Toronto FC pulled off a trade on Tuesday, exchanging allocation money with D.C. United.

TFC sent $337,500 US in targeted allocation money (or TAM) to D.C. United in exchange for $225,000 in general allocation money (or GAM).

It was the type of deal that left many casual – and not-so casual – Major League Soccer fans feeling like this:

So, what’s going on? What is GAM? What is TAM? And what does this trade mean for TFC in the long run?

What is GAM?

Before we get into that, it’s important to note that the MLS salary cap will increase to $4.035 million US per team in 2018, and that the maximum a player can make is $504,375.

Also, the Designated Player rule is still in effect in MLS. That means that each team can sign up to three players who can earn more than the maximum salary charge, with only $504,375 of his wages counting against the salary cap. In TFC’s case, they have three stars (captain Michael Bradley, and forwards Jozy Altidore and Sebastian Giovinco) who are each on multi-million dollar deals, but as DP players their salary cap hits are only $504,375 each.

Now, what is general allocation money?

General allocation money is available to each MLS team in addition to its annual salary budget. Each MLS club is given an annual allotment of GAM by the league.

Teams can use GAM in a number of ways, including to buy down a player’s salary cap hit – for instance, if a player is making $400,000, a team could use $100,000 worth of GAM to reduce his salary cap hit to $300,000. In doing so, that team would free up $100,000 of cap space. A club can use GAM to buy down a player’s salary cap hit by as much as 50 per cent.

Teams can also use GAM to pay down a salary cap charge of a DP player to a non-DP level, as low as $150,000. Clubs would generally do this if they wanted to free up a DP slot to sign another DP player.

GAM can also be used to sign new players to MLS (a player who didn’t play in the league the previous season), to re-sign a player to a new contract, and to offset loan and transfer fees.

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What is TAM?

Targeted allocation money is a special pot of money provided by the league to clubs so that they can either sign or retain impact players who are not considered DPs.

Each MLS team will receive $1.2 million of TAM per year for 2018 and 2019. Teams can spend all of their 2019 TAM money this season, but they have to spend the full year’s allotment by the end of the campaign. They can’t carry over their TAM money from this year into 2019, so it’s use it or lose it. This form of TAM is known “mandatory TAM.”

In addition, teams also have an additional $2.8 million in TAM for 2018 and 2019. This money is not given to teams by the league – instead, it comes directly out of the pockets of team owners. This form of TAM is known as “optional TAM” – teams do not have to use it.

Teams can use TAM to sign a player who makes more than the league’s maximum salary of $504,375 and no more than $1.5 million.

It’s important to keep in mind, though, that these players are not considered DPs. TFC used TAM last year to sign Spanish playmaker Victor Vazquez, who made $700,000 in 2017. The Reds also spent TAM to sign veteran Dutch defender Gregory van der Wiel last month.

TAM can be used to convert a DP player to a non-DP player by buying down his salary cap hit. However, if TAM is used to free up a DP slot, the club must then sign a new DP at the same financial level as the DP he is replacing.

The minimum salary cap hit for a player who is bought down with TAM is $150,000.

TAM and GAM can’t be used in combination to sign or re-sign a player, or to buy down the budget charge of a DP.

The major difference between GAM and TAM is that GAM is more versatile, as it can be used to pay down the cap hit of ordinary player salaries. TAM is basically used to sign high-level players who are not DPs. Also, teams can trade “mandatory TAM,” but not “optional TAM.”

Why did TFC make this deal?

After last December’s MLS Cup win, TFC general manager Tim Bezbatchenko acknowledged that the club would be tight up against the salary cap ahead of the 2019 season.

In acquiring $225,000 in general allocation money from D.C. United, the Reds essentially acquired more salary cap space to use on non-TAM players. They can use this GAM to potentially re-sign veteran defender Jason Hernandez and winger Tsubasa Endoh to new deals – Hernandez was out of contract at the end of the 2018 season, while Endoh had contract option declined by the club.

TFC can also use the GAM they received in this trade to buy down a couple of contracts and create the necessary salary cap room to then go sign another TAM player.

We don’t know exactly how much TAM was used by TFC to sign van der Wiel. But Bezbatchenko confirmed this week that the club did not spend all of its TAM for this season – that it still has “mandatory” and “optional” TAM to use in 2018.

Bezbatchenko also hinted at signing other TAM players, saying: “We still need maybe one or two more signings to really complete what we need to do.”

Clearly, Bezbatchenko feels that trading away the $337,500 in targeted allocation money won’t adversely affect his ability to sign TAM players for the rest of 2018, and that acquiring $225,000 in general allocation money as part of the deal with D.C. United will allow him to round out his roster with regular players, or create the salary cap space to sign another TAM player.