How 49ers circumvented the 30-percent rule

With so few contracts of substance in this depressing uncapped year for players, it’s worthy of note when one comes along of some significance. The extension reached Tuesday between linebacker Patrick Willis and the 49ers overcomes the limitations of the dreaded 30-percent rule that has hampered long-term extensions for rising young star players and guarantees close to 60 percent of total value for a player whose contract was not due to expire for two seasons.

The marketplace

When the bell rang for free agency on March 5, the Miami Dolphins’ team negotiators were directed to not let linebacker Karlos Dansby out of the building until he signed, leading to a total deal of $43 million over five years with over half ($22 million) guaranteed, including $16M in a signing bonus. Dansby will earn almost $21M in 2010. The deal compares favorably with another first-day free-agent linebacker deal, that of Bart Scott with the Jets a year ago.

On March 30, the Texans jumped in with a new contract for their ascending linebacker, DeMeco Ryans. Ryans, a restricted free agent, cashed in with a total value of $48M over six years with $21.75M guaranteed, $7.5M in signing bonus.

Now comes Willis, neither an unrestricted nor restricted free agent. Willis was entering the fourth year of his five-year first-round contract from 2007, thus less leverage than either Dansby – who had the most – or Ryans.

The Willis deal has a total value of roughly $50M over seven years, with $29M guaranteed and a signing bonus of $15.5M.

The 53.3M of the deal is in the following form:

23M in 30% increase money
20.3M in signing bonus and supersede money
10M in easily-earned escalators

The 29M guarantee for Willis is in the following form:
15.5M signing bonus
4.8M supersede bonus (see below)
8.7M in future salary guarantees (injury only)

Thus, the Willis deal.

The 30-percent rule tactic

Like any rule passed to insure competitive balance, teams look around and see what other teams are doing to work within – or around – its boundaries. As discussed here, the 30-percent rule was making it extremely difficult for young and rising players to be rewarded this year without a disproportionate and unwieldy amount of their contracts placed in signing bonus, the major category of payment that does not count toward the rule.

Last week, the Eagles worked within the rule to find a short-term solution with quarterback Kevin Kolb. Kolb, whose contract was expiring this year, was given a one-year extension with a signing bonus in excess of $10M and a total of $12.26M for the two years (some of that was to be paid to Kolb anyway based on a one-time incentive he would likely earn next season by playing as well as his offseason workout bonus).

While teams and agents were studying the short-term solution for Kolb, along comes Willis with anything but a short-term solution -- a seven-year deal, with five new years added to his existing two.

I don’t know all the particulars yet on the deal, which I will have in a coming column, but it appears that Willis’ agents and the 49ers found a bit of a loophole in the rule.

Willis, as we would expect, has a very large signing bonus of $15.5M. Although large, it’s not as large as we thought it would take in terms of getting deals done for young players, the theory being that the signing bonus would have to be disproportionate to the rest of the deal.

Here’s where it gets a bit tricky:

During training camp of 2011, Willis has a second signing bonus, a supersede signing bonus – the same mechanism used in deals analyzed here for Jake Delhomme and JaMarcus Russell – that is backed up (protected) by an option bonus combined with a non-exercise fee. In layman’s terms, the option and non-exercise fee are tools to have the guarantee be as rock solid as possible.

Like the original signing bonus, the supersede signing bonus of $4.8M is not subject to the 30-percent rule. This means teams still must use a large signing bonus to comply with the rule but not as big a bonus as originally thought.

The 49ers can still only increase the numbers year to year of 30 percent based on the 2009 number of $1.66M ($498,000). This number, though, is relatively high due to Willis being a former first-round pick with higher salaries and option bonus proration, which former low first-rounders (Chris Johnson) and second-rounders (DeSean Jackson) do not have.

The way the numbers continue to rise in this deal is through one-time NLTBE (not likely to be earned) incentive amounts with minimum performance thresholds that are also not part of the 30 percent calculations. There are 10M of such escalators in the deal, all in the final three years. While this money is not “guaranteed” in a literal sense, it’s as close as you can get while keeping it out of the calculations.

In sum, my sense is that this deal will look similar to the structure of one of the top picks in the draft. With the supersede as a “second” signing bonus and future one-time incentives, the deal shows one way to do a deal under these circumstances.

This is now a template out there to maneuver around the rule. My feeling is that even though there are a lot of players and agents watching this deal, there will be few, if any, who mimic it, whether due to not having a contract made for this scenario (a former high first round pick), a feeling that it’s rule circumvention or the bigger and separate issue of owners not wanting to make significant long-term player contract investments amid the uncertainty of the labor system in the NFL.

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