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The 5 O’Clock Club: Another deep dive on the salary cap - voidable years, and how they can be used to make Johnathan Hankins affordable in 2018

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It’s 5 o’clock somewhere…

NFL: Preseason-New York Giants at Buffalo Bills Kevin Hoffman-USA TODAY Sports

The 5 o’clock club aims to provide a forum for reader-driven discussion at a time of day when there isn’t much NFL news being published. Feel free to introduce topics that interest you in the comments below.

Today I’d like to discuss a tool that teams can use to lower the immediate cap hit of a player contract if cap space is tight this season. The team will eventually have to pay the piper, but structuring the contract can delay the inevitable cap hit, allowing a team to ‘squeeze’ a contract in that they might not have been able to manage otherwise.

Voidable years

A voidable year is an ‘extra’ year on the length of the contract that the team and the player intend to void.

The Redskins used this method with Desean Jackson when he was unexpectedly available in the 2014 off season. The Redskins wanted to give him a 3-year contract, but they were concerned about the impact of his rather hefty dollars on the 2014 cap. They instead gave him a 4-year contract with a ‘voidable’ 4th year. The effect was to shift part of his salary cap hit from Year 1 & 2 to Year 3, allowing the Redskins to sign a high-impact free agent that they really wanted.

NFL: Washington Redskins at New York Giants Brad Penner-USA TODAY Sports

So, how can the voidable year be used?

It can be a bit technical and complex, but we’re not gonna go there. Let’s just keep it simple.

Example contract structure

Let’s say a team wants to sign a veteran free agent to a 3-year, $24m deal, but they are tight on cap space.

  • In my example, the team is going to give the player half the contract as a signing bonus — that is, $12m.
  • The remaining $12m in salary will be paid equally at $4m per season.

Here’s what the contract looks like:

Yr - Salary - prorated bonus - cap hit

Yr 1 - $4m - $4m - $8m

Yr 2 - $4m - $4m - $8m

Yr 3 - $4m - $4m - $8m

The structure is simple, and you can see that the cap charge of $8m hits equally in every year of the 3 year contract.

Adding a voidable year

To use the voidable year effectively, the team is going to write a contract for 4 years instead of 3, but the 4th year is really a “dummy” year — its only purpose is to shift cap hit from Year 1 to later in the contract. The player’s contract will actually still terminate after the 3rd year.

  • The team will pay the same $12m as salary over the first THREE years of the deal, knowing that the player will be paid this money.
  • They will add a non-guaranteed $4m to the ‘dummy’ 4th year, knowing that it will never be paid.
  • To make the contract more immediately cap-friendly, the base salary will start low in Year 1, and escalate.

The new contract structure looks like this:

Yr - Salary - prorated bonus - cap hit

Yr 1 - $2m - $3m - $5m

Yr 2 - $5m - $3m - $8m

Yr 3 - $5m - $3m - $8m

Yr 4 - $4m - $3m - $7m (this is the ‘dummy’ year that will never be paid)

You can see that the cap hit for this contract has been lowered from $8m in Year 1 under the standard contract, to $5m under the voidable contract structure, partly due to the lower base salary, and partly by spreading signing bonus money over 4 years instead of 3.

The team now has to plan carefully for Year 3, because at the end of the third year, the mechanism to void the 4th year will be triggered. When that happens, the $3m prorated signing bonus from Year 4 gets charged immediately to Year 3.

The final structure of the contract, when the 4th year is voided, will look like this:

Yr - Salary - prorated bonus - cap hit

Yr 1 - $2m - $3m - $5m

Yr 2 - $5m - $3m - $8m

Yr 3 - $5m - $6m - $11m

4 - $4m - $3m - $7m

The team is taking the same $24m cap hit that they would have taken with a standard contract, but $3m of the signing bonus cap hit has been shifted from Year 1 to Year 3, giving the team a couple of years to figure out how to create room for it.

Because of the ability for the team to roll over unused cap space, it’s possible for the team to simply carry forward the Year 1 cap savings until they need it in Year 3, but enjoying the added flexibility of having increased cap space if they need it in the meantime.

How could the Redskins use this tool in 2018?

This kind of “voidable year” cap structure can be used with a player like Johnathan Hankins, who might be a bit more expensive than the team wants to pay this season, but who offers the skill set the Redskins need to compete more effectively in 2018.

Let’s say that the Redskins and Hankins agreed to a 4 year, $36m deal, but the Redskins felt that it was unaffordable to take the $9m cap hit in 2018.

A ‘voidable’ 5th year could be added to the contract to create a structure that looks something like this:

Signing bonus: $20m

Total base salary (for 4 years): $16m

Yr - Salary - prorated bonus - cap hit

1 - $1m - $4m - $5m

2 - $5m - $4m - $9m

3 - $5m - $4m - $9m

4 - $5m - $4m - $9m

5 - $5m - $4m - $9m (this is the ‘dummy’ year that will never be paid)

The final structure of the Hankins example contract, when the 5th year is voided, will look like this:

Yr - Salary - prorated bonus - cap hit

1 - $1m - $4m - $5m

2 - $5m - $4m - $9m

3 - $5m - $4m - $9m

4 - $5m - $8m - $13m

5 - $5m - $4m - $9m

The team is taking the same $36m cap hit that they would have taken with a standard contract, but part of the signing bonus cap hit has been shifted from Year 1, 2 & 3 to Year 4, giving the team a few years to figure out how to create room for it.

The effective ‘savings’ of $4m on the 2018 cap space ($5m instead of $9m) can be significant — perhaps enough to allow the team to sign a talented free agent defensive lineman who became unexpectedly available.

Obviously, the team needs to be “all in” on the player to go this route since this structure makes it impractical cap-wise to cut the player prior to completion of the contract.

The Redskins used this tool with Desean Jackson 4 years ago.

Perhaps they’ll use it with Johnathan Hankins today.

Poll

What is the MAXIMUM average annual salary that the Redskins should pay Johnathan Hankins if they sign him this week?

This poll is closed

  • 9%
    $6 million per year
    (93 votes)
  • 20%
    $7 million per year
    (199 votes)
  • 38%
    $8 million per year
    (366 votes)
  • 22%
    $9 million per year
    (213 votes)
  • 4%
    $10 million per year
    (44 votes)
  • 1%
    I’m comfortable with a number higher than $10m per season
    (15 votes)
  • 2%
    None of the above - the Redskins shouldn’t sign him at all
    (24 votes)
954 votes total Vote Now