Miami Heat Create NBA-Record $55 Million in Potential Cap Space

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Many years from now, Saturday, June 28, 2014, could be remembered as a critical day in Miami Heat history. It marks the day when guard Dwyane Wade and forwards Chris Bosh and Udonis Haslem declared their intentions to join LeBron James and Chris Andersen in opting out of their contracts. It could ultimately mark the day in which the destruction of the Big Three era was initiated in earnest, or the day in which the remodeling of Pat Riley’s two-time championship-winning creation received a major boost.

Agent Henry Thomas, who represents all three players, has reportedly informed Heat president Pat Riley of their choices. Wade will exercise his Early Termination Option for the remaining two years and $41.8 million on his contract, Bosh will do the same for the two years and $42.7 million remaining on his contract, and Haslem will not exercise his player option for the lone season remaining on his $4.6 million contract.

Technically, there is no mechanism to notify the league that an option or ETO will not be exercised. Since the contracts of Wade and Bosh contain ETOs for this summer, they are required to inform the league of their intentions. Since Haslem’s contract contains a player option, he need do nothing but wait.

These actions, particularly in the wake of James, Wade and Bosh meeting last week on Miami Beach, make it rather clear that the Heat’s stars, as well as its supporting players, have decided to work together to provide the Heat the salary-cap flexibility with which to add additional components to a roster that earlier this month lost in the NBA Finals to the San Antonio Spurs, cutting spectacularly short the Heat’s bid for basketball immortality – four straight NBA Finals appearances and three straight NBA titles, a feat which has only been accomplished once in league history.

Without the opt-out decisions, the Heat would have gone into the offseason far in excess of what is projected to be a $63.2 million salary cap for the 2014-15 season, and without much ability to materially improve. Instead, the moves enable the Heat to create as much as an all-time NBA-record $55 million in cap space with which to reconfigure the roster(1). 

The Heat now figure to start free agency on July 1 with only one player, Norris Cole, under guaranteed contract. Center Justin Hamilton holds an $816K non-guaranteed contract, which will become 50% guaranteed if he is not waived before August 2nd. The Heat also holds the draft rights of 2014 first-round pick Shabazz Napier, the guard out of Connecticut acquired in trade during Thursday night’s NBA Draft, for whom the Heat will incur an immediate $1.03 million cap hold. The Heat have reportedly been in trade talks involving Cole in the wake of the Napier acquisition, with the goal of clearing Cole’s $2.0 million salary off the books(2).

Much of the Heat’s projected available cap space will go into new deals for James, Wade and Bosh. Haslem also will receive some of that salary-cap space. The rest figures to be used on outside free agents.

Once the Heat finish using up their cap space, they will then be granted a $2.7 million salary-cap exception to sign an additional player. From there, the Heat can sign players at the minimum salary, the vehicle which may be used to retain Ray Allen and James Jones and other lower-salaried free agents. They can also then offer contracts to players who remain on the Heat’s books via their cap holds, a vehicle which they may leverage to sign Napier (who is eligible to sign a rookie scale contract with a starting salary at up to 120% of his cap hold) and Chris Andersen.

But any cap space scenarios first require that the Big Three take less. The key to the Heat’s offseason, then, is how much of a discount, if any, they’re willing to take.

The Heat’s trio of stars has reportedly been discussing financial terms of new contracts amongst each other. Unlike in 2010 when all three took nearly identical contracts, the discussions this time could include the possibility that the contracts could vary widely.

They have three general options on how to put together their deals, which will greatly affect how aggressive the Heat can be in going after outside free agents.

They could all attempt to re-sign for up to the maximum salary, currently projected at $20.7 million, which would once again carry the Heat into the luxury tax and significantly limit their spending options in this and following seasons, leaving only the $3.278 million Taxpayer Mid-Level Exception and minimum salary additions with which to improve.

