Mechanics Behind the Miami Heat Vision

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. 

In preparation for the start of the free agent signing period, the Heat has already taken some preparatory action. They traded Daequan Cook to the Oklahoma City Thunder in order to clear his $2.17 million salary, exercised their $854,389 team option on Mario Chalmers, declined their $762,195 team option on Kenny Hasbrouck, bought out James Jones’ contract for $4.95 million (which will include a $1.54 million cap hit for the 2010-11 season), and, after Joel Anthony declined his $885,120 player option, they made him a qualifying offer for $1.06 million. As expected, Dwyane Wade has elected to opt out the final year of his contract that would have paid him $17.15 million.

The Heat will have just two players under contract – Chalmers and Michael Beasley, totaling $5.82 million. Jones’ buyout will add $1.54 million, and Anthony’s qualifying offer another $1.06 million. That’s a total of $8.42 million.

The Heat will have eleven unrestricted free agents this July, and these players also continue to count against the team’s cap until the player re-signs, signs somewhere else, or is renounced. The exact amount of a free agent’s cap hold depends on his previous salary and the type of free agent he is. The Heat’s unrestricted free agents (with their cap hold amounts) will be Jermaine O’Neal ($24.17 million), Dwyane Wade ($16.57 million), Quentin Richardson ($13.05 million), Udonis Haslem ($10.65 million), Dorell Wright ($5.77 million), Yakhouba Diawara ($1.23 million), Jamaal Magloire ($0.85 million), Carlos Arroyo ($0.85 million), Rafer Alston ($0.85 million), Shavlik Randolph ($0.85 million) and Kenny Hasbrouck ($0.76 million). In all, a whopping $75.62 million will be added to the Heat’s cap to account for these players.

Finally, the Heat also have two trade exceptions from deals they made earlier this year – one valued at $2.17 from the Cook trade, and another valued at $0.85 million from the Chris Quinn trade. In all, $3.02 million is added to the Heat’s cap to account for these trade exceptions.

Add up the players under contract, the qualifying offer to Anthony, the buyout amount for Jones, the cap holds for their free agents, and the value of their trade exceptions, and you get a total of $87.06 million. But wait, there’s more! Since this total is higher than our $56.1 million cap, the Heat also get their Bi-Annual ($2.08 million) and Mid-Level (approximately $5.73 million) exceptions. This brings their total to approximately $94.87 million.

Let’s stop a moment to reflect on the dichotomy – the Heat will have $5.82 million in actual contracts, yet their cap figure will be nearly $95 million.

Here is where you might say, “Wait a minute! I thought the Heat were supposed to have just about enough cap room to sign three maximum free agents.” The answer is that they CAN have enough cap room to go after Wade, LeBron James and Chris Bosh, but they’ll need to do some maneuvering first.

Let’s first look at how they might gain as much cap room as they can. Suppose they renounce O’Neal, Richardson, Haslem, Wright, Diawara, Magloire, Arroyo, Alson, Randolph and Hasbrouck, and that they withdraw their qualifying offer to Anthony (prior to July 23). The cap holds for all of the aforementioned players will come off their books, reducing their cap amount by $59.05 million.

At this point they will have only four roster spots spoken for — Beasley, Chalmers, Wade and Anthony (who had his qualifying offer withdrawn, which means he will become an unrestricted free agent, but the Heat will still retain his Bird rights because they didn’t renounce him, which means he will have a reduced cap hold of $0.85K) — so they have to incur a roster charge for eight additional spots. A single roster charge is equal to the rookie minimum salary ($473,604 this summer), so the Heat’ cap is charged a total of $3.79 million. All told, their team salary is reduced to $39.41 million — but since this total is below the $56.1 million cap, they lose their exceptions. Their Mid-Level, Bi-Annual and trade exceptions drop off the books, removing another $10.83 million. Their actual team salary is therefore $28.57 million if they renounce everyone they can renounce other than Wade, whose Bird rights the Heat will definitely want to keep.

