Home > Commentary > Could the Miami Heat afford Carmelo Anthony, Big Four?

Could the Miami Heat afford Carmelo Anthony, Big Four?

Tweet about this on TwitterShare on FacebookEmail this to someone

Now that the New York Knicks have both a president and a head coach with championship pedigrees, one would think there should be no problem luring championship caliber players to a city that’s been starving for a title since 1973. But any visions of grandeur in the Big Apple, at least in the near future, are predicated on the upcoming decision of their star, Carmelo Anthony.

There has been widespread speculation about a lack of desire for the 30-year-old to remain in what would surely be a rebuilding process in New York under the new regime headed by Phil Jackson, with neophyte coach Derek Fisher this week added to the mix. Anthony has the right to become a free agent this summer, or he could remain with the Knicks for another season before his contract expires.

Numerous reports have linked Anthony to the possibility of joining LeBron James in Miami, with the Heat’s James, Dwyane Wade and Chris Bosh all in position to terminate their contracts by the end of the month as well. That flexibility could position the Heat to potentially create salary-cap space to add Anthony to the mix.

The success of the Heat’s 2010 free-agent bonanza has established them as one of the NBA’s destination franchises, with owner Micky Arison empowering big-thinking team president Pat Riley to attempt to pull off another coup despite the limitations of the new and more restrictive collective bargaining agreement.

Discussions have reportedly begun within the Heat organization about trying to grow their so-called Big Three into a Big Four. Heat officials have already started to explore their options for creating sufficient financial flexibility to make an ambitious run at adding the Knicks’ scoring machine this summer in free agency.

Can Pat Riley pull this off again? Is it even possible? 

The Heat are prevented from making any formal contact with Anthony until July 1, and can do so then only if he opts out. Anthony has until June 23 to notify the Knicks of his intentions. But while neither Riley nor any agent of the Heat organization can engage Anthony in discussions prior to his decision deadline, Anthony is not prevented from discussing the possibility with James, Wade and Bosh within the confines of current NBA rules.

So how would it be financially possible for such a Big Four scenario? How could the Heat afford Carmelo Anthony without giving up any of their stars?

The mere concept would require the Big Three to all opt out of their current contracts by the end of the month as well, and likely take further salary reductions in new deals that start next season to give Miami the ability to offer Anthony a respectable first-year salary. Here’s what they’d all be giving up:

Salary_to_be_Sacrificed

The question is: What would they be getting back in return?

The good news for the Heat is that cap and tax projections are rising. The salary cap this year was $58.679 million, but the early expectation is that it will jump to around $63.2 million for 2014-15. The luxury tax threshold is projected to increase correspondingly, from $71.748 million to around $77.0 million.

Relative to those targets, this is a snapshot of the Heat’s current salary cap situation for next season:

Heat_2014_Team_Salary_Current

The Hypothetical Structure of a Big Four Scenario

A hypothetical Big Four scenario would be considerably more challenging for the Heat than what they faced in the summer of 2010, for obvious reasons. That was a Big Three scenario. This is a Big Four. This time around, the Heat would need to fit the salaries of four star players, as well as salaries and placeholders for nine others, all within the confines of a $63.2 million salary cap.

Here’s the best way to think about the situation: The salary cap is projected to be $63.2 million. The Heat would have as much as $11.9 million tied up in Haslem, Cole, Andersen, its first round pick, Hamilton and mandatory roster charges. That leaves $51.3 million remaining.

If you’re envisioning Carmelo Anthony in a Heat uniform, that’s $51.3 million split four ways – $12.8 million per player. The Heat’s team salary for next season would end up looking something like this(1):

Heat_2014_Team_Salary_Including_Carmelo_Anthony

As you can see, they’d all be giving up considerable sums of money of varying magnitudes.

Wade, whose current age limits the number of years for which he can sign(2), would be passing up on the $42 million he is owed over the next two years and replacing it with a maximum four-year contract, paying out as much as $57 million, that would very likely take him into retirement.

Meanwhile, James and Bosh would be passing up on a new contract worth up to $119 million over five years, and replacing it with five years at up to $74 million. That’s a whopping $45 million discount.

