Understanding the Charges

After a wild ride through a doomsday scenario that would have made it impossible for the Heat to achieve its goal of acquiring thee maximum contract free agents this summer, things have somewhat stabilized.

The economy is slowly bottoming. Salary cap projections for next season are slowly rising.

The cap is still, by all accounts, expected to fall from this season’s $57.7 million level. But agents who have been briefed on updated financial figures now are using $54 million as their operating number, a stark improvement from previous league-issued projections as low as $50.6 million.

Unfortunately, the upcoming drop in the salary cap will not take the maximum salary amounts for the league’s most coveted free agents with it.

Max salaries are determined as a percentage (either 25, 30, or 35 depending upon a player’s tenure) of the cap (1). Therefore, when the cap declines, so too do all the maximum salary calculations. But there’s a fail safe. A free agent’s maximum salary in the first year of a new contract is never less than 105% of his salary in the last year of his previous contract. In this declining salary cap environment, the fail safe will apply to each of Dwyane Wade, LeBron James, Chris Bosh, and Amare Stoudemire.

The latter player is currently earning slightly more than the former three. So if the goal is to acquire the former three within the confines of the cap, we can already definitively know how much it will cost. Each player will command a salary of up to his $16,508,968 maximum. Add three together, and you get $49,706,724.

So for every dollar the cap declines, that’s one less dollar the Heat will be able to apply to the $49,706,724 goal.

There are plenty of teams positioning themselves to sign two maximum contract free agents, and plenty of them in desirable perhaps equally desirable markets – teams like the Knicks and Nets in New York, the Clippers in Los Angeles, and the Bulls in Chicago. What most differentiates the Heat from the pack is its potential to sign three.

The Heat only has on its books for next season Beasley’s $4,262,436 salary, Cook’s $2,169,857 salary, and Jones’ partially-guaranteed salary which can be reduced to $1,856,000 if he is waived. That’s a total of $8,288,293, producing a net difference of $45,717,707 at an assumed $54 million cap level.

Trade away Michael Beasley and it increases to $49,974,143.

So that’s it. Trade away Beasley and the Heat are sure to have enough cap space to sign three maximum contract free agents, right? Wrong. 

Because of pesky little non-cash charges, the Heat actually won’t have any salary cap space at the start of free agency at all. But they can get most of it back.

When a team elects to use its cap space in the offseason, it has four primary non-cash charges to worry about: cap holds, exceptions, scale amount for unsigned first round draft picks, and roster charges. Here’s a look at how they work:

1. Cap Holds. Cap holds are placeholder charges against team salary for a team’s own free agents. They are designed to protect against a team using all of its cap space to sign outside free agents and then circling back to its own free agents utilizing their Bird rights, which allow teams to exceed the cap to re-sign their own players.

The amount of the cap hold depends upon several factors, including the player’s previous salary and what kind of free agent he is. Cap holds for players on minimum salary contracts are equal to the minimum salary for the upcoming season, but for most other players are generally between 150% and 300% of their previous salary.

The cap holds can be released in order to free up the cape space, but it comes at a cost. To release such cap holds, a team can either re-sign the free agent, at which point his cap hold is replaced with his new salary, or renounce him, at which point his team forfeits his Bird rights.

Therefore, cap holds do not reduce the calculation of maximum available cap space.

2. Exceptions. Exceptions are as a means for teams to operate above the salary cap. They are not applicable to teams using cap space(2). If a team’s team salary ever falls below the level of the salary cap, it automatically loses any of its un-utilized Mid-Level, Bi-Annual, Disabled Player and trade exceptions. Once a team loses its exceptions, it can never get them back – even if the team eventually gets above the salary cap.

Therefore, exceptions do not reduce the calculation of maximum available cap space.

3. Scale Amounts for First Round Draft Picks. There’s a strict salary scale utilized for first round draft picks and their first contracts. The league does this because it was previously common for rookies to hold out, not signing with their team until they got the contract they wanted.

Unsigned first round picks are included in team salary immediately upon their selection in the draft, at their scale amount. Naturally, this reduces a team’s available cap room. However, a team can always renounce (or, if possible, trade) its unsigned first round draft picks in favor of the additional cap space. Of course, this means the team would lose the player.

Renouncing a first round draft pick isn’t good business practice; it creates ill-will between team and player. It’s only ever been done once. The point, though, is that it is possible.

Therefore, scale amounts for first round draft picks do not reduce the calculation of maximum available cap space.

4. Roster Charges. When a team carries fewer than 12 players on the roster (including players under contract, free agents included in team salary, players given offer sheets, and first round draft picks) at any time during the offseason, a roster charge is automatically added. Such charges temporarily reduce a team’s available cap room. The amount of the charge is equal to the rookie minimum salary ($473,604 for next season) for each player fewer than 12.

The charges get removed when the team builds back up to 12 players. Since a team must carry a minimum of 13 players on the roster to start the regular season, no teams can ever exit the offseason with roster charges remaining. (For example, a team with only two players on the roster gets assessed 10 roster charges; after the team signs its next player one of the charges gets removed, leaving nine remaining, and so on until they are all removed). Therefore, these charges do reduce the calculation of maximum available cap space. But they do greatly affect the allocation of available cap space allocated between a team’s players.

So what does it all mean?

To calculate a team’s maximum available cap space, all you need to do is subtract a team’s guaranteed salaries, from both current and previously waived players, from the value of the salary cap. That’s it.

But be careful. Just because a team has cap space doesn’t mean the team can use it all on one player. Roster charges complicate the issue, and will have a profound impact on the Heat’s ability to sign three max contract free agents.

If the Heat were to aim to sign three maximum contract free agents, costing a total of $49,706,724, it would need at least $54,442,764 of cap space, even if it had nobody else on the roster, when roster charges are accounted for. That means moving not just Beasley, but also Cook (perhaps not all that difficult to do) and Jones (nearly impossible to do) for the Heat to get within striking range.

More realistically, the Heat would need a cap figure of approximately $55.8 million to accomplish that goal. At current projections, we’re currently less than $2 million short, and hopefully rising.

Footnotes:

(1)     The N.B.A. uses a slightly different cap calculation to determine maximum salaries, which is based on 48.04% of projected league-wide revenues, or BRI, as opposed to the 51.0% used to arrive at the true cap).

(2)     There are two notable exceptions: Bird rights and the Minimum Player Salary Exception. Bird rights are technically a salary cap exception, but can be retained for a player even when a team falls below the cap so long as the player’s cap hold is retained. Also, teams can offer players minimum salary contracts utilizing the Minimum Player Salary Exception, even if they are over the cap and even if they had previously utilized cap space.