Dwyane Wade’s Looming Free Agency Decision
With the 2013-14 NBA season now at its tragic end, it seems as though the biggest topic of conversation is whether LeBron James is going to opt out of his contract with the Miami Heat, two years prior to its expiration, and explore his options as a free agent. As pundits weigh in and teams’ salary cap experts scramble to figure out how they might be able to get their hands on the greatest player of this basketball generation, Dwyane Wade’s potential free agency looms quietly in the background.
Wade just completed the fourth of a six-year $108 million contract he signed in the summer of 2010. He, like James, structured his contract to give himself the ability to opt out after both the fourth and fifth seasons. The first of those opt out decisions needs to be made by June 30.
We as fans can’t possibly overstate the importance of Wade to the Heat franchise, both on and off the court, but we also can’t ignore his advancing age or the health restrictions that cause him to miss so many games and render him ineffective in so many others. And so, we tell ourselves that the Heat brass needs to try to persuade him — for all of his undeniable status as a Heat legend, as well as the chief co-linchpin alongside Pat Riley who brought the Big Three together — to opt out and instead take a Tim Duncan-style pay cut for the good of Miami’s flexibility.
We tell ourselves that Wade should take a discount because he simply isn’t worth the $42 million he has coming to him over the next two years. We tell ourselves that Wade should take a discount because he is making tens of millions of dollars in endorsement money. We rationalize our convictions any which way we can. We ignore the reality: Wade is owed this money.
Lest we forget, Wade has already taken a discount for the benefit of the organization. His current contract was eligible to be for as much as $126 million, and we were all more than happy to offer it to him. Instead, he took less. He has already sacrificed $11 million as a result. He’ll sacrifice another $7 million over the next two seasons if he completes his current contract. Rather than reward him for that generosity, we would instead be asking him to compound that sacrifice — this, in a day and age when most athletes will chase the money, even if it obliterates their franchises’ flexibility.
The reality is that Wade probably won’t want to compound his sacrifice. For the Heat to lower his salary for the next two seasons, Wade will surely demand a longer-term contract – one that compensates him for most or all of the $42 million he is owed for those two seasons but also acknowledges the fact that his value would decline substantially in the years thereafter. In other words, he may be willing to take less per year if it means more in the long run.
So, if he is to opt out of his current deal, what kind of contract can you build out that both compensates Wade in full for the next two seasons but also acknowledges his basketball mortality in the years thereafter?
When it comes to Wade, on the surface, the biggest question is how many playing years he has left. In a perfect negotiation setting, Wade’s agent would have him opt out this summer and secure him a five-year contract taking him into the twilight of his career. Below the surface and crouched in the CBA minutia, however, lies another issue: the Over-36 Rule.
The NBA’s Over-36 Rule exists to recognize the reality that even though NBA players may sign contracts that will not expire until after they are 36-years-old, the likelihood of them playing until that age is slim. It is designed to close a potential loophole whereby an elder player signs a contract with a lower average annual payout in exchange for a longer term that has him being paid into his retirement — a creative way of making his post-retirement salary a form of deferred compensation for services rendered during his playing days. The Over-36 Rule discourages this type of manipulation of the salary cap rules.
The Over-36 Rule applies when a player signs, extends or renegotiates a contract that is four years or more in length, and the player will be older than 36-years-old when at least one of those seasons begins. The presumption is that those seasons are likely to come after the player has already retired. Therefore, if the Over-36 Rule applies to a player’s contract, upon execution of the contract, his salary for the seasons in which he is over 36-years-old at the start of the season (defined as October 1 for these purposes) are automatically reallocated for salary cap purposes towards the earlier seasons of his contract, in proportion to the salary in each of those seasons. As he proves the presumption wrong and continues playing, his cumulative remaining salary cap charge is then averaged over the remaining term of the contract at the start of each subsequent season.
For Wade, who turned 32-years-old last January, the Over-36 Rule and its operation is something of which his representatives and the Heat organization must be aware. If Wade’s representation seeks a five-year contract, because of Wade’s age, the salary called for in the fifth year of said contract would immediately get reallocated over the first four years. This archaic yet punitive rule will make it (realistically) impossible for Wade to receive a five-year contract this summer. Instead, if he were to opt out of his current deal, he’d be looking at no more than four years.
So let’s refine our baseline question: What kind of four-year contract can you build for Wade that would both compensate him for the $42 million he has remaining over the next two years and compensate him fairly for the following two?
What would Wade be worth as a free agent in 2016? As painful as it may be for his teammates to endure large stretches of the season with him on the sidelines as he manages knee issues, he continues to be a quality and at times elite NBA player when healthy. What is a player like that worth? $15 million per year? $10 million? How about just $5 million? Can Wade live with that? Does that sound fair?
