Fans are frequently tripped up by the idea of cap room. The premise is pretty straightforward – there’s a salary cap, and if the team’s payroll is at or above this amount, they don’t have any money to spend on free agents. But if they’re below it, they do. In practice it’s not so simple. Teams below the cap typically have less cap room than it might appear, and can actually be considered to be over the cap. Let’s take a look at how all this works.
First the basics: the NBA has a “soft” cap, which means teams can be over it and still function – albeit with restrictions. In fact, a team being over the cap (especially during the season) is far more common than being under it. There are mechanisms called exceptions which allow teams to sign players or make trades while they are over the cap. For example, the Mid-Level exception allows teams over the cap to sign a player or players for up to five years starting at the league average salary. Another well known exception is Bird rights, which allow teams to re-sign their own players while they are above the cap.
The system is designed so that teams may have either cap room or exceptions, but never both at the same time. In order to accomplish this, the league applies the following rules:
• When a team is below the cap, they add additional amounts to their team salary. This includes the value of any unused exceptions, the scale amount for any unsigned first round draft pick, a cap hold for any free agent to which the team has Bird rights, and a charge equal to the rookie minimum salary for any roster spots fewer than twelve otherwise unaccounted for. This keeps the team from using its cap room on other teams’ free agents, spending right up to the salary cap, and then using their exceptions to spend above the cap. A team really has cap room only when their payroll and all these extra charges add up to a value that is below the cap.
• An exception is a mechanism that lets a team function while they’re over the cap – a concept that doesn’t apply when the team is below the cap. So if the team is ever far enough under the cap that their payroll plus all these added charges are still under the cap, then they don’t get their exceptions. If they start out above the cap per these rules and they later drop below the cap, then they lose any unused exceptions.
• A team can renounce its exceptions or free agents at any time. By renouncing an exception a team gives up its right to use that exception, but potentially gains an equivalent amount of cap room (if the team is under the cap without the exception). When a free agent is renounced the team clears the player’s cap hold off their books, but gives up its right to sign the player using the Bird exception.
Let’s look at how these cap rules will apply to the Miami Heat this summer, assuming the cap comes in at the current $56.1 million estimate. Read more…