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Jul 09

How Contract Extensions Differ from New Contracts

I received a question today concerning the treatment of the signing bonus on Victor Cruz’ contract and why it is prorated starting in 2013 rather than 2014 and doesn’t extend into the final year of the contract. It’s a great question and I thought might make for an informative post and something I’ll probably touch upon in a future video presentation as well. I’ll also look at why teams prefer the extension to simply waiting out a new contract.

The reporting about extensions and new contracts can be pretty confusing. I’ve been in that same boat many times myself in the past not understanding the differences. The basic job of the media is to report on whatever numbers they are told and sometimes something gets lost in translation. Yesterdays reports on Cruz clearly were confusing. At one point I read (and Im sorry but I cant recall where from) that Cruz received a 5 year extension worth$ 43 million and that his RFA contract would remain in place. Reports like that are easy to construe as meaning Cruz earns $2.879 million this year and the Giants don’t begin payment on a new deal until 2014. That is not correct.

An in-season contract extension is different than a brand new contract signed in free agency.  An extension can be looked at as a deal containing two separate contracts. For Cruz there is a $43 million dollar extension and a $2.879 million one year contract. But the contracts for cap and cash flow purposes do not run one after the other as it would if Cruz played out his year on the RFA contract and then re-signed with the Giants.  The contracts operate in tandem with one another with the $2.879 million being built into a 6 year period worth $45.879 million.

The extension benefits both sides. In Cruz’ case he will earn a $9.5 million dollar signing bonus and $630,000 base salary in 2013 according to Pro Football Talk. That represents a $7.25 million dollar raise for Cruz, essentially a large prepayment on the extension. So Cruz benefits from the money now rather than later. The Giants, on the other hand, benefit from the ability begin prorating a signing bonus immediately thus limiting their dead money hits on the contract since the CBA only allows proration for a 5 year maximum period.

The dead money is of the utmost importance for a player like Cruz and the Giants situation. Cruz is a gamebreaking type of talent. He isn’t a great route runner with great hands. He’s a burner that runs away from people. Normally that type of play declines with age and last year Cruz’ numbers were already way down.

The Giants are also dealing with a QB who is going to be 32 this season. While there is no reason to think that Eli Manning is going anywhere anytime soon, it is not impossible to consider that his game will need to change as he gets older.  Manning will be a free agent when turns 35. Again it’s doubtful he leaves but a lot can happen in 3 years. You don’t want to be saddled with overpriced receivers that may no longer fit the skillset of the QB of offensive direction of the team.

From a dead money perspective here is what the Giants would be looking at with Cruz under the accepted structure and the same cash flow system but with the contract beginning in 2014.

 

Year

Manning Age

Cruz Age

Dead Money Actual

Cap Savings Actual

Dead Money New Contract

Cap Savings New

2013

32

27

$15,530,000

($13,000,000)

$0

$2,879,000

2014

33

28

$13,000,000

($5,700,000)

$15,530,000

($10,479,000)

2015

34

29

$5,700,000

$2,450,000

$10,479,000

($2,329,000)

2016

35

30

$3,800,000

$6,100,000

$5,700,000

$4,200,000

2017

36

31

$1,900,000

$7,500,000

$3,800,000

$5,600,000

2018

37

32

$0

$8,500,000

$1,900,000

$8,500,000

 

So what you have in the accepted structure is a situation where the Giants can begin to get leverage to take paycuts in 2015 or to simply walk away with no damage in 2016, especially if that year Eli does not stay in New York. Every year thereafter becomes more and more difficult for Cruz to earn the reported money.

By signing Cruz to an extension the Giants could walk away in 2015 having just paid him $15.53 million for two years. If the deal began in 2014 he would be guaranteed a spot thru 2015 with the Giants paying just over $21 million to Cruz for 3 years. The Giants would get some leverage with Cruz in 2016 with the real leverage beginning in 2017, when he would be 31 and Manning 36. So in terms of flexibility the Giants receive a tremendous amount of cap flexibility by getting this deal done now rather than simply holding off until 2014.