calculated and why it isn't circumvention.

 

[OilersFanatics505]

Can't believe Frank didn't check in with the HFboards financial advisors before agreeing to the deferrals

Everyone’s a medical professional/tax attorney/cap compliance officer/macro economics professor on this website? Aren’t you all of these things?

 

[LOFIN]

"Total value of the deal is 18M, and by deferring some of salary down the got the AAV down".
Like I was trying to say yesterday, that's what this is simplified. You can disagree with CJ, he's not a financial expert, but one of the top insiders/journalists covering the sport.

 

[KeyserSoze81]

Reposted from the Sabres board: I can't escape the feeling that he is going to miss out on a lot of potential returns if he just took the salary currently (despite the immediate hit on taxes).

The highest marginal tax rate in california appears to be 13.3%, Federal is 37%. So if he took his salary normally, he would net $1,509,000 per year (worst case - it would be less because of travel games). If you assume a conservative 7% return on investment annually, he should have ~$7.2M in 2035. The value of the stated 10 year annuity even with no income taxes (assuming 7% rate of return/opportunity cost) is ~$6.3M.

I understand the desire from the Ducks perspective, and this may be the best option available, but I would avoid it as a player.

 

[Mac Attack]

It's not a pretty good idea, it's a guarantee, short of some sort of economic crash leading to significant deflation. (And the government would much rather inflate than deflate)

... But if he's thinking far enough ahead to sign a contract like this, he's probably making some sound investments and living beneath his means. Pretty sure he'll be fine.

Sorry, that was my way of saying of course it full be higher in the future, and if you doubt it look at how inflation has been constant through history. If he's planning to retire directly after he finishes this contract in a low tax area I can see it working out. If not I'd have a hard time seeing this being beneficial. Compound growth on investments is a hell of a thing.

 

[duckpuck]

Reposted from the Sabres board: I can't escape the feeling that he is going to miss out on a lot of potential returns if he just took the salary currently (despite the immediate hit on taxes).

The highest marginal tax rate in california appears to be 13.3%, Federal is 37%. So if he took his salary normally, he would net $1,509,000 per year (worst case - it would be less because of travel games). If you assume a conservative 7% return on investment annually, he should have ~$7.2M in 2035. The value of the stated 10 year annuity even with no income taxes (assuming 7% rate of return/opportunity cost) is ~$6.3M.

I understand the desire from the Ducks perspective, and this may be the best option available, but I would avoid it as a player.

Your math fails to take into account that the ducks weren't willing to pay the deferred amounts today. If this was an all cash 3 year deal, the ducks would not have paid $18M. It would have been something less than that.

 

[Rec T]

One thing that hasn't been mentioned is that the Ducks are probably going to come out way ahead with this contract. To keep the math simple we'll just assume that they're setting aside the entire 4.5million next year (rather than 1.5/yr for 3 years) & that they will pay the entire 9 million as a lump sum in 10 years (rather than 900k/yr for 10 years). Depending on how they invest the money in the meantime they should be able to cover the payout reasonably easily. If they just dropped the money into a Dow Index Fund (averages 10.5%/yr over the last 70), they'd have roughly 12.5 million when it came time to pay the 9 million (and with them paying out only 900k/yr, that would continue to grow for the 10 year payout time frame). I'm assuming that a multi billion dollar corporation can figure out better things to do with the money than just dumping it into a mutual fund...

The 'only' thing Frank is due is the 900k/yr, he's not entitled to any other gains that the money may have made over the next decade before the payouts start.

 

[FriendlyGhost92]

Sorry, that was my way of saying of course it full be higher in the future, and if you doubt it look at how inflation has been constant through history. If he's planning to retire directly after he finishes this contract in a low tax area I can see it working out. If not I'd have a hard time seeing this being beneficial. Compound growth on investments is a hell of a thing.

I think in some cases people with enough money would settle for less money out of spite, if it means the government isn't stealing it out of their pockets.

It sounds dumb... But I also understand it.

 

[RickyLafleur]

Because California has insanely high tax rates so most athletes probably don't want to retire there.

Maybe they shouldn't play in California then? Or they want the benefits of living there while paying f*** all in taxes, like most rich people.

 

[Mac Attack]

I think in some cases people with enough money would settle for less money out of spite, if it means the government isn't stealing it out of their pockets.

It sounds dumb... But I also understand it.

Haha, this is perhaps the best comment I've read on this situation. I think you're on the money here.

 

[GirardSpinorama]

Money now is better than tomorrow.

I think this will still be a rarity, not a norm.

But if your team and player can take advantage, you should. Even if it only saves you 300K per year, why would you not (as a team)?

Huge win for the team both now and future. Why would they care the player escaping taxes.