In Anthony’s case, he’d be passing up on the ability to sign a five year contract worth $131 million in guaranteed salary in New York, that is if he could get it, only to replace it with four years at $55 million. That’s a whopping $47 million discount over four years, plus the loss of a fifth year guarantee for a then-34-year-old.

We’ve all undoubtedly told ourselves at some point during the past four years that James, Wade and Bosh should be willing to sacrifice more to once again make something special happen. We use a variety of arguments to convince ourselves – that they should take such a discount because they’re simply not worth their remaining contracts (as if we were somehow qualified to make such a determination), or because they are already making tens of millions of endorsement dollars, or because they’re incredibly rich and don’t need the money. We rationalize our convictions any which way we can. We ignore the reality: they don’t need to take discounts.

Think about your own salary from last year. Then ask yourself this: Would you reduce it by around 40% so that you could work with a friend?

As much as we may hope that this scenario could happen, it’s not even remotely likely.

But it’s not the only scenario. In fact, it’s not even the likely scenario.

How would you feel if I told you that a Big Four scenario were possible, and without necessitating any dramatic sacrifices to make it so? It’s possible.

Understanding how first necessitates an understanding of certain salary cap rules, with regard to “Bird rights.” The “Larry Bird” exception allows teams to exceed the salary cap in order to re-sign their own free agents. To qualify for this exception, a player essentially must play for at least three seasons without clearing waivers or changing teams as a free agent. This means a player can qualify by playing under three consecutive one-year contracts, a single contract of at least three years, or any equivalent combination. These contracts can call for as much as the player’s maximum salary, be up to five years in length, and contain annual raises of up to 7.5% of the salary in the first season of the contract.

For the Heat, James, Wade and Bosh all qualify for this exception, and will continue to do so for the remainder of their Heat tenures (whether or not they choose to exercise their opt out rights in either of the next two seasons).

The Heat does not, however, hold Bird rights to Carmelo. If he wants to leave New York, be it with the Heat or any other team, he’d need to sacrifice the extra year (4 years, rather than 5) and the larger raises (4.5%, rather than 7.5%). His maximum starting salary, however, would remain unchanged.

If he is to opt out of his contract, Anthony would be eligible to receive a starting salary of up to $22,763,888 next season, in the first of an up to four year contract with raises of up to 4.5% of the first year amount. But for the Heat to give it to him, they’d need to fit the entire amount within the confines of the cap – which means that James, Wade and Bosh would have to take less. Much less.

Again, it’s $51.3 million split four ways. If Anthony took $22,763,888, James, Wade and Bosh would have exactly $28,525,490 to split for next season – that’s $9,508,497 per person.

But here’s the thing.

If James, Wade and Bosh were to each sign a one-year contract – even at the ridiculously underpriced $9,508,497 per person – they’d each have still their Bird rights intact at the end of that one year. They could therefore leverage their Bird rights to restore their previous salaries for the second year (subject to maximum salary rules) and beyond.

The catch is that the Heat won’t be able to promise any of the Big Three that second year. A pre-arranged future deal would be illegal under league rules. That could be an issue for Wade, and perhaps even for Bosh. But if the Big Three were to put its collective trust in Riley, he could surely read between the lines.

Stated plainly: Carmelo Anthony could sign a full four-year maximum contract with the Heat (or less, if he chooses). For the math to work James, Wade and Bosh would each need to opt out of their current contracts and sign a one-year contract at around $10 million (which represents a one-time $10 million discount). After the year is up, they could each sign a full maximum contract.

Their salaries over the next two years could look something like this:

Big_Four_First_Year_Salaries

This scenario is certainly plausible.

And it’s precisely how a Melo-to-Miami scenario would surely work.

The Potential Cost

But it’d be costly.

Depending upon whatever concessions Anthony (who may be willing to take a small sacrifice to put his salary on par with James) and Wade (who can no longer earn a full length, full value maximum contract(2), and may be willing to take a reduced salary in exchange for more years) would be willing to make, by 2015-16, the Heat could have four players earning at least $80 million. Building out a full team at those levels could cost $100 million. These numbers are getting ridiculous.

Legal, sure. But ridiculous.

