Contract Question - When can a new deal be made from scratch vs Cap hits/Dead Money?

[Tuco]

You can always sign a player to a new deal (well, mostly always). But you can never get rid of prorated bonus or dead cap.

 

As others have mentioned, prorated bonuses  are money already paid to the player. They have to be charghed to the cap at some point. And there are really only two choices. It stays prorated in the years it's supposed to, or the player gets cut, traded, etc. and is no longer on the team. At that point the prorated cap is accelerated and becomes dead cap.

 

The only exception to this is if a player gets suspended or incarcerated, or simply refuses to play or pulls a sudden retirement soon after signing a new deal. In such cases a linear amount of prorated cap can be refunded/credited to a team. But even then, it usually doesn't happen until the following year if at all.

[Sweats]

#likewtfveryconfused

[fergie's ire]

Back in the day, the Patriots used to do what you are suggesting.  I think they did it to Troy Brown, if I remember.  If they had a player who was not performing up to his contract, they would cut him...effectively tearing up the old contract...and then re-sign him.  It's also what teams like the Bills do at cut-down day at the start of the season.  There are a few problems, however.  A) The player needs to agree to a pay cut (which is not usually the case with the cut-down day players) B) You need to be confident that they won't jump to another team and C) You have to pay them any guaranteed money owed on the original deal.  NFL contracts have never been guaranteed (which is why the Patriots could just cut Troy Brown and not owe him anything), but in recent years players have been insisting on including more and more guaranteed money in their contracts.  Often, it's done through signing bonuses that get paid out right away but are spread out over the length of the contract for cap purposes.  You still have to count that money against the cap if you cut him.  The worst example of the guaranteed money problem is Deshaun Watson.  He's almost half way through his contract which is fully guaranteed and has barely played and hasn't played well.  Sure, they can cut him but they still have to pay the rest of the 230 million because it's guaranteed.

[SoCal Deek]

Let’s see if I understand it:

 

The Team enters into a 4 year, $40 million contract with a player, but they agree to pay him only $5 million for each of the first two seasons instead of the $10 million it averages out to. If the two sides agree to either part ways or the player is cut, the Team still owes him the remaining $5m for each of those first two years, and therefore that remaining $10m would count against the next year's cap even though he’s no longer on the Team. 

[DCofNC]

On 2/23/2024 at 3:28 PM, FireChans said:

I believe they do. IIRC, Brock Osweiler was such a deal. 
 

He was packaged to Cleveland with a second for like a 4th rounder back under the condition Cleveland picked up the part of the cap hit. 

Not the same, he had guaranteed money, but it wasn’t all tied to signing bonus.  What screws us with the Von and Diggs deal is the amount of signing bonus/salary converted to bonus.  Upfront, it allows you to pay a guy, and the cap hit gets spread out over the remainder of the contract.  However, the minute he leaves you accelerate all the cap hit to that year.  Os just had big guaranteed money, so they could trade that away, if anyone would take it.   The basically paid in draft picks for a team to eat it.

[BarleyNY]

8 hours ago, SoCal Deek said:

Let’s see if I understand it:

 

The Team enters into a 4 year, $40 million contract with a player, but they agree to pay him only $5 million for each of the first two seasons instead of the $10 million it averages out to. If the two sides agree to either part ways or the player is cut, the Team still owes him the remaining $5m for each of those first two years, and therefore that remaining $10m would count against the next year's cap even though he’s no longer on the Team. 

 

 

Not quite, it depends on the contract structure. For a contract that large there would be a signing bonus. So let’s look at a 4 year, $40M contract with the following structure: $10M signing bonus and salaries of $4M, $6m, $9.5M and $10.5 M. The cap hit associated with the signing bonus would be split among all 4 years. Here are the cap hits and cash payments:

 

Y1: $6.5M (salary + 1/4 of signing bonus) [$14M cash]

Y2: $8.5M [$6M cash, $20M total]

Y3: $12.0M [$9.5M cash, $29.5M total]

Y4: $13.0M [$10.5M cash, $40M total]

 

Now, let’s say the player gets cut in March of Y3. The caps hits would be thus:

 

Y1: $6.5M (salary + 1/4 of signing bonus) [$14M cash]

Y2: $8.5M [$6M cash, $20M total]

Y3: $5M (remainder of signing bonus) [$0 cash]

 

So it is easy to see why teams use signing and restructure bonuses to kick out cap hits. And why players like that. 

