Lugo gets a $3 million signing bonus as part of the deal and will be paid $20 million in each of the next two years.
The deal also includes a vesting option in 2028 worth $17 million with a $3 million buyout.
Lugo was a potential trade candidate for other teams ahead of the July 31st MLB trade deadline, will now be on the Royals through possibly 2028 as the team is looking to make a Wild Card push the rest of the season.
A vesting option in baseball is an option year where, if the player agrees to it, his contract salary for that year becomes guaranteed but only after certain thresholds are met.
The 35-year-old will be 38 during his vesting option in 2027.
Lugo is having yet another stellar year for the Royals - tossing a 2.95 earned run average through 19 starts. The veteran is currently 7-5 on the year with 99 strikeouts through 113.0 innings, walking 33 batters while giving up 90 hits.
Lugo's current 1.09 WHIP is the exact one he finished with last year for the Royals. His 2.98 ERA since being a member of the Royals is the best of any starting pitcher in franchise history with at least 50 games under his belt.
The longtime pitcher made his first All-Star Game last season and finished 2024 with a career-high 16 wins. It was the only season in Lugo's entire career where he won more than 10 games.
Lugo was originally selected in the 34th round of the 2011 MLB Draft by the New York Mets, where he went on to spend the first seven years (2016-2022) of his career.
After spending a year with the San Diego Padres (2023), he joined the Royals, becoming the team's ace.
Lugo has a career 3.33 ERA with 928 strikeouts and 846 hits in 960.2 innings.