 

[GirardSpinorama]

The ducks are getting $4.5m at 3 years. If they were to establish a sinking fund to pay those future payments, they’d be dropping the $4.5m in there ($1.5x3 over his base salary) and it’d wind up being the $9m.

The Ducks are getting a cheap loan and Vatrano gets a lower tax bill. Those are the big benefits here. I’d bet they were at $4.5 and $5 on a standard contract and this is how they met in the middle.

The only loser is california tax collection.. kinda.

 

[duckpuck]

One thing that hasn't been mentioned is that the Ducks are probably going to come out way ahead with this contract. To keep the math simple we'll just assume that they're setting aside the entire 4.5million next year (rather than 1.5/yr for 3 years) & that they will pay the entire 9 million as a lump sum in 10 years (rather than 900k/yr for 10 years). Depending on how they invest the money in the meantime they should be able to cover the payout reasonably easily. If they just dropped the money into a Dow Index Fund (averages 10.5%/yr over the last 70), they'd have roughly 12.5 million when it came time to pay the 9 million (and with them paying out only 900k/yr, that would continue to grow for the 10 year payout time frame). I'm assuming that a multi billion dollar corporation can figure out better things to do with the money than just dumping it into a mutual fund...

The 'only' thing Frank is due is the 900k/yr, he's not entitled to any other gains that the money may have made over the next decade before the payouts start.

This is not how financial analysis works. First of all, it is a mistake to "set aside" the full amount of $4.5M now (or any time soon). That is because the ducks were never willing pay that amount to Vatrano now or any time soon. If there was going to be a lump sum payment (or even a payment over the next 3.5 years), it would be less than $4.5M - basically the discounted value of the future payment stream. You can run an NPV calculation if you'd like.

Beyond that, you're ignoring that Vatrano also has no risk (other than the tiny risk that the Duck's franchise, with an owner worth over $20 BILLION, files bankruptcy) which is why he has no upside. That is how these things work.

As an aside, I think Ohtani does have more risk as the dodgers have a lot of debt and deferrals. But it is a small risk.

 

[FriendlyGhost92]

Maybe they shouldn't play in California then? Or they want the benefits of living there while paying f*** all in taxes, like most rich people.

What exactly are the "Benefits" of living in California, beyond weather?

Apparently it's a "Benefit" to be in the highest cost of living state in the Continental US, while also being taxed at a higher rate than any other state in the US.

 

[MacDonald4MVP]

Ducks would be better suited to trade him.

 

[LuGBuG]

Maybe they shouldn't play in California then? Or they want the benefits of living there while paying f*** all in taxes, like most rich people.

Let’s be honest if you were rich you’d absolutely being trying to pay less taxes too. We all would. It all gets pissed away in the end anyway.

 

[RickyLafleur]

Let’s be honest if you were rich you’d absolutely being trying to pay less taxes too. We all would. It all gets pissed away in the end anyway.

Some people are a little more honest than that and don't need to scam the system every chance they can get. How much money do rich people need? Are millions of dollars not enough?

 

[duckpuck]

Some people are a little more honest than that and don't need to scam the system every chance they can get. How much money do rich people need? Are millions of dollars not enough?

Taking a proper and legal tax deduction and/or engaging in tax planning is not "dishonest" or "scamming the system." It is abiding by the system. I'd venture that 99% of taxpayers do what they can to pay the least amount - probably including you.

The suggestion that the "rich" (whatever that means) are obliged to pay more than legally required strikes me as very odd.

In terms of hockey players and other professional athletes, if they retire at 35, they need to plan for 40+ years of drastically reduced earnings with ever rising expenses (including college for kids, etc.) and during their NHL careers, they get accustomed to a comfortable lifestyle. Even if a retired player finds a "good" job (such as a scout or in player development for an NHL front office) and lives a reasonable lifestyle, those salaries are pretty modest and you can be fired on a moment's notice. And for most, the earning potential outside of hockey is pretty limited.

So I don't begrudge any professional athlete - with a very limited earning window - from maximizing their net earnings after taxes.

 

[slappipappi]

Would he have received 18M on the open market? Very much plausible.

No he would not have, unless there was similar deferral.

What you fail to understand is that the value of this contract is in reality $14M. And therefore the cap is based on that value. He is not getting $18M worth of value in todays dollars.

 

[slappipappi]

If Ducks were able to get 4-5 on 3 years, we wouldn't be seeing this, and if Vatrano wanted deferred money with that offer, the cap would be even lower. That's not what took place here. The cap is at 4.5 because it would have been higher, instead Vatrano took the deferred money, thus lowering the cap.

Yeah we would have, I bet that was negotiated first, his value. The rest just was about mechanics, it did not change the value.