This approach is certainly possible, but somewhat unlikely. They’ve each elected to cancel their existing contracts for a reason, to reshape the future of the team. It was a decision predicated on sacrifice, not greed. The only scenario under which this approach appears plausible, then, would be if the Heat are to be unsuccessful in their goal to recruit others to join at a price that makes viable sense. At that point, the Heat could essentially reinstate its stars’ salaries and sell them on a perhaps equally tempting 2015 or 2016 plan. But it’s an approach not without its risks. Should the Heat not land a premium free agent, it could send the organization reeling. James’ priority is clearly to find a way to make a future work with Miami, but a failure by the Heat to improve the roster to his satisfaction could potentially send him aggressively into free agency. Riley would then be left to decide what contracts he’d be willing to offer Bosh and Wade, both of whom have expressed strong desires to remain in South Florida, as well as how to fill out a roster severely depleted of headline talent.

They could instead all take moderate pay cuts, either in unison or staggered at different levels. This would likely not leave significant cap space but it would take the Heat below the luxury tax line and enable them up to use the full Mid-Level Exception of $5.305 million as well as the Bi-Annual Exception of $2.077 million to bring in multiple role players. But, as things stand today, the Heat can already maneuver to have access to these exceptions, if they manage payroll appropriately, without necessitating any pay cuts. Such a scenario would also restrict the Heat to a projected $81 million hard cap on spending.

The last and most thrilling option is one in which they all take significant pay cuts, perhaps as much as $8 million, that would take the Heat below the salary cap and leave enough room to chase a major free agent. Potential free-agent targets could include Carmelo Anthony, Kyle Lowry, Marcin Gortat, Pau Gasol and several others. There are multiple derivatives to such a construct, and not all of them would require the ultimate level of sacrifice that you might think.

Wade, for his part, could choose to negotiate for a lower salary over more years – one that compensates him for most or all of the $41.8 million he is owed for the next two seasons but also acknowledges the fact that his value would decline substantially in the years thereafter – that takes him into the twilight of his career in style.

An archaic yet punitive Over-36 rule will make it (realistically) impossible for Wade to receive a maximum five-year contract this summer. So what kind of four-year contract can you build for Wade that would both compensate him for the $41.8 million he has remaining over the next two years and compensate him fairly for the following two?

What would he 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? $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. If you’re right, then perhaps he’d be willing to sign an up to four year contract paying between $50 million and $55 million, as many have been speculating.

Bosh, for his part, is reportedly seeking a new five-year contract worth between $15 million and $16 million per season. Over the next two years, that equates to as much as $32 million, to replace the $42.7 million from which he has opted out. But what if I told you there was a way to lower his salary for next season down to as low as Wade’s theoretical $13 million, allowing the Heat greater flexibility for this summer, and still pay him as much as $35 million over the next two years? Which option would you take?

There is such a way. The Heat will retain Bosh’s full Bird rights now that he has officially opted out of his contract, and can continue to do so if he should choose to remain with the Heat. If the Heat were creative, and if Bosh were willing, Bosh could therefore sign a one-year contract at $13 million (with a player option for a second year, which would guarantee him $14 million in the unlikely event of long-term injury) and, leveraging his Bird rights, follow it up by signing an as much as full five-year maximum contract next summer, which, at current league projections, would start with a base salary of nearly $22 million. If that weren’t compelling enough, you’d no longer be talking about the up to $16 million per year Bosh reportedly wants after year two, but rather as much as $22 million or more.

James, for his part, could be seeking a full maximum contract(3) – or something close to it – to stay with Miami, according to reports. But he could instead choose to follow a similar approach to what Bosh could do. He could actually choose to sign consecutive one-year deals (both with second year player options as protection against injury), and choose to lock in his long-term contract under the auspices of what could become a vastly higher salary cap in the summer of 2016. That’s the summer during which the league’s new national television rights deal takes effect, which has the potential to vault maximum salary amounts by as much as $4 million or more. He could, ultimately, end up securing more money over the next five years with such an approach than what he could guarantee himself by signing even a maximum long-term contract this summer, which could effectively make such an approach not only not a discount, but rather a more financially-lucrative decision.

