Heat’s Forgone Draft Picks Could Prove Costly

Pat Riley turned 65 in March, the age of retirement for many but apparently the age of reinvention for him. Just when he seemed to be on the verge of fading into professional irrelevance, he executed an unprecedented triple play: LeBron James, Dwyane Wade, Chris Bosh. All playing together. All here in South Florida for the Miami Heat.

Lost in the exultation of today, however, is an unpopular potential storyline: The Heat may well be destroying its tomorrow. It is doing it by massively undervaluing the import of the NBA draft. And it could have dire consequences in the years to come.

Riley makes no equivocation about his disdain for building through the draft: “I’ve said in the past, and I believe this, that the way I always want to build a team is through free agency and trades. Probably some of the best players we’ve gotten here were free agents and trades. Also, through the draft. But the only way you build through the draft is to lose and get three, four, five years of top 10 lottery picks. Since (losing to get those picks) has never been a philosophy of mine – we’ve only had three lottery picks in 15 years – I always use (draft picks) as an adjunct to help free agency and trades. As chips I would use maybe to acquire players through trade.”

His actions over the past several months validate that philosophy. 

Dorrell Wright: Back in February, with the Heat going nowhere, Riley passed on the chance to deal the expiring contract of upcoming unrestricted free agent Dorell Wright to the Memphis Grizzlies at the trade deadline. The Grizzlies were offering their 2011 first round draft pick. Shedding Wright’s contract would have also produced $7.7 million of savings for owner Micky Arison. Wright is gone now, having never been part of the Heat’s long-term plan. So the question needs to be asked: Were 26 meaningless final games of Dorell Wright really worth $7.7 million AND a 2011 first round draft pick?

Daequan Cook: Last month, Riley traded away the Heat’s 2010 first round pick to the Oklahoma City Thunder as a means to unwind the inexplicably awful error from the prior October that was exercising the team option of perennial backup Daequan Cook for the upcoming season and, in the process, violating Riley’s own philosophy of maximizing cap space for this summer. It is not hard to see what Riley was thinking – removing the $2.2 million in salary obligations to Cook was critical to the realization of a Big Three scenario. But why not instead use up to the maximum allowable $3.0 million in cash, and a bevy of second round picks if need be, to do so? Why throw away a first round pick?

We can tell ourselves it was the wise choice because trading the first round pick itself freed up some cap space. But it wasn’t as much as you’d think – a net $764K in total. For perspective, that’s roughly the same amount of cap space that Riley is still to this day eating up to retain the restricted free agent rights of underwhelming center Joel Anthony. Anthony is a marginal NBA talent at best, barely deserving of a minimum salary contract. So the question needs to be asked: Wouldn’t you rather have Eric Bledsoe than, for the same money, the chance to give Joel Anthony more than the minimum salary? Or, if you’re not so high on Bledsoe, wouldn’t you have rather done what the Thunder did with the pick: trade it to the L.A. Clippers for a future first round pick (top-10 protected top 10 in 2012-15, unprotected in 2016)?

And here’s the kicker: ultimately, with the cap having risen from prior projections, the Heat would have had enough room to retain that first-round pick and Anthony (and Mario Chalmers) and still max out the Big Three.

That’s two potential first round picks gone.

LeBron James and Chris Bosh: To that pick count, we must now layer in the consequences of today. Riley and salary cap guru Andy Elisburg have been praised for the acquisitions of James and Bosh. That they got them? Very deserving of praise! How they got them? Not so much. How the Heat chose to structure the acquisitions of James and Bosh could significantly damage the Heat’s future. Worst of all, it was seemingly unnecessary.

Each member of the Big Three took significantly less than for what he was eligible, in order to accommodate the inevitable signings of Mike Miller and Udonis Haslem. It was a particularly awesome display of selflessness – putting happiness over money, friendship over fame. In return for that selflessness, however, they each demanded the longest possible contract the NBA allows.

