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Where Do the Miami Heat Go From Here?

The Miami Heat’s bid for a three-peat – to many, the ultimate basketball accomplishment, and a prerequisite for dynasty status – has fallen short. In the wake of this frustrating failure, we’re all left wondering what the future holds. We’re all left wondering if this is the end of something great, or maybe just a bump in the road at the start of something greater.

LeBron James, Dwyane Wade and Chris Bosh are all eligible to become free agents this summer, but, following last Sunday’s crushing loss to the San Antonio Spurs, they deflected questions about their NBA futures. They each plan to take some time and talk with their families before eventually deciding how to move forward. The wait is infuriating. The uncertainty unnerving.

Of the 15 players currently under contract, 13 can or will become free agents at season’s end.

There are eight players with expiring contracts: Greg Oden, James Jones, Mario Chalmers, Michael Beasley, Rashard Lewis, Ray Allen, Shane Battier and Toney Douglas. Battier will retire. Allen may retire. The status of the rest remains unclear.

There are five players with player options/ETOs: James, Wade and Bosh, as well as Udonis Haslem and Chris Andersen. Haslem and Andersen are likely to be back with the Heat next season, though they may opt out of their contracts to help the Heat maneuver around salary cap issues. Andersen has reportedly already declared his intention to decline his option.

The final two current Heat players are under contract through next season as well: Norris Cole and Justin Hamilton. Hamilton’s salary is non-guaranteed.

The Heat also has its first round pick (No. 26 overall), its second round pick (No. 55 overall), and its 2013 second round pick James Ennis to consider.

Amid this cloud of uncertainty, the Heat did receive a bit of good news in April, when the NBA issued new projections for the 2014-15 salary cap and luxury tax thresholds. All 30 teams were informed via league memorandum that an increase in the cap from this season’s $58.6 million to $63.2 million next season is expected. A corresponding rise in the luxury tax threshold from $71.7 million to $77.0 million is also expected. These are the last non-binding forecasts that will be provided by the league until the official cap and tax thresholds for next season are announced in early July, following a league-wide audit.

With the gravity of these projected increases, many of us have been seduced into thinking that the Heat will have the necessary maneuverability with which to materially improve this summer. But does that line of thinking have any basis in reality? It all depends upon what you believe James, Wade and Bosh are willing to sacrifice. 

This is a snapshot of the Heat’s current salary cap situation for next season:

Heat_2014_Team_Salary_Current

Riley has met with all three of his highest paid players over a two-day span this week and relayed that he and team owner Micky Arison are willing to do “whatever it takes” for them to move forward and contend for championships for several more seasons. With this in mind, let’s take a look at what he can do. Ignoring possible trade scenarios, there are three primary options to consider.

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Option 1: Utilize the Taxpayer Mid-Level Exception

The Taxpayer MLE would allow the Heat to sign an outside free agent to a contract with a starting salary of up to $3.278 million. It may be used for contracts of up to three years in length, with raises of up to 4.5% of the salary in the first year of the contract. The Heat has utilized this exception in past seasons to sign both Shane Battier and Ray Allen.

This option does not require James, Wade or Bosh to make any concessions. They could all continue on under the terms of their current contracts. It would also allow the Heat to sign its first and second round draft picks and retain all of its current free agents at contract values at least as high as they were this season.

With this option, the Heat would be bound by the constraints of a new and more penal luxury tax system. As a result of the new CBA that was ratified in December of 2011, the NBA amplified its already painful luxury tax penalties by instituting a more punitive “incremental tax” that, after a two-year delay, started this past season. An even more onerous “repeater tax,” aimed at teams that have paid the tax in four out of five seasons, will start next year.

These punitive tax consequences have already affected the Heat in ways with which dynasties of the past never had to deal. The luxury tax as a concept was only started in 2002. When the Chicago Bulls outspent their nearest competitor by a whopping 30% in support of their dynasty in 1997, they didn’t need to worry about luxury tax consequences. They didn’t need to worry about luxury tax consequences when they led the league in spending the following season either. Neither did the Lakers and Celtics dynasties of decades past.

The Heat has produced four straight finals appearances, and two titles, without ever having led the league in spending, and yet the new and more punitive tax rules threaten its continued existence as presently structured. It is, quite simply, far more difficult to build a dynasty now than it has ever been in the history of the NBA.

Tax implications have already caused the Heat to waive Mike Miller utilizing the league’s single-use amnesty provision last summer. Riley attempted some slight of hand Thursday in trying to convince an audience of sentient humans that the team’s decision to axe Miller via the amnesty provision had nothing to do with Arison’s desire to cut his tax payment. Riley said the team cut Miller because it didn’t want his contract on the books for the 2014-15 season. Which is only half true. If that were all true, why not keep Miller around for one more year. Why not wait until, you know, the 2014-15 season to amnesty a key contributor to the team’s 2013 title?(1) The team thereafter abstained from using the MLE as well. So, while Arison – the beneficial owner of more than $6 billion in Carnival stock – can surely afford it, luxury taxes are a consideration, whether we like it or not.

Under one hypothetical scenario, the Heat could re-sign Chalmers and Allen at around the same salaries as they have today, utilize the Taxpayer MLE, sign its first round pick, sign its second round pick, sign James Ennis, maintain a full 15-player roster, and still have total payroll obligations roughly equivalent to what they were for this season:

Heat-2014-Team-Salary-Taxpayer-MLE

This is the baseline scenario. But there are other options to consider.

Option 2: Utilize the Non-Taxpayer Mid-Level Exception

The Non-Taxpayer MLE would allow the Heat to sign an outside free agent to a contract with a starting salary of up to $5.305 million. It may be used for contracts of up to four years in length, with raises of up to 4.5% of the salary in the first year of the contract. However, this exception comes with a great deal of restrictions.