Of course, while Wade is likely to be negotiating for one final contract next month, James and Bosh in such a scenario would be planning for consecutive contracts. Any pre-arranged deal with the team would be illegal under the rules. Such a violation is considered by the league to be among the most egregious a team can commit. The league will investigate any allegations of wrongdoing. A violation can result in a fine up to $6 million, forfeiture of draft picks, voiding the player’s contract(s), and/or the suspension for up to one year of any team personnel who were involved. In addition, the player himself can be fined up to $250,000, and prohibited from ever signing with that team. That’s some serious stuff.

But if James and Bosh were to each put his faith and trust in an organization that has a deep tradition steeped on loyalty and integrity, it shouldn’t be an issue. It is certainly not illegal for Riley to read between the proverbial lines.

So, perhaps, each member of the Big Three would sign a contract that starts as low as $13 million for next season. Or perhaps that’s a pipe dream. If they do deploy such a strategy in contemplating their futures, it could possibly open up room enough for not one but two targeted outside free agents. If the reality lies somewhere in the middle, maybe it’s only one. The scenarios made possible by the events of June 28, 2014 are limited only by the mind’s imagination.

The practical reality, however, is that nothing yet is certain. James, Wade, Bosh are all players approaching or in their early 30s. They are three players entering very different stages of their careers, and lives, with vastly differing off-court income streams and, as such, some may be more reluctant than others to negotiate reductions in their salaries, and rightfully so. Bear in mind that any discounts they’d be willing to take would be on top of discounts they already took in the summer of 2010, at a time when we were all more than happy to give each player a full, six-year maximum contract. There is also nothing definitive to suggest that if the Heat were to create the requisite room – whether it be cap space or an available exception, as the case may be – that they could attract a desired free agent with it.

But it is certainly thrilling to speculate.(4)

Notes:

(1) For the salary cap experts among you, the Heat’s maximum potential cap space is actually significantly higher than $55 million, because roster charges will get added back as the Heat rebuilds its roster.

(2) Empty roster charges for each player fewer than 12, at $507,336 each, make up the difference. Such temporary charges get added back as a team builds back up to 12 players. Add everything up and you’ll get to $55 million.

(3) The $130-million contract figure presented in the linked article is incorrect. At current salary cap projections, James’ maximum salary for next season would be approximately $20.7 million. That equates to a five-year contract, paying out up to $119 million. 

(4) If you agree with the perspectives presented in this article, this is a depiction of how it could work within the confines of the salary cap rules. You can, of course, play with the numbers however you see fit. 

5 Responses

  1. Berkeley223 says:

    Could we deal cole just for picks or do we need to take salary back under the rules. What do you think we can get for him? He’s a nice player and I hate to lose him over the small difference between his contract and a vet minimum contract

  2. Albert says:

    @Berkeley223
    Technically, both teams need to send and receive something in every trade, but it does not need to be salary. It could be a draft pick (with or without protections), it could be the rights to a previously drafted player, it could be cash considerations, etc.

    If they were to trade Cole, the Heat wouldn’t really be losing him over the small difference between his contract and a veteran minimum contract. By trading him, the Heat would recover an additional $1.5 million in cap space (i.e., the difference between his salary and the requisite roster charge), which could be redeployed elsewhere.

    I certainly don’t mean to suggest that trading Cole is what they’ll do. I only mean to give you the facts.

  3. Berkeley223 says:

    I’d rather keep Norris. The 1.5mm I can’t see really being the difference between getting a guy we want or not. However I fully expect Riley to deal him for a second rounder which isn’t equal value.

  4. Albert says:

    @Berkeley223
    I would imagine Riley’s actions will be predicated on what he can accomplish in free agency. There will be no decisions made with haste.

  5. Adam and Mike says:

    Albert,

    Love the post. Mike and I are wondering who you would consider for the 3 TBD positions you have outlined. Gortat and Lowry would be great additions, but I still believe this roster leaves several unresolved problems. A SF is likely needed to spell Lebron’s minutes and lengthen his career. Also, what player can fill in for Wade when he sits out significant time? Allen has shown he can’t really handle that role, I would think Shabazz is not ready and it might be difficult for Lowry to switch back and forth between PG and SG (although with Spo, who knows considering his mantra of position-less basketball). What do you think?

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