With a $56.1 million cap and a $28.57 million team salary, the Heat will have about $27.53 million in cap room.

If they sign Wade to a $16.57 million max contract, his salary will get added to team salary and his identical cap hold will get subtracted, causing no change to the Heat’s team salary.

If they add a player like Chris Bosh to a second $16.57 million max contract, his new salary will get added to, and then one roster charge will get subtracted from, team salary, leaving the Heat at $44.67 million, with $11.43 million in additional cap room. That’s about $5.14 million short of being able to offer a third $16.57 million max contract, this time to LeBron James. Fortunately there are alternative strategies to free up more space.

First, the Heat can trade Beasley. They could, for example, deal him and his $4.96 million salary to a trade partner in exchange for a future first round draft pick. That would clear his salary off the books, then add one additional roster charge, and leave the Heat with $15.92 million of cap space. That’s still about $649K short.

Second, the Heat can renounce Anthony. Renouncing Anthony would clear his $854K salary but would add a roster charge, thereby producing a net savings of only $381K. They might deem it a worthwhile risk because Anthony probably isn’t worth more than the minimum salary on the open market anyway. This type of move only happens if each of Wade, James and Bosh demand nothing less than the maximum salary. Even still, it leaves the Heat $268K short.

Third, the Heat can look to trade Chalmers. Trading Chalmers, whose salary is the same as Anthony’s cap hold, would clear another $381K, bring the Heat all the way there. But since he figures to compete for the starting point guard position, it’d only be a last resort.

There is no specific date by which free agents need to be renounced. The Heat can put off renouncing their free agents until the last moment, which keeps their options open as long as possible. Renouncing is only necessary when they need to clear the cap room to sign a free agent. This means they can come to a verbal agreement with a player, then renounce their own free agents, and finally sign the player with their newfound cap room. If they strike out in the free agent market, or if they don’t get all three max contract free agent targets, they can still come to terms with their own players.

The only exception to this is their restricted free agent, Anthony. As long as their qualifying offer is outstanding, Anthony is free to accept it. If he does, the Heat are locked into a one-year contract with him for the amount of his qualifying offer. If they feel Anthony is worth the risk, they can leave his qualifying offer on the table. If not, then they don’t have to submit a qualifying offer at all (which would make him an unrestricted free agent rather than restricted). They can also walk the middle ground – submitting a qualifying offer, but withdrawing it if they need to reclaim the cap room. If they decide to withdraw it, they must do so by July 23 – after that date, the qualifying offer can’t be withdrawn without Anthony’s consent.

Note that when an exception is renounced, it can’t be recovered. It’s gone forever. There are, however, a couple of exceptions that can be utilized after a team uses up all of its cap space.

The Bird exception is one. As long as a team does not renounce a player’s Bird rights, they can use it to exceed the cap in re-signing him. But since his cap hold remains on team salary in the interim, utilizing this strategy only makes sense if the team intends to sign him to a contract with a starting salary that is greater than the value of his cap hold. The cap holds are generally set so high (take a look at the size of the Heat’s cap holds above) that this situation is very rare. For the Heat, it probably only applies to Anthony. That’s if they chose not only to retain him but also to pay him more than the minimum salary.

The other is the minimum salary exception. All teams are allowed to use this exception to sign free agents or acquire players making the minimum salary in trade. There is no limit to the number of players that can be signed or acquired using this exception. Therefore, once (and if) the Heat utilizes all of its cap space to sign Wade, James and Bosh, expect lots of minimum salary signees to follow.

In summary, even a seemingly straightforward concept like cap room has nuances that can get very complicated. As outlined here, these nuances provide teams with options, and a crafty GM can navigate these options to make the best moves that will equip his team for the upcoming season and beyond.

This will be the most unusual of offseasons for the Heat. If everything goes according to plan, they will start the summer far in excess of the cap, drop way down below the cap in order to clear maximum cap space, and then finish the summer far exceeds the cap once again.

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