Sources: Hurricanes and Seth Jarvis agree to $63.2 million contract with unique deferred structure

The Carolina Hurricanes and restricted free agent Seth Jarvis have agreed to terms on a new eight-year, $63.2 million contract, sources tell Daily Faceoff. It’s an important piece of business for the Canes, locking up the heartbeat of their team for the foreseeable future, but the way the contract is structured may be important business for the NHL’s other 31 clubs.

That’s because Jarvis’ new deal is set to become one of the first in NHL history to have a salary cap hit substantially lower than the typical average annual value because he was willing to defer salary.

Nearly every NHL contract in the salary cap era, since 2005, has been prescribed a simple cap hit: Take the total dollars ($63.2 million) and divide it by the length of the deal (eight years) and you arrive at $7.9 million per year on the team’s salary cap chart. With this deal, Jarvis will land on the Canes’ books at approximately $7.5 million per year, a savings of $400,000 each season.

No source was willing to divulge precisely how much money has been deferred, or in which year(s) of the deal the money is deferred, but there is a deferred signing bonus payment that is scheduled for July 1, 2032 – which is one day after the contract officially expires on June 30, 2032.

Because that payment is technically scheduled for Year 9 of the eight-year deal, there is no Year 9 cap charge for the Hurricanes, and the cap hit for the Hurricanes over the course of the eight-year deal is charged on what is actually paid out during that time.

Deferred payments have been allowed in the Collective Bargaining Agreement, but to this point, the Hurricanes are believed to be the first NHL team to cross this threshold in a meaningful way. Sources indicated the NHL’s Central Registry and the NHL Players’ Association have been briefed and signed off on the structure of this deal before terms were agreed upon; the deal is expected to be registered on Saturday.

In fact, the new eight-year deal for Hurricanes defenseman Jaccob Slavin was the first deal to be registered this summer with a deferred payment. But it wasn’t significant enough to alter the salary cap hit in a meaningful way to register on anyone’s radar: It’s been erroneously reported that Slavin’s eight-year deal has a $6.461 million cap hit, but it is actually going to be $6.396 million per year. It’s almost as if Slavin’s deal was Carolina’s trial balloon.

How do deferred payments work? Well, the first thing to know is they’re not free. This is an example of Hurricanes owner Tom Dundon, who has somehow received a reputation of being stingy, actually spending more over time to benefit his team in the shorter term. A smaller salary cap hit, theoretically, allows for more spending and thus a more competitive team if spent properly.

The NHL’s CBA calls for a time value of money discount calculation. It is easy to understand the value of money over time – we would all rather have $1 million today than $1 million three years from now. So, the NHL has a formula that estimates how much the time value of money is, based on the current interest rates, and adjusts for that. That way the $1 million that you deferred today for payment three years from now might only count on the books as if you received $850,000 today.

Of course, there is risk here. This type of contract structure requires understanding from Jarvis and his agent, Gerry Johannson of Edmonton-based The Sports Corportation, on a varying number of topics including investment vehicles, tax structures and elements, plus a healthy risk profile on things such as escrow rates, the possibility of a buyout or trade that could change every calculation. So, this was a mature conversation that evolved over the last two months to the point where everyone is comfortable, and Johannson and the NHLPA believe this is good for Jarvis – not just the Hurricanes. This deal was the brainchild of GM Eric Tulsky and his staff, which includes Darren Yorke, Aaron Schwartz and now Tyler Dellow, and there is risk for Carolina too, but it can be minimized or eliminated with returns on investment of the deferred money.

The larger question now is: Who will be the next NHL team to replicate this type of deferred contract? And how big of a salary cap discount will the NHL allow before this blurs the line of cap circumvention?

The Jarvis contract has the ability to be a precedent setter for the entire league. Deferred payments can exploit the salary cap hit the larger the payment and the longer it extends, and it isn’t difficult to conjure up a real-world example – especially for a player who is entering a third contract, has already put a significant amount of money in the bank, and has a competitive appetite to provide his team with more salary cap ammunition because he has an insatiable desire to win.

Take Hart Trophy winner Leon Draisaitl and the contract he is currently negotiating with the Edmonton Oilers. Sources indicate Draisaitl’s initial ask on a long-term deal was north of $14 million per year on average. Let’s call it $14.2 million for example and argument sake. That is a total of $113.6 million over eight years, which yes, would typically come with a salary cap charge of $14.2 million on the AAV.

What if Draisaitl was hypothetically willing to defer $33.6 million of that contract to be paid out over the 40 years after the deal expires? That would be approximately $840,000 per year from 2033 until 2073, and yes, we’re talking a Bobby Bonilla-type contract. That would pay Draisaitl $80 million over the first eight years of the deal, hypothetically making for a cap hit in the neighborhood of $10 million per year – or a discount of $4.2 million per year of the deal.

That isn’t exactly how the calculation or the math works, but the numbers are round and it’s easy to grasp and understand. Draisaitl has already earned north of $70 million in his career. To bring in another $80 million over the first eight years of the next deal makes him more than financially secure for future generations of Draisaitls – and the deferred $33.6 million, which is accruing interest the entire time, is not just gravy but also idiot-proof savings.

It’s also an easy example to illustrate why the Jarvis deal could open up a can of worms. How much is too much in the eyes of the NHL, the NHLPA, and the other 31 clubs?

Teams are always looking for an advantage – and deferred payments have been quietly whispered about all summer, but no one has pulled it off until now. Good on Seth Jarvis, Johannson and the Hurricanes. And Game On for everyone else.