Edited February 27 by BarleyNY

[Beck Water]

On 2/23/2024 at 4:33 PM, Virgil said:

Something I've never understood, is when a deal can be re-worked without penalty vs a deal that creates dead money.

 

For example, let's just say Von Miller.  Is there any way for them to throw out his old deal and sign him to a new 1 year deal?  I feel like the answer is no, as the Saints proved with their ongoing plan to kick the can down the road.  I also understand that the player needs to be on board for the new contract.

 

But overall, what are the rules with this?  I keep hearing about deals where the old contract is essentially torn up, but I just don't get the logistics.

 

I may not be clear on what you're asking, so feel free to help me better understand.

I think you're asking if a player's amortized bonuses, which have either already been paid or are already committed to the player and guaranteed, can be "given back" as part of a new contract.

 

The only circumstance of which I'm aware where signing bonuses can be given back, is if the player retires before his contract is complete.  And then, it's usually only if the player retires pretty immediately after he signs the contract, not a couple years down the line (in theory, the team could request repayment but often don't).

So fundamentally, the contract consists of two types of money: yearly cash (salary, per game roster bonuses, and workout bonuses; incentives), and bonuses already paid, but amortized over the length of the contract.  The yearly cash can be re-worked  as a new contract. 

 

The bonuses already paid can not.

For example, when a player is traded, his bonuses stay with the trading team, but he is still under contract to the new team with the yearly cash specified in his deal for the duration of the deal.  The new team can negotiate a new contract and tear up the old contract, but old team can't (in the immortal words of Eric Wood to Aaron Maybin) say "Give back some of that (bonus) money you ain't *****in' earned!"

[Beck Water]

13 hours ago, SoCal Deek said:

Let’s see if I understand it:

 

The Team enters into a 4 year, $40 million contract with a player, but they agree to pay him only $5 million for each of the first two seasons instead of the $10 million it averages out to. If the two sides agree to either part ways or the player is cut, the Team still owes him the remaining $5m for each of those first two years, and therefore that remaining $10m would count against the next year's cap even though he’s no longer on the Team. 

 

Not quite.

 

The 4 year, $40 million contract will include a signing bonus, which will be paid to the player** up-front.  Let's say in this case the player received a $12 million signing bonus.  The player puts $12 million in his piggy bank, but for accounting (cap) purposes, the team gets to amortize it over the length of his contract, so $3M each year for 4 years.

 

Then the player will typically be paid a lower salary in his first year (because he got a fat signing bonus) and more money the rest of the contract.

For example, in 2021, when Tre White's contract extension took effect, he was paid less than $1M in salary (NFL minimum).

Let's say the player's salary will be $1M the first year, $8M his 2nd year, $8M his 3rd year, and $11M his 4th year.

So his cap hit is:

1: $1M + $3M = $4M

2: $8M + $3M = $11M

3: $8M + $3M = $11M

4: $11M + $3M = $14M

 

Hold on, next wrinkle: $20M of the player's contract was guaranteed, meaning his $12M signing bonus, plus $1M of 1st year salary, plus $7M of his next year salary.

So if the team cuts the player in year 2, they owe him $7M additional cash, and that $7M PLUS the $9M of his remaining year's salary bonuses count against the cap.

They have $16M dead cap for that player.

On the other hand, if the team cuts the player in year 3, they're only on the hook for $6M (two years of amortized signing bonus) dead cap, which is already in the player's bank account.  In year 4, they're on the hook for $3M, since none of his $11M salary was guaranteed.