Guess how much the luxury taxes — including the league’s new progressive tax system, as well as the onerous “repeater tax” consequences – on a 2015-16 payroll of $100 million would be.(3) $60 million!

The Heat’s total payroll obligations could reach $160 million!

Would Arison be willing to fund that?

He certainly can afford it. He and his family do own more than $6 billion worth of Carnival stock alone. That “billion,” with a “b.”

But having the means to afford such a staggering amount does not equate to having the desire to do so. After all, the Heat probably only generates around $180 million of revenue at present levels.

An analysis of cost is a far more difficult proposition, made even more challenging by the scores of non-cash charges and intra-company arrangements professional sports franchises often incur in an effort to reduce both their tax liability and their reported profitability for when they need to negotiate with their local governments for arena/stadium funding.

Forbes data over the past several seasons approximates the Heat’s operating costs, exclusive of player payroll and revenue sharing obligations, at roughly $70 million per year. This figure may or may not be correct. It may or may not be close to correct. It surely changes, perhaps substantially, from year to year. There is no way to get a more definitive estimate. It is the best data we have.

The rest is basic math: About $180 million of revenues. About $160 million in payroll expenses. About $70 million in other expenses. Another $10 million or so in revenue sharing obligations. You’d be asking your owner to fund an annual deficit that could quickly approach $60 million.

Or maybe not.

Consider this. The landscape of the NBA is changing very dramatically, and very rapidly.

The league’s national TV rights come up for bid when its current agreements with ESPN/ABC and TNT, which pay out roughly $930 million on average, expire after the 2015-16 season, and rumors are that revenues could more than double, to $2 billion or so, supported by record ESPN and TNT cable television ratings. That could add an incremental $30 million or more per year, on average, over the course of a multi-year contract.

The Heat’s local TV rights come up for bid when its current agreement with Fox Sports, which pays out roughly $20 million per year, expires after the 2017-18 season, and rumors are that revenues could multiply between four and five times, to between $80 million and $100 million, supported by some the game’s best player and some of the league’s best viewership.

Is it all that unrealistic, then, to see the Heat’s revenues increase by around $100 million over the next few years?(4)

Revenues for the Heat, and all NBA teams, are about to soar astronomically higher. With exploding revenues to come, it is no wonder valuations for NBA franchises are rocketing into the billions.

Owners who once leveraged $300 million in supposed annual losses as the impetus to renegotiate their take of league-wide revenues from 43% to around 50% are now producing record profits.

The players are bound to want to renegotiate. They’re bound to want to get a little back on the revenue split.

They’ll have their shot one year after the new national TV rights deal kicks in. The current CBA runs through the 2020-21 season, although either side may opt out after the 2016-17 season. The timing of the opt-out is not an accident.

The question needs to be asked: If owners were using claims of mounting losses as the impetus to increase their split of league-wide revenues back in 2011, and six years later they’re no longer losing money but rather making piles stacked to the heavens of it, is it not fair for players to want to adjust the split back down?

The last negotiation was about sustainability. Teams were losing money, and the league fought to replace the existing system with a new one that helped them become and stay profitable. The next one will be about how to best share a windfall.

The NBA salary cap – which forms the basis for how players are paid – is set based on a percentage of league revenues. As the league as a whole generates more revenues, the salary cap increases correspondingly. A higher salary cap means all of the league’s teams are allowed (and required) to spend more money on their players. Through the increasing spending (and backstopped by the guarantee of a check for the difference should salary spending not ramp up enough), the players acquire their agreed-to split of revenues.

If the players choose to opt out of the current collective bargaining agreement after the 2016-17 season in order to re-coup part of the split of revenues conceded in the lockout, the cap and tax levels could rise even further in any new collective bargaining agreement to come. That’s because the percentage of revenues upon which the cap and tax are based (currently 44.74% and 53.51%, respectively) would rise correspondingly.

Imagine a hypothetical scenario where the players were to successfully negotiate for three of the then-six(5) lost percentage points back. That change alone would increase the cap by more than $7 million. The league could be looking at the following type of scenario – starting with a relatively modest $81 million tax threshold for 2015-16; seeing it increase a whopping 20% to $97 million in 2016-17 on the strength of a a new national TV rights deal; and then seeing it rise sharply again, to around $111 million in 2017-18, based largely on a potential shift in the revenue split between players and owners.

