I don't look at this as a 3 year contract. I look at this as a 1 year, $8.5M deal with team options for 2 years after that. That is a good deal with little long-term risk. The $5M cap hit next year hurts if he's cut, but that's the reason that the cap number is a deceivingly low $3.5M. Since they can carry over cap room to next year, they can just as easily look at this as $8.5M this year with no cap hit next year and roll over an extra $5M to next year's cap, if they so wish.
People tend to forget that this isn't like MLB at all. Contracts are routinely signed with no real intention of them being completed in their entirety. If Peppers is going to see the 2nd year of the contract, he'll have to be playing like a $12M dollar player. I wish the $10.5M was in the second year and $12M in the third year, but it's manageable either way if he's earning it, and if not, it's not going to be devastating to send him out.
Also 7.5 sacks is only a "down year" by Peppers' standards, that still would have let our team. I think he'll wind up with 10-12 sacks if healthy and probably help Matthews as well.