 

Now let's say in year 3, the team was cash-strapped.  So they converted $7M of the player's $8M salary to "restructure bonus".  They can amortize it against the length of his contract

3:$1M + $3M(signing) + $3.5M (restructure) = $7.5M   This gives the team an extra $3.5M in cap space to sign a low-tier FA or 2, but the player gets paid the same.

4: $11M + $3M(signing) + $3.5M (restructure) = $17.5M.

But, if the team cuts the player in year 4, they now take on $7.5M dead cap instead of $3M

 

There are more games that can be tucked into contracts to try to manage the cap while bidding competitively for players - option bonuses, void years, etc but this is just a basic example.

 

One more piece.  Let's say the player hasn't quite lived up to expectations and in year 3 has no guaranteed money.  Maybe they go to the player and ask if he'd be willing to take a $3M pay cut, to $5M salary.  The player sees his status on the team is in jeopardy, but he likes his chances to start and play well with this team.  So he says "OK, I'll do that, but in return, I want you to fully guarantee my $5M salary and $3M of my salary next year".  The player is, at minimum, still guaranteed the same amount of money as he'd get this season (just spread over 2 years), the team gets cap relief, and the player is trading guarantees for a reduction in his overall contract value.

 

[Ethan in Cleveland]

It's called dead money for a reason. Once you pay the signing bonus you have to account for it. That is done over the length of the remaining years on the contract. A restructure can be done anytime but it doesn't impact the dead money that needs to be accounted for at some time. 

A guy can agree to a pay cut instead of getting cut. Morse did this a couple years ago. They may do the same with White instead of just cutting him. That can lower his cap figure for this year because it is salary money.  

[Ethan in Cleveland]

3 hours ago, Beck Water said:

 

Not quite.

 

The 4 year, $40 million contract will include a signing bonus, which will be paid to the player** up-front.  Let's say in this case the player received a $12 million signing bonus.  The player puts $12 million in his piggy bank, but for accounting (cap) purposes, the team gets to amortize it over the length of his contract, so $3M each year for 4 years.

 

Then the player will typically be paid a lower salary in his first year (because he got a fat signing bonus) and more money the rest of the contract.

For example, in 2021, when Tre White's contract extension took effect, he was paid less than $1M in salary (NFL minimum).

Let's say the player's salary will be $1M the first year, $8M his 2nd year, $8M his 3rd year, and $11M his 4th year.

So his cap hit is:

1: $1M + $3M = $4M

2: $8M + $3M = $11M

3: $8M + $3M = $11M

4: $11M + $3M = $14M

 

Hold on, next wrinkle: $20M of the player's contract was guaranteed, meaning his $12M signing bonus, plus $1M of 1st year salary, plus $7M of his next year salary.

So if the team cuts the player in year 2, they owe him $7M additional cash, and that $7M PLUS the $9M of his remaining year's salary bonuses count against the cap.

They have $16M dead cap for that player.

On the other hand, if the team cuts the player in year 3, they're only on the hook for $6M (two years of amortized signing bonus) dead cap, which is already in the player's bank account.  In year 4, they're on the hook for $3M, since none of his $11M salary was guaranteed.

 

Now let's say in year 3, the team was cash-strapped.  So they converted $7M of the player's $8M salary to "restructure bonus".  They can amortize it against the length of his contract

3:$1M + $3M(signing) + $3.5M (restructure) = $7.5M   This gives the team an extra $3.5M in cap space to sign a low-tier FA or 2, but the player gets paid the same.

4: $11M + $3M(signing) + $3.5M (restructure) = $17.5M.

But, if the team cuts the player in year 4, they now take on $7.5M dead cap instead of $3M

 

There are more games that can be tucked into contracts to try to manage the cap while bidding competitively for players - option bonuses, void years, etc but this is just a basic example.