The NBA collective bargaining agreement gives the home team a financial advantage when it comes to re-signing its own players. The maximum starting salary is the same no matter where a player signs, but the home team can offer one more year (six instead of five) and bigger raises (10.5% instead of 8%).

The Heat is the home team for Wade, but not for James and Bosh. The latter two receiving the longer contract necessitated that they be signed by their home teams and simultaneously traded to the Heat, in what are referred to as sign-and-trade transactions.

That’s exactly how it happened. James and Bosh each agreed to a starting salary of $14.5 million. That translates to a contract of $109.8 million over six years, versus the $84.1 million over five years that the Heat could offer on its own.

But over the first five years, their current deals will pay out $87.7 million, which isn’t too far away from the $84.1 million. The primary difference between the two is the lack of a $22 million salary for the 2015-16 season. But here’s the thing: Whether or not that season is locked in under the current contract, unless either player suffers a career-ending injury, he is ultimately going to receive a salary that season anyway, and it’s likely going to be at least as much or more than $22 million. So locking in that sixth season up front really only does one thing – it provides peace of mind (i.e., a protection measure against career-ending injury).

How much is that peace of mind worth?

Think of it like this: If you and I were negotiating, how much more would I need to pay you over the first five years of your contract in order for you to sacrifice the peace of mind of locking in that sixth year up front?

What if I gave you an extra $4 million just to sacrifice that peace of mind? What if I told you that instead of $87.7 million over five years, I’d pay you $91.8 million over those same five years? And all you’d need to do is hold off on locking in that sixth year you’re ultimately going to get anyway. Would you take it?

Before you answer, bear this in mind: Locking in the sixth year up front is likely to mean nothing to you. Why? Because you’re not likely to ever make it to your sixth season. Your contract is going to have an opt out right after four years, and you’re absolutely going to exercise it. If things aren’t going as planned, you’re going to exercise it so you can leave. If things are going as planned, you’re going to exercise it because it gives to added flexibility at no cost — flexibility to apply pressure to the Heat organization to keep spending what it takes to maintain a winning product, flexibility to increase your payout if maximum salaries have increased, flexibility to replace the two years left on your existing deal with another long-term full max contract, etc. Either way, you’re never going to make it five seasons, let alone six. Therefore, locking in that sixth year today means nothing. I’d be giving you an extra $4 million essentially for nothing. So… Would you take it?

Now I have just one more question for you. A more difficult question.

You love Udonis Haslem. He’s a great man. He’s a first-class human being. But remove emotion for a second. Painful as it might be, if someone offered you four first-round draft picks and two second-round draft picks in exchange for him, would you take it?

Before you answer, bear this in mind: If you take it, Haslem could earn $13 million more than if you don’t. While it would undoubtedly be great to have him around, you’d be asking him to make a massive financial sacrifice. And bear in mind as you are deciding that his career earnings are only a tiny fraction of yours. So… Would you take it?

If you answered yes to both of those sets of questions – as I assume most of you did – then you have implicitly acknowledged that Riley, the Heat organization and the Big Three individually and collectively made a critical mistake.

The Heat could have given James and Bosh the extra $4 million over the first five years of their contracts in exchange for sacrificing that up-front sixth year guarantee(1), and the Heat could have saved all six draft picks if just they were willing to sacrifice Udonis Haslem(2), and Haslem had offers on the table that were $13 million higher than what he took with the Heat. It was a readily available option. It required nothing more than the vision to execute upon it.

By instead acquiring Bosh and James via sign-and-trade, the Raptors and Cavs were able to extract valuable draft assets from the Heat in order to serve in their role as facilitators.

To the Raptors for Bosh, the Heat sent:

• The Heat’s own 2011 lottery-protected first round pick. If it is not conveyed in 2011 (i.e., if the Heat don’t make the playoffs next season), the obligation will be extinguished; instead, the Heat will be required to pay $3 million in cash.

• A future lottery-protected first round pick from the Raptors, which the Heat had previously acquired in the February 13, 2009 trade that sent Shawn Marion, Marcus Banks and cash considerations to the Raptors in exchange for Jermaine O’Neal and Jamario Moon.

