MLS 101: The benefits and the perils of loan deals

Chivas USA acquired Erick Torres on loan from parent side Chivas Guadalajara last season. MLS subsequently classified the Mexico youth international as a Designated Player. 

Kirby Lee/Kirby Lee-USA TODAY Sports

Building a squad within the confines of a salary budget system requires ingenuity and precision. The modest resources available leave little room for error. The structure – even with allocation funds, Designated Players and other mechanisms designed to increase spending power from the expected threshold of $3.0975 million in 2014 – places a premium on locating value wherever possible to separate from other teams.

Most sides lean on loan deals to bolster their squads without hindering their budgetary flexibility. Toronto FC highlighted one segment of the market when it acquired Queens Park Rangers goalkeeper Júlio César on Friday, but this particular practice extends well beyond the extraordinary occurrence of procuring a Brazilian international goalkeeper for a one-year spell in MLS to improve his chances of playing in the World Cup.

Júlio César’s arrival isn’t typical by any means, but it does offer a glimpse at how the process works and show why teams scour the market for players available at a discount. There are two fundamental principles to keep in mind when discussing potential loan moves and pondering their subsequent impact on a team’s salary budget:

1. Any loan fee paid counts against the salary budget in some way, shape or form

Clubs tend to shy away from paying transfer fees for players signed on permanent deals because those expenditures count against the salary budget or drain allocation resources. The sum doled out to another team for the right to loan a player falls into the same category. Those prices can vary from nominal figures to hundreds of thousands of dollars depending on the situation, but every outlay requires some accounting against the budget.

New England defender José Gonçalves drew salaries from both MLS and parent club FC Sion while on loan with the Revolution last season.

2. Teams are responsible only for the portion of the player’s salary paid by MLS, not his overall wages

Some players who join MLS clubs on loan carry wages significantly in excess of their perceived value in the salary budget system. In those instances, the club and the league negotiate with the parent outfit to determine how the player will be paid during his loan spell. Some deals require MLS and the incoming club to pay all of the player’s salary. Other temporary swaps divide the wages between the two parties in some fashion.

MLS accounts for these discrepancies by charging teams for the portion of the player’s salary actually shouldered by the league per the terms of the loan agreement, not the complete terms of his original deal. This particular regulation explains why some loan players appear in the MLS Players Union list of player salaries at a wage well below their actual compensation.

This practice comes with a caveat: loans between affiliated clubs do not necessarily follow the same procedures. MLS does not want to provide a competitive advantage to teams with partners in other leagues. Chivas USA, for instance, counts Erick Torres as a Designated Player, even though Chivas Guadalajara could theoretically offer him on a free loan and pay his entire salary. There are no hard and fast rules – other Chivas Guadalajara players joined Chivas USA on loan for minimal budget hits last season, for instance – in this situation, but the regulations allow the league some latitude to mete out appropriate budgetary hits to protect the competitive balance among its members.

Take another look at Júlio César’s loan to Toronto FC with those two guidelines in mind. The deal appears problematic at first glance from a salary budget perspective given his Premier League-size contract, but the structure of the loan agreement presumably addresses those concerns. If TFC and QPR agreed to a free loan and QPR opted to carry all but a small, MLS-sized portion of Júlio César’s salary on its books, then TFC could theoretically fit the ex-Inter Milan goalkeeper within the parameters of the salary budget assuming the Reds possessed the requisite room (or allocation money) to absorb the charge.

Toronto FC worked with Queens Park Rangers to strike a budget-friendly loan deal for Júlio César.

The charge for the first season is often easy to navigate, but the problems for some teams start at the end of a successful initial campaign. Most loan agreements struck between MLS and a foreign club involve a purchase option at the conclusion of the term with personal terms between player and league already sorted. The exercise provides a straightforward way to obtain a player’s services for the long term, but it does not mitigate the additional budget strain created by acquiring the player on a permanent basis or reduce the issues created if the price is simply more than the team is willing to bear.

Problems manifest in a couple of different ways. Salary always presents a concern, particularly if a player is taking a pay cut to join the league or the MLS side wants the player to accept reduced terms from the previously discussed contract. Transfer fees prompt another issue with MLS clubs always keen to knock down the stated price if possible given the salary budget ramifications. The initial agreements provide a starting point and a last-ditch resort, but the issues do not always resolve easily.

The current disagreement between New England and captain José Gonçalves highlights the potential pitfalls. Gonçalves excelled during his first season with the Revs and garnered MLS Best XI and MLS Defender of the Year honors for his performances. New England exercised its option to purchase Gonçalves’ rights from FC Sion and then triggered its contractual option for 2014 in accordance with that deal. The stated terms afforded Gonçalves a salary in the $450,000 range for the upcoming season, according to league sources familiar with the situation. That figure constitutes a significant chunk of money for a central defender in MLS terms, but it does not match the amount of money Gonçalves made between his Revolution pay and his Sion wages last year. And now the two sides are trying to figure out a way to reach common ground before the start of the season next month.

Gonçalves’ situation isn’t typical, though. Most clubs are willing to risk the odd conflict at the end of the term for the benefits reaped by striking the loan deal in the first place. They exert control over the situation from the outset: they agree to the fee and the wages with the league’s consent, discern out how to fit those figures within the salary budget and use the year to evaluate whether to cut ties with the player or keep him around for a longer period of time through another loan deal or a permanent transfer. In a league where most resources are restricted within the salary budget system, that sort of control supplies clubs with an important tool as they attempt to assemble their squads for the short- and the long-term.