 

One more piece.  Let's say the player hasn't quite lived up to expectations and in year 3 has no guaranteed money.  Maybe they go to the player and ask if he'd be willing to take a $3M pay cut, to $5M salary.  The player sees his status on the team is in jeopardy, but he likes his chances to start and play well with this team.  So he says "OK, I'll do that, but in return, I want you to fully guarantee my $5M salary and $3M of my salary next year".  The player is, at minimum, still guaranteed the same amount of money as he'd get this season (just spread over 2 years), the team gets cap relief, and the player is trading guarantees for a reduction in his overall contract value.

 

Perfect analysis!

I would only add one thing to your last paragraph.  The two parties may agree to a lower salary but also build in performance bonuses so the player can earn back the total of his previous deal.

This is exactly what White and Beane should do.  If they cut White, his value in free agency may be very little. So he would be wise to lower his salary this year, take it in a lump sum and then add some performance escalators. Otherwise he gets cut, Bills take the dead cap hit but save overall cap space, and White probably has to wait until next season to sign a practice squad deal coming off two major injuries. 

[GunnerBill]

1 hour ago, Ethan in Cleveland said:

Perfect analysis!

I would only add one thing to your last paragraph.  The two parties may agree to a lower salary but also build in performance bonuses so the player can earn back the total of his previous deal.

This is exactly what White and Beane should do.  If they cut White, his value in free agency may be very little. So he would be wise to lower his salary this year, take it in a lump sum and then add some performance escalators. Otherwise he gets cut, Bills take the dead cap hit but save overall cap space, and White probably has to wait until next season to sign a practice squad deal coming off two major injuries. 

 

But they can't cut him until he can pass a medical by which time the additional guarantee has triggered and the money saved by cutting him is reduced further... which is a further reason why they should negotiate in exactly the way you say. 

[GunnerBill]

Basically the easy way to think about it is dead money is money that has been paid already but not accounted for on the cap yet. 

[Matt_In_NH]

On 2/23/2024 at 6:28 PM, SoonerBillsFan said:

I think the NFL and NFLPA  should allow Teams to dump 1 contract per year, with the agreement the team has to pay the player 1/2 of the remaining contract.

 

In other words, Terry pays Von 1/2 of what he owes on his contract, but it's 100% off our cap.

That would make the CBA garbage.  Why would the owners do that?  It would also mean the cap is toilet paper.  
 

you live with contracts you agree to

Edited February 27 by Matt_In_NH

[SoonerBillsFan]

1 minute ago, Matt_In_NH said:

That would make the CBA garbage.  Why would the owners do that?

Not really. 1 per offseason is no big deal. AND the player gets guaranteed money in hand and can sign with another team.  

 

It's a win win.

[GunnerBill]

On 2/23/2024 at 11:28 PM, SoonerBillsFan said:

I think the NFL and NFLPA  should allow Teams to dump 1 contract per year, with the agreement the team has to pay the player 1/2 of the remaining contract.

 

In other words, Terry pays Von 1/2 of what he owes on his contract, but it's 100% off our cap.

 

Teams can dump as many contracts as they like and not have to pay players anything further. When a team cuts a player the money that is left behind on the cap is money ALREADY paid. If the Bills cut Von tomorrow they don't own him a single extra penny. The dead cap is all money he already has. 

[Tuco]

1 hour ago, GunnerBill said:

 

But they can't cut him until he can pass a medical by which time the additional guarantee has triggered and the money saved by cutting him is reduced further... which is a further reason why they should negotiate in exactly the way you say. 

 

Actually they can. They can't cut an injured player during the season he's injured. But if he still can't play by the next season he can be cut. But it's not a free and clear cut like most people think. The CBA contains an injury protection clause, and if Tre has no other, higher injury guarantee in his contract (and according to OTC and Spotrac he doesn't), the Bills would still have to give him $2.05 million, of which $1.23 million would be considered salary. This would reduce the often-quoted cap savings of $6.07 million down to $4.84 million. Less than most people think, but it can be done.