The latter pick had the chance to become as valuable as a draft pick can ever be. It had the chance to become the No. 1 overall pick in a future NBA draft. According to the details of the 2009 deal, the pick was originally a lottery-protected 2010 pick. When the Raptors missed the playoffs during the 2009-10 season, two things happened: (i) the Heat received a 2010 second-round pick from the Raptors (which they ultimately utilized to select Da’Sean Butler at No. 42), and (ii) the Heat received a first round pick in the first year from 2011 through 2014 that Toronto made the playoffs. If the Raptors fail to make the playoffs by 2014, it would have become an unprotected first round pick in 2015. The Raptors figure to be among the worst teams in the NBA for the foreseeable future.

To the Cavs for James, the Heat sent:

• The Thunder’s 2011 second round pick (originally acquired by the Heat in the Latavious Williams trade)

• A swap right on the Heat’s own 2012 first round pick (which will surely go unexercised)

• The Hornets’ 2012 second round pick (originally acquired by the Heat in the Marcus Thornton trade)

• The Heat’s own 2013 first round pick (top-10 protected through 2014, unprotected in 2015)

• The Heat’s own 2015 first round pick (top-10 protected through 2016, unprotected in 2017)

Riley’s shocking lack of success when it comes to matters of the draft might make it easier to discount the import of those draft picks to the Heat’s future. But that’s a naïve and foolish way to look at things. These picks carry tremendous value, not just in how they may be utilized in future drafts. Draft picks – particularly first round picks – serve as tremendous currency for trade.

The Heat has now sacrificed a whopping six first round picks and two second round picks in a span of just five months!

It can be argued that the Heat didn’t need to sacrifice a single one. It can be argued that the Heat should now have, in addition to the Big Three and Mike Miller, a whopping 21 draft picks over the next seven years — 10 first round picks and 11 second round picks(3). Instead, rather than having what would have been the largest collection of future draft picks in the NBA with which to improve in the years ahead, the Heat now has the smallest.

Riley has stated it clearly: He doesn’t like to build through the draft. So let’s placate him. Just for a second, let’s forget about what all those picks might have produced in future drafts. Let’s instead focus on how giving them up has restricted future trade scenarios.

Beyond just not having access to the 10 draft picks they sacrificed, the Heat now faces major and complicated restrictions in trading away any of the four future first round picks over the next seven years they still do have. Here is a review of the earliest future first round picks that can be traded (as you read this, bear in that draft picks can be traded up to seven years into the future, and that teams cannot trade away all of its future first round picks in consecutive years):

• From now until after 2012 draft: The earliest, and only, first round pick the Heat can trade is their 2017 pick, and they can only trade it on condition that they will have already satisfied the last of their pick obligations to the Cavs by 2015. In other words, no trade partner could ever be assured that they’d actually get the pick the Heat would be trading.

• From after the 2012 draft to before the 2015 draft: The earliest first round pick the Heat can trade is their 2017 pick, and they can only trade it on condition that they will have already satisfied the last of their pick obligations to the Cavs by 2015. The trade technically wouldn’t be phrased as a 2017 pick but rather a pick in the “next allowable draft,”which would be two years after the final pick obligation to the Cavs is dealt. Since the final pick obligation to the Cavs will be satisfied by no later than the 2017 draft, the earliest first round pick the Heat will be eligible to trade without any conditions will be their 2019 pick.

• From after the 2015 draft onward: The earliest first round pick the Heat can will depend upon whether the Heat has already satisfied the last of their pick obligations to the Cavs by 2015.
  • If so, they can finally start trading all of their future first round picks, from 2016 onward, without any conditions.
  • If not, they can only trade future first round picks on condition that they are conveyed at least two years after the Heat’s final pick obligation to the Cavs is satisfied. Since the final pick obligation to the Cavs will be satisfied by no later than the 2017 draft, all trades involving first round picks in 2019 and beyond can be traded without any conditions. Once the Cavs (or any team to which they trade the pick) have already made their selection with the Heat’s final pick obligation, the Heat will then be eligible to immediately start trading any of their future first round draft picks up to seven years out without any conditions.