Against this backdrop, a $100 plus million payroll doesn’t seem so daunting.

***

A Melo-to-Miami scenario is not likely.

But it is possible.

Whether it makes sense, I will leave to you to decide.

Notes:
(1) The total team salary is greater than $63.2 million because once the Heat spends exactly to the salary cap, it will be able to exceed the cap by utilizing the MLE for Room Teams ($2.7 million) and the minimum player salary exception. 

(2) Dwyane Wade is currently 32 years old, and will therefore not be able to sign to sign a five-year maximum value contract, in accordance with the NBA’s Over-36 rule. The NBA’s Over-36 rule exists to recognize the reality that even though NBA players may be signing contracts that will not expire until after they are 36-years-old, the likelihood of them playing until that age is slim. The Over-36 rule applies when a player signs a contract that is four-years or more in length, and the player will be 36-years-old or older when at least one of those seasons begins. If the Over-36 rule applies to a player’s contract, his salary in his over-36 season is reallocated evenly over the earlier seasons of his deal for purposes of the salary cap, thus making it impossible for Wade to achieve a full maximum contract over a five-year term. I have drafted a post on Wade’s options, which I will post at the end of the season. 

(3) The NBA is currently projecting a salary cap and luxury tax threshold for the 2015-16 NBA season of $66.5 million and $81.0 million, respectively.

(4) The Heat would have revenue sharing obligations that could eat up as much as 30% of that increase.

(5) The players will automatically gain an extra point for the purposes of the salary cap calculation in any new deal because the current cap calculation is based on an assumed 50-50 split of revenues, but by the time the new national TV deal kicks in, the players will actually be earning 51%. A new CBA will surely correct for this issue. 

Categories: Commentary Tags:
  1. Jon
    June 14th, 2014 at 17:26 | #1

    Thanks for the post. I’m sorry to hear your life is crumbling around you. You need to hit up the HEAT and get an assistant capologist position with them.

  2. RemoteHeatFan
    June 15th, 2014 at 23:45 | #2

    Albert,

    I find it interesting you bring up dropping 40% of a salary to play with a friend. Your comparison to a person making 40k or even a 100k a year to a person making 10-20 million a year is comparing apples to oranges. Sure it is money left on the table, but for the 40->100k person, that is a drastic lifestyle change. For a person making 10+ million a year, it isn’t changing much at all.

    I read an interesting quote by Dave Chappelle. I am paraphrasing, a bit here 🙂 He stated, “Here I am at this fancy restaurant. The guy over there, he is worth 50 million. We are both eating here, both have no problems with the bill. Does it matter if I have 10 million or 50 million?”

    To assume that a NBA player thinks the same way that a Wall Street guy does is a fallacy. Wall Street guys are wired for greed. NBA players . . . not so.

    If the the big 3 or 4 or whatever want to look at the formula, look at Duncan’s salary for the last 10 years. San Antonio showed how to do it financially.

  3. June 16th, 2014 at 00:08 | #3

    @RemoteHeatFan
    I anticipated that sentence to cause some controversy. I contemplated not adding it. But I felt it needed to be incorporated, if only to make the reverse point. I don’t think it is fair to ask a player to take a discount, or assume he will, simply because he is wealthy.

    I don’t think one can generalize NBA players versus Wall Street guys (I myself being the latter, of course, and highly successful at it, but hopefully never one to be interpreted as greedy about it, in a former life). I don’t think one can generalize people of varying wealths and their willingness to take a discount. Each person is different. Each situation is different. For every Tim Duncan, I can show you a Kobe Bryant. Just as not every investment banker is motivated purely by greed. People have different goals and different motivations. Their willingness to reduce their salaries would naturally be predicated on their particular circumstances.

    I do, however, most certainly acknowledge and understand your point. The impact of taking a discount can have a far more drastic impact on a person’s lifestyle at lower income levels.

  1. No trackbacks yet.

Time limit is exhausted. Please reload CAPTCHA.