 

I'm not saying they should or shouldn't. And the injury guaranteed amount isn't a whole lot different than his $1.5 mil roster bonus. Just pointing out they can let him go before the season if they choose to.

[GunnerBill]

17 minutes ago, Tuco said:

 

Actually they can. They can't cut an injured player during the season he's injured. But if he still can't play by the next season he can be cut. But it's not a free and clear cut like most people think. The CBA contains an injury protection clause, and if Tre has no other, higher injury guarantee in his contract (and according to OTC and Spotrac he doesn't), the Bills would still have to give him $2.05 million, of which $1.23 million would be considered salary. This would reduce the often-quoted cap savings of $6.07 million down to $4.84 million. Less than most people think, but it can be done.

 

I'm not saying they should or shouldn't. And the injury guaranteed amount isn't a whole lot different than his $1.5 mil roster bonus. Just pointing out they can let him go before the season if they choose to.

 

Yea they can't cut him without the additional guarantee coming into place. That was my point. I was trying to keep it quite simple.

[Tuco]

1 hour ago, GunnerBill said:

 

Yea they can't cut him without the additional guarantee coming into place. That was my point. I was trying to keep it quite simple.

 

Okay. But there are numerous posters all over who say they can't cut him while he's injured like it's not possible to do so. And they are wrong. I may have been thrown off by your first sentence that begins . . . "They can't cut him until he passes a medical. . . "  So I was pointing out, yes, they can. Glad you understand it. Many here do not.

[GunnerBill]

6 minutes ago, Tuco said:

 

Okay. But there are numerous posters all over who say they can't cut him while he's injured like it's not possible to do so. And they are wrong. I may have been thrown off by your first sentence that begins . . . "They can't cut him until he passes a medical. . . "  So I was pointing out, yes, they can. Glad you understand it. Many here do not.

 

Yea they can but basically the implication is the same.... whether they cut him pre-medical or cut him post medical but also post guarantee activating they end up with their 2024 cap savings reduced from roughly 6 to 4.5. 

[Bleeding Bills Blue]

On 2/23/2024 at 5:33 PM, Virgil said:

Something I've never understood, is when a deal can be re-worked without penalty vs a deal that creates dead money.

 

For example, let's just say Von Miller.  Is there any way for them to throw out his old deal and sign him to a new 1 year deal?  I feel like the answer is no, as the Saints proved with their ongoing plan to kick the can down the road.  I also understand that the player needs to be on board for the new contract.

 

But overall, what are the rules with this?  I keep hearing about deals where the old contract is essentially torn up, but I just don't get the logistics.

 

Easiest way to look at this is bonuses are already paid.  So you can spread them out over multiple seasons (im sure theres a billion parameters on how to do this).  So you can't just throw out certain aspects of contract because it was originally paid out as a bonus in 2022 and spread across 5 years to lessen cap charges in year 1.  The same goes for restructure charges.  You are essentially converting game check base salary into a bonus, so that bonus can then be spread across multiple seasons.  So essentially all of that money is already "paid" and must remain on the cap.  

 

Von's probably a tough example, 10M of his 2024 salary is guaranteed, and the rest guarantees on March 18th.  We already restructured him once, and any further would likely result in having to keep him for another season.  He has no further guarantee's beyond this season, so the only way id see it is if he signed like a new 2 year deal or something to drastically reduce base salary over the next 2 years.

 

https://www.spotrac.com/nfl/buffalo-bills/von-miller-7717/

 

So signing bonus is spread over 5 years, and then they restructured in 2023 and spread that 13M across another 5 years.  When you trade or release a player that all loads up into the dead cap number.  3yrs at 3.705+4yrs at 2.669 = 21.79M.  His base salary guarantee is 10.71M (until 3/18).  Add that up for ur dead cap number (if you had guaranteed salaries anywhere else those also get added in the cap charge).  While you might have offset language that reduces the actual outgoing cash to a player (new team pays their salary and it is offset by language in the contract so we pay the difference), the cap charge is unaffected.