Working within the MLS salary budget

Navigating the complexities of TAM, GAM and DPs: What can a team do or not do?

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RussoSoccer Note: This page is based on the CBA that was in effect from 2015-19

Prior to the start of the 2019 season, a couple of teams in MLS face important decisions in the nature of managing their designated players (“DPs”).

Atlanta United fans are dreaming of a way for the team to find a loophole and have 4 designated players. Meanwhile on the left coast, the Los Angeles Galaxy has its own four-DP problem.

These scenarios beg the question: Can you have four DP’s in MLS?

I’ll get to the bottom line straight away: MLS does not allow a team to have more than three DPs.

But within the confines of the MLS roster rules, what can a team do or not do with general allocation money (“GAM”), targeted allocation money (“TAM”) and designated players (“DPs”)?

It’s another chapter in those confusing MLS rules. Let’s dive in, shall we?


RESTRUCTURING CONTRACTS

Can a team restructure a contract to circumvent the DP rule?

Louis Napoleon signs a four-year contract to play for the Impact de Montréal

For example, if Montréal signed a European player, Louis Napoleon, to a four-year deal but wanted to try avoid making him a DP for the first year he is with the team, could they structure his contract so as to back-load his guaranteed salary, making more of the compensation payable in the last two years, and then use TAM to buy down the salary and avoid the DP tag in the first year?

The salary budget charge for a designated player is actually not complicated: MLS takes the payments over the course of the entire guaranteed portion of the contract—salary plus transfer fee—and averages them to determine the budget charge. So to use my example, backloading a guaranteed contract to push more money to the later years would not have an impact on the players’ budget charge at the front end of his contract.

Here’s how it would break out: Assume Napoleon has signed a four-year contract with MLS to play for Montréal. (All contracts are between a player and MLS, not the team he will play for, due to the fact that MLS is a single-entity business.) Napoleon will make $700,000 in 2019 and then $4 million in 2020, $4.5 million in 2021 and $5 million in 2022. His salary budget charge would be $3.55 million per year, the average of those four salaries, and still well over DP level. Thus, Louis Napoleon is a designated player under the MLS roster rules.

TRANSFER FEES

Is a transfer fee divided out over the entire contract or can it be all put in year 1?

Louis Napoleon transfer fee paid to his former club, En Avant Guingamp

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A transfer fee of $16,000,000 is to be paid to Napoleon’s former club, En Avant Guingamp. Under the MLS roster rules, the transfer fee gets divided over the length of the guaranteed portion of a Napoleon’s contract (i.e. not option years). So if he has two years guaranteed, then it is divided over those two years.

However, Montreál and Guingamp can make their own agreement as to when the transfer fee is paid, whether it is paid all at once or in installments.

Thus, a team can pay the full transfer fee up front in that first year, but it will have no effect on a player’s budget number. So even if Montréal paid all $16 million of Napoleon’s fee up front, that $16 million still is divided up over the length of the guaranteed portion of his contract, not just in the first year of the deal.

What’s the maximum transfer fee a team could agree to pay that would make a player a DP in the first year, but allow a team to use TAM to buy down his contract for subsequent years of the contract?

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The answer to this question really depends on the salary for the player and the number of guaranteed years of a contract. To begin the math, you would work back from the $1.53 million cap on TAM-eligible contracts. (In order to be eligible to be bought down with TAM, a player must make more than the maximum budget charge, $530,000 in 2019, but not more than $1 million over the maximum budget charge, or $1.53 million.)

Therefore, if a team is signing a player to a three-year deal, it can’t spend more than that $1.53 million cap multiplied by three years, or $4.59 million in combined salary and amortised transfer fee, if it wants to buy down a player with TAM.

In my above example, Montréal would be unable to buy down Louis Napoleon’s contract using TAM. The team could only spend $6.12 million in combined salary and amortised transfer fee. With a transfer fee of $16 million amortised over the two guaranteed years, the transfer fee alone would have a salary budget hit of $8 million per year, without even getting to the player’s salary.

If a player’s contract gets restructured, what effect, if any, would that have on the amortisation of the transfer fee?

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A player’s contract can definitely be restructured, but the player’s salary budget charge for the transfer fee would be the same over the original guaranteed years of the deal. This prevents a team from restructuring and trying to amortise the original fee over the added guaranteed years of a new deal.

Does a team keep all of the transfer fee it might receive from the transfer of a player to a team in another league?

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No, the team must share the transfer fee with MLS, 75% to the team and 25% to MLS.

If a team in another league wanted to buy a player, but that player is currently on an MLS II team, can they, and if so, who receives the transfer fee?

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Yes, that player could be signed, assuming he has not been made a homegrown player by his MLS club. Further, if the player is not on an MLS contract, then MLS would not have a claim over any portion of that transfer fee. However, USL might claim a portion of any transfer fees.