The restrictions are long and confusing but, to simplify, they mean that, for the next two years, the Heat will not be able to trade away a first round pick until at least the year 2017(4) and, even then, they won’t be able to provide any assurances it will actually be conveyed.

Think about that for a second. Think about all the times you’ve identified a player you’d like to acquire in trade. Think about all the times you’ve imagined a scenario where the Heat would simply toss back a first round draft pick as compensation for that player. For the next two years, you can’t under any circumstances(4) create a hypothetical scenario involving the trade of a Heat first round draft pick that provides assurances to your trade partner that it would ever actually receive the pick.

Even if we assume it would be conveyed: How far out is 2017? It is one year after the contracts of James, Wade and Bosh expire. Do you really want to start trading first round picks in drafts that take place after the Big Three era is already over? Do you really want to start mortgaging the team’s future by trading picks that far out?

Of course, none of us can know which players might be available in trade in the years to come. But that’s not the point. The point is that we know that trade scenarios will emerge. We know that the Heat will need draft picks to facilitate those trades. And the Heat is now left without any.

So, forget about being able to offer a first round pick in trade at any point during the Big Three era.

Actually, forget about being able to complete any trades of any kind during the Big Three era. With the way the roster has been constructed, it is difficult to see how the Heat will have any player assets of any kind beyond the James, Wade, Bosh, Miller and Haslem, none of whom would realistically ever be traded.

Imagine how frustrating it is going to be, year after year, to contemplate potential trade scenarios that the Heat will not have the assets upon which to execute.

And so, if for some reason this team does not work out, if there are not rings for everybody in the years to come, if champagne isn’t constantly falling from the heavens, it’s worth noting that the Heat had countless options in constructing its roster.

It’s worth noting that, while we are all vociferously celebrating the Heat’s brilliant construction, the organization may well have also quietly secured its premature destruction.

What kind of roster will LeBron James and Chris Bosh find around them when, and if, they opt out of their contracts four years from now? How much damage has the method by which they were signed caused, if any, to the Heat’s potential development for the future? Will Riley, despite his stated preference for the seasoned veteran over the youngster with upside, be able to transcend the limitations caused by the method by which they were signed? These are the true questions that must be addressed. The pressure is on.

Notes:
(1) This analysis assumes that Dwyane Wade signs a six-year contract with 10.5% annual raises leveraging his Bird rights, while LeBron James and Chris Bosh sign five-year contracts with 8.0% annual raises utilizing cap space. The analysis further assumes that the payout to all three is identical over the first five years of their contracts. Thus, the starting salaries become $15.8 million for James and Bosh, $15.2 million for Wade. This has common-sense logic as well – Wade locking in that sixth year guarantee is far more important than for James and Bosh, since he’s older.

(2) That amount rises from $4 million each for LeBron James and Chris Bosh to $7 million each if the Heat were to keep Udonis Haslem and instead part with Mike Miller.

(3) The 10 first round picks would include all seven of the Heat’s own picks, plus picks from the Raptors (2011 protected; Jermaine O’Neal trade on 02/13/09), Grizzlies (2011, protected; Dorell Wright non-trade), and Clippers (2012 protected; Heat’s 2010 pick which was traded by the Thunder to the Clippers). The 11 second round picks would include six of the seven Heat’s own picks (the Heat’s 2011 pick was traded to the Lakers for Patrick Beverley), plus picks from the Wolves (2011 and 2014; Beasley trade which has yet to be completed), Thunder (2011; Latavious Williams trade on 6/24/10), Grizzlies (2011 top-55 protected; Shaun Livingston trade on 1/7/09) and Hornets (2012; Marcus Thornton trade on 6/25/09). 

(4) This, of course, assumes the Heat won’t acquire another first round pick in trade, which they could always re-trade.