Pick whatever number you are comfortable with. Let’s say it’s $5 million. So add two years at $5 million each to the $42 million Wade is already owed and you get four years at $52 million, or $13 million per year.
Reduce his salary for next season from $20 million to $13 million? Sold!
Or maybe not.
The question first needs to be asked: What would you be trying to accomplish in reducing Wade’s salary so sharply anyway? It’s not like the extra $7 million of savings can be redeployed elsewhere. That’s not how the salary cap rules work.
We may have seduced ourselves into thinking that concessions from Wade, along with rising salary cap projections, will enable our team the necessary maneuverability with which to materially improve this summer. But does that line of thinking have any basis in reality?
The most thrilling scenario for Heat fans is one in which the Heat utilizes cap space to add a major free agent this summer. This is the scenario under which the possibilities become endless. It’s also the least realistic.
In this scenario, the Heat wouldn’t be limited by punitive luxury tax concerns. Instead, the team would be handcuffed by its need to operate within the confines of a projected $63 million salary cap.
Here’s the best way to think about this scenario: The salary cap is projected to be $63 million. The Heat would have $11 million tied up in Haslem, Cole, Hamilton, its first round pick and mandatory roster charges. That leaves about $52 million remaining.
Therefore, the reality is that even if Wade were to take a discount, the Heat couldn’t use cap space anyway — unless you can figure out a way to divide $52 million among both the Big Three and any other player you’d be targeting with the cap space. With $13 million allocated to Wade, that leaves $39 million left for James, Bosh and whomever you might be targeting.
Wade is not about to reduce his salary without a reason. For him to do it, there surely needs to be a motivation. It can’t just be to save Micky Arison some luxury tax dollars. There needs to be a tangible benefit to the on-court product. So, again, why would you be asking him to take less? What, exactly, would you be trying to accomplish? How exactly would envision any savings to be redeployed? Who exactly would you be targeting — with $39 million to split between said player, James and Bosh — and would he (and James and Bosh) accept?
If you can’t identify such a player, then it makes no logical sense to ask Wade to take less, at least not this summer. The Heat would gain nothing (but tax relief). Better to clear one more year of his elevated salary off the books than to spread that payout out over future seasons.
And even if you can identify such a player, there’s another question to ask yourself: Is that player truly worth committing to two additional seasons with Wade, at $13 million per year, during which seasons he will be 36 and 37 years old?
Be careful how you answer this question.
Consider the ramifications.
The current contracts of Wade, James and Bosh are all set to expire prior to the 2016-17 season. As of now, there isn’t a single Heat contract on the books for that season. The Heat could start over. Start fresh. Be better positioned than they were in the summer of 2010.
2016-17 is also the first season in which the new national TV rights deal will kick in – a deal that is projected to increase the league’s take by around a billion dollars per year on average. That could cause the cap to rocket toward $80 million. It sits at $58.679 million today.
The Heat has masterfully positioned itself to have a clean slate in the very summer during which the cap could rocket toward $80 million! That also just so happens to be the very summer that stars such as Kevin Durant, Kevin Love and Dwight Howard can all become free agents! Is it all that unreasonable to think a new, better Big Three era could emerge?
It’d be one thing for the Heat to eat into that theoretical cap space by locking LeBron James into a long-term contract. He’d be a major selling point for any one of these guys. But would you really want to be paying Wade $13 million at that point? Years during which he’d only be worth, in your estimation, $5 million?
This could be what lies ahead for the Heat. And it’s not like the Heat would necessarily be risking the present to get there. Even if Wade and James and Bosh were each to opt into the fifth seasons on their contracts, the Heat could still utilize the MLE with which to improve the roster this summer. That’s $3.3 million. In fact, with some creative financial maneuvering, the Heat could gain access to the bigger MLE, the one that pays out $5.3 million. One final question, then, needs to be asked: If the Heat could clear another year of Wade’s salary off the books and sign a player to a contract with a starting salary of up to $5.3 million, would you still want Wade to instead take a discount which could cripple the Heat’s future?
It could be argued that it’d be in the Heat’s best interest salary cap wise if Wade does not take less in 2014 in exchange for a longer-term deal. It could be argued that the best option for both the Heat and Wade is for Wade to play out his existing contract, so that the team would be wiped clean of obligations to their star for the all-important summer of 2016.
Much like with James, if he trusts in Pat Riley, Wade loses nothing by opting out. It gives him, and his team, flexibility. It provides potential options. Perhaps you can identify a player for which Wade taking a discount becomes a necessity, and perhaps it does become a legitimate possibility in the weeks ahead. Perhaps, then, the best option for Wade would be to opt out of his current contract, and if nothing were to materialize, to trust in Riley to restore the salaries called for in his then-terminated contract.