Can money received in the form of a transfer fee be used to pay down an existing DP to TAM level, or does it only apply to acquisition costs and not salary/budget charge costs?

Could a club use a transfer fee it receives to pay down the “pro-rated” transfer fees of a prior DP acquisition transfer fee in order to reduce that prior DP’s salary budget charge?

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An MLS team may assign up to $750,000 of any transfer monies received to be used as GAM, per the MLS roster rules. The remaining balance of the team’s share (if any), which cannot be traded, can be used against the expenses incurred by the team in relation to the costs of an existing or new DP, or, if the league approves, against an expense that (i) would not otherwise have been incurred by the club; and (ii) reasonably represents an investment in the League or club (e.g., youth development and training facilities).

In other words, an owner pays his or her own money for all salary above the maximum budget charge, plus the transfer fee. The roster rules allow that money to come from the profits from a player sale. However, it has no impact on the actual salary budget charge – the money cannot be used to reduce a prior DP’s salary budget hit.

LOANING A DP

Example: If Vancouver has four DPs on its roster prior to the roster compliance date, could Vancouver loan its Dutch young DP, midfielder Brian Kluivoort, while keeping its other three DPs on the roster, in an effort to be roster compliant?

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In theory it is permitted. With a young DP like Kluivoort, Vancouver would only need a team to cover his salary in order for Kluivoort to be removed as a DP from the roster. (For a senior DP, that formula is far more complicated.)

While it is permitted, doing this would present a risk to Vancouver. For one thing, they risk upsetting their young DP, whom they have invested a lot of money in. Secondly, depending on the status of the other DPs, are they going to continue to have their services, or are they planning to sell one of them after the season? If so, Vancouver should probably consider completing a transfer of the departing DP now so as to keep Kluivoort on the roster. Also, what if Kluivoort refuses to return to Vancouver after his loan spell? You’re then likely forced to sell Kluivoort at a huge loss. Finally, the message that this kind of a move sends is negative.

Does sending a player out on loan impact a team in terms of DPs?

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Orlando City DP Carlos Santana goes on loan to FC Barcelona

Pursuant to the MLS roster rules, loaning a player provides roster relief but not budget relief. So, yes, loaning a DP removes that DP from the roster as long as the other team is covering his salary.

Thus, if fictitious player Carlos Santana, a star Brazilian forward who is a DP with Orlando City, were to be loaned for six months to FC Barcelona, the entirety of his salary budget charge must be covered in order to remove him from the books entirely. So loaning Santana would free up a DP slot for Orlando, but not automatic salary budget relief.

In order to calculate this, one would have to include his salary of $6.3 million in total compensation in 2018, plus the transfer fee Orlando City paid to Flamengo to acquire him (which as was explained in the earlier example above is amortised over the guaranteed years of his contract).

Bottom line: For a six-month loan, this would be an expensive deal for Barcelona.

Can an MLS team loan one of their extra DPs to their USL team to comply with MLS rules? 

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No, per the MLS roster rules:

An MLS club can receive roster relief and budget relief for a maximum of one player loaned to its USL affiliate; provided:

  1. The player is under the age of 25 (i.e., he does not turn 25 prior to the end of the calendar year);
  2. The player’s Salary Budget Charge is less than or equal to the MLS Senior Minimum Salary (including any loan fees, transfer fees, agent fees, housing, car, etc.); and
  3. The loan of the player to the USL affiliate must last for the duration an entire USL season; provided, however, that such a player may be recalled to his parent MLS club only in the case of extreme hardship.

When a player is assigned to an MLS II team that plays in the USL, what effect will that have on the the MLS team’s salary cap/roster spots?

Can players play for both teams regularly? 

An MLS team may assign a player to an MLS II or other USL team but this will not have any effect on the MLS team’s salary budget cap or roster spots, unless it meets the requirements from the preceding example.

No, a player cannot have simultaneous contracts with both a USL team and an MLS team.

On this point, it should be noted that there are also short-term loans of USL players to MLS, but only for Champions League, Open Cup and exhibition games.

TAM AND GAM

What are the origins of TAM and GAM?

Remember that MLS is a single entity, not individually owned teams. The league invented both forms of allocation money, which explains why they are jokingly referred to as “Garber dollars.” TAM was instituted after the 2015 CBA went into place. There is no equivalent in other leagues.

Is there a list of TAM / GAM amounts, how they were acquired and when they expire or was used, so that a fan can figure this out?

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MLS is not transparent as to the specific amounts of GAM and TAM a team has. It is guarded as a state secret.

Obviously, it would be a very useful tool that would completely change how we talk about MLS teams, offseason needs, in-league trades and roster building. The league fights against it out of fear that it would impact contract negotiations to the detriment of owner/operators. That said, the league is being very short-sighted since the amount of allocation money a team possesses has almost no bearing on negotiations in much larger global market.

