Monday Money Matters

With two weeks left in the season, it will be interesting to see whether teams are proactive with their own free-agents-to-be in securing contract extensions before the Dec. 27 deadline for allowing prorated bonuses to be used in 2008.

                       Around the time of the election in November, there were reports of agents and players pushing for extensions, fearful the incoming Obama Administration’s new tax plan might have adverse financial effects once the new year arrived.  The prediction of a flurry of contracts prior to the end of the year has certainly not transpired.  Whether it is due to the present financial crisis or simply the normal course of business, there has been little on the contract front since Aaron Rodgers secured his extension with the Packers six weeks ago.

As of this weekend, there was approximately $158M of available Cap room in the NFL, an average of $4.935M per team.  Teams with the most room are Kansas City ($22M), Cincinnati and Tampa Bay ($10.8M each).  There doesn’t appear to be a strong push by those teams to use up that Cap room on their own players for extensions in the next two weeks, although it still could happen.

And, as discussed here last week, the Giants, although awash in Cap room as we approach the end of the season ($8.7M), appear in no hurry to extend either of their top two running backs, Brandon Jacobs and Derrick Ward. Both are a couple months from unrestricted free agency and potentially could sign with any NFL team.  The Giants have decided to put their money into cornerback Corey Webster for a top-of-the-market, five-year extension that can max out at almost $43M.  The key number, however, is that Webster has $20M in guaranteed money, a number that has become a true badge of honor for top NFL players. 

Webster, a second-round pick in 2005 who turns 27 in March, was three games from free agency. The Giants obviously felt he could have received even more with the bidding open to all teams.  They had already locked up their third-round pick from that draft, Justin Tuck, with an extension in 2007 (five years, $30M, $16M guaranteed).   The terms appear to represent a head-of-the-class contract for Webster, playing a key position for a championship contender.  Webster certainly attracted the attention of the Giants’ front office ahead of other pending free agents such as Jacobs, Ward and Amani Toomer.

The only significant extension besides Webster is that of Marc Colombo of the Cowboys.  That deal, however, is being held up by a vital tax issue that came to the attention of players, agents and teams this week…

NFL agents were sent an urgent memo this week from the NFLPA, requiring immediate attention to Federal Tax Code 409A.  This provision, originally aimed at bloated executive compensation packages, potentially calls for a full tax burden on signing bonuses and future guaranteed money in the year the package is negotiated, even if the money is deferred over several years.  This would have dramatic ramifications.

Virtually every signing bonus of any significance in an NFL contract is paid out over a period of at least a couple of years.  For instance, if an NFL player signed a contract in March 2008 with an $8M bonus, payment terms of that bonus might have looked something like this:

$2M upon execution of the contract;

$2M in October 2008;

$1M in both March and October 2009;

$1M in both March and October 2010.

Some teams have more deferrals than others, but the amount of deferral is usually not a sticking point in negotiations with agents, as the money is guaranteed.  Agents and players obviously want as much as they can get upfront, but they will not walk away from a huge signing bonus due to the necessity of deferrals.  Ultimately, if a team and its owner need to pay out a bonus in installments, agents will not quibble.

Now, tax code 409A becomes a major concern if enforced, meaning the full value of these deferred payments could be brought to taxation in the year negotiated, not earned, potentially affecting tens, even hundreds of thousands of dollars depending on the size of the contracts. 

The NFLPA was clear about the importance of this provision in its memo to all agents:  “This memorandum identifies an extremely important tax issue that may affect your player-clients and requires your immediate attention. The NFL has just informed the NFLPA that NFL clubs did not draft or amend many NFL player contracts in order to bring them into compliance with Section 409A of the Internal Revenue Code.  As a result, many player contracts that include certain deferred compensation arrangements may not comply with the new tax provisions, thereby resulting in accelerated taxable income and/or an additional 20% tax, imposed on the player-client, unless the contracts are amended on or before December 31, 2008."

These contracts are now being brought into compliance through language that has been vetted by the NFL Management Council and the NFLPA to allow for the taxation of deferred guaranteed money in the year of receipt rather than in the year of negotiation of the contract.  These revisions are occurring around the league as you read this.

A final note to these revisions:  In normal circumstances, any revisions to an existing contract are considered renegotiations, meaning a contract cannot be touched again for a period of twelve months.  Due to the urgent and immediate nature of this issue, the revisions for tax code 409A will now not be considered renegotiations, as per agreement between the NFL and the NFLPA (there is something they are agreeing on).  Therefore, these contracts can be renegotiated again, much to the player’s potential benefit, again in 2009…

It doesn’t look like the NFL will be headed to the nation’s second-largest city anytime soon.  The proposed construction of a new NFL-ready stadium in the City of Industy near Los Angeles has been pushed back at least a year, according to reports.  After initial optimism about building the project, which would cost $600-$800M, there now appears to be a cat-and-mouse game going on between the builder of the stadium, Majestic Realty, and the league.

The NFL wants to wait until the City of Industry approves the project before there’s any more talk about moving a team there.  Majestic, however, will not go forward with this massive project unless and until it knows it’s going to have an NFL tenant.  As for approval from the City of Industry, that process continues, but as it does, there are no holes in the ground.  The bottom line appears to be that if there’s NFL football in Los Angeles, something that has been tossed around since the Raiders and Rams left, the earliest feasible date is 2012.

It’s hard to gauge the enthusiasm on the part of league officials about Los Angeles.  Years ago, there was serious discussion about a couple of potential sites, the Coliseum and the Rose Bowl among them, but after further economic analysis, those discussions seemed to fade.  And earlier this year, the Majestic discussions brought some life to the topic, only to be dissipated with the present news.  The sense here is that L.A. can wait.

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