Compared to other North American sports leagues like MLB, NFL, NHL and the NBA, where there is much discussion and data available about player salaries, salary caps, on sites like Spotrac, MLS is still in the dark ages with regard to information sharing.

Do MLS teams get inside information about the other teams’ contracts? 

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The clubs have some details on other teams, but it is not constantly updated. So teams general have some idea of which teams have more or less GAM and TAM to move, but usually not exact amounts.

If a DP has his contract bought down using TAM, and later that player is transferred, does the MLS team get to keep 100% of the transfer fee they receive in order to recover their TAM monies they used before applying the 75-25 split of the transfer fee with the league?

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It goes without saying that this complicated.

Take the hypothetical example of Miguel Sánchez, a Spanish international midfielder with the Houston Dynamo. He was signed as as a DP, and in the second year of his contract Houston uses TAM to buy down his contract, thus freeing a DP slot on the roster.

Let’s say Sánchez is on a four-year guaranteed contract. His transfer fee is amortized over the four years of the deal, each year 25% of the fee. Once Miguel is bought down with TAM, the league begins to reimburse the Dynamo for 25% of the transfer fee, year-by-year, in years in which the player is no longer a DP. So, as an example, if Miguel’s transfer fee was $2 million, his budget charge would include $500,000 per year on top of his salary. Once Miguel’s contract is being paid down with TAM, the league begins to pay Houston back year-by-year for that transfer fee used to acquire him, considered to be an “out-of-pocket” cost because that $500,000 is now covered by TAM.

If Miguel is then sold, the Dynamo would recoup all “out of pocket” expenses from the one DP year of the deal before the transfer fee is then split 75-25 with MLS.

There is one caveat: If Houston used discretionary TAM (as opposed to mandatory TAM – money they are required to spend each year) to buy Miguel’s contract down, given that it is discretionary funds, that money is recouped by the owner/operators of the Dynamo in the event of a sale.

BUYING OUT A PLAYER’S CONTRACT

If a club buys out a player’s contract in the offseason … does the player automatically go to the allocation order or re-entry or some other mechanism?

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The player must first go through waivers before a team is able to buy out his contract.

Can an MLS team buy out a DP in the last year of his contract and re-sign that player to a contract calling for a minimum salary, in order to buy a new DP? 

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Theoretically this is permissible, but the league would likely not allow it, considering it to be damaging to its image to have a DP being re-signed to non-DP money after being bought out. From a legal perspective, when a team buys a contract out, it means the player is no longer contractually bound to his team. That is, the contract in place is terminated by buying it out. So that player is a free agent at that point, free to sign with any other club outside of MLS. He will also be placed on waivers in MLS and could be signed by another MLS team. Finally, from a player perspective, if I’m making DP money, I’d not going to play in MLS at minimum salary if there’s a chance I can go to a team in another league for more money.

APPLICABILITY OF ROSTER RULES IN OTHER TOURNAMENTS

Are MLS teams bound by MLS roster rules when playing in competitions outside of MLS, for example the U.S. Open Cup or CONCACAF Champions League?

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MLS teams are still olbigated to follow MLS roster rules when engaged in other tournaments outside of MLS.

The 2019 CONCACAF Champions League regulations state clearly in Section VI, Part C: “All players must be registered with the club and the appropriate Association and eligible to play in any league match for the current playing season per the FIFA transfer deadlines in each country.” As for the U.S. Open Cup, its regulations state: “Teams entering the Open Cup shall use their official league roster as their Open Cup roster.”

In other words, you have to be roster compliant within your own league in order to be roster compliant with CCL and U.S. Open Cup.

INTRA-LEAGUE LOANS

Would MLS be better suited to allow teams to loan within the league? –

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This is allowed.

The benefits of intra-league loans include allowing young players a chance to develop in MLS, provide a short-term solution for teams having a need on their roster, and provide another developmental outlet for teams with top academies. However, this is not done frequently in MLS for budget and other reasons.

THE NEXT CBA

Will MLS increase the number of DP’s to four?

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It is possible that this could happen with the 2020 CBA that will enter into force prior to the 2020 season. However, there is an emerging divergence of opinion among MLS owner/operators on the subject of increasing spending on player salaries versus maintaining a tight budget.

Why doesn’t MLS just combine the two types of allocation money to make things simpler?

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Well we are talking about MLS, where it seems they pride themselves on over complicating rules. There is talk of transforming TAM/GAM to convert it to a pool of money meant for a squad to use as it sees fit. A lot will be answered on this and other topics in the next CBA. The MLS Players Association may push for TAM to be eliminated in favour of a larger salary budget coming out of the CBA negotiations in 2020.