This exception is available only when a team is below the “apron” – the point $4 million above the luxury tax line. The determination is made after the exception is used, so a team below the apron cannot use this exception if doing so takes it above the apron. Once the exception is utilized, the team becomes hard-capped at the apron for the remainder of the season.

At a projected $77 million luxury tax threshold, the apron would be set at $81 million. Therefore, if the Heat were to utilize the Non-Taxpayer MLE, they would not be able to exceed a total payroll of $81 million.

This option comes with an added benefit as well. Teams that remain below the apron also have access to Bi-Annual exception. This exception, which may not be used two years in a row, would allow the Heat to sign a free agent to a contract with a starting salary of up to $2.077 million, with a length of up to two years, with raises of up to 4.5% of the salary in the first year of the contract.

Practically speaking, what does this option mean for the Heat?

The MLE player would cost as much as $5 million. Haslem, Cole, Andersen and Hamilton figure to cost another $8 million. The first round pick will cost $1 million. The second round pick and James Ennis will each cost $507K, the least expensive NBA salary possible. That’s eight total players, at $16 million.

Subtract $16 million from $81 million and you’re left with $65 million with which to fill out the roster with current Heat free agents, the BAE and/or minimum salary contributors. So, therefore, the question becomes: How can you divide $65 million among at least five players?

If you add one player signed at the BAE and another at the minimum salary, the Big Three wouldn’t need to take any discount at all. That becomes(2):

Heat_2014-Team-Salary-Non-Taxpayer-MLE

But before concluding that this is to be the preferred course of action, consider the following:

The Heat would need to part ways with Ray Allen and Mario Chalmers, unless either would accept the BAE or the minimum salary).

The Heat would need to start the season with the minimum 13-player roster. They’d be able to add one player at the minimum salary during the season, on or after December 6, 2014.

Most importantly, hard-capped teams cannot exceed the apron for the rest of the season under any circumstance.

Think about that: the Heat would not be able to increase its team salary beyond the apron for the rest of the season for any reason – not to replace an injured player, not to sign a free agent at the buyout deadline, and not to complete what would otherwise be a highly beneficial trade. If the Heat subsequently wanted or needed to increase its team salary beyond the apron, it’d be required to first create room under the apron by waiving player(s) with non-guaranteed salary, waiving player(s) with guaranteed salary and utilizing the stretch provision to spread their cap hits over multiple seasons (only applicable to players signed under the current CBA), trading downward in salary, etc. In other words, it would be exceedingly difficult for the Heat to make any roster improvements during the course of the season beyond the addition of a lone minimum salary player on or after December 6.

So ask yourself this: Is it worth it for the Heat to face these restrictions just so that the team would be able to increase the amount by which it could offer an outside free agent by a mere $2 million, from $3.3 million via the Taxpayer MLE to $5.3 million via the Non-Taxpayer MLE? Who would you be targeting with the extra funds? Would he accept?

Option 3: Utilize Cap Space

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 most challenging.

In this scenario, the Heat wouldn’t be limited by excessive luxury tax demands, or even by the $81 million apron. Instead, the team would be handcuffed by the vastly lower $63.2 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 (if he exercises his option)(3), Andersen (if he declines his option), Cole, its first round pick, and mandatory roster charges. That leaves about $52 million remaining.

Now subtract out from $52 million however much you have in mind to spend on another star player. The difference will need to be divided among the Big Three however you see fit.

You wouldn’t choose this option unless you envisioned that star player to be making more than the $5 million he could make in “Option 2″ above. That’s $47 million or less allocated to the Big Three.

So the question becomes: If you were Riley, do you think you could convince each member of the Big Three to take an average salary of $16 million or less to allow the team the flexibility to pursue more desirable outside free agents? Who might that free agent be?

Perhaps your target would be Kyle Lowry, or Marcin Gortat. Perhaps one would be willing to take a starting salary of $8 million. That would leave the Big Three with $44 million to split.

Perhaps your target would be Pau Gasol. Perhaps he’d be willing to take a starting salary of $10 million. That would leave the Big Three with $42 million to split.

Perhaps your dreams are grander. Perhaps you’re envisioning Carmelo Anthony in a Heat uniform. Fifty-one million dollars split four ways is less than $13 million per player.

Consider this: We assume that several destinations have been all but eliminated from contention for the services of LeBron James because they cannot free up the necessary cap space to attract him. If you’d now be asking him to consider taking less from the Heat – as little as $13 million per year – how many of those destinations would then need to be brought back into contention? Can you, for example, build a team that has James taking $13 million from the Heat that would be more compelling to him than, say, taking $14 million to play with Chris Paul, JJ Redick and Blake Griffin for Doc Rivers and the Clippers?

The problem becomes that the bigger the discount you’d be asking LeBron to take, the greater the number of teams that could realistically vie for his services. Riley has stated that he doesn’t anticipate presenting a plan in which James, Wade and Bosh would take huge pay cuts should they opt out of contracts.

There is some good news.

This option has no hard-cap requirement — just as it did in 2010, the Heat could utilize the minimum player salary exception once its cap space is all used up.

Better still, unlike in 2010, there is a new exception that would become available to the Heat after its cap space was also used up — the MLE for Room Teams. The MLE for Room Teams would allow the Heat to sign a free agent to a contract with a starting salary for 2014-15 of up to $2.732 million after all of its cap space is fully utilized. It may be used for contracts of up to two years in length, with raises of up to 4.5% of the salary in the first year of the contract.

The Heat’s team salary would probably end up looking something like this (or perhaps a few million dollars more expensive(4)):

Heat-2014-Team-Salary-Cap-Space

The Mechanics

How likely is it that James, Bosh or Wade take discounts? This is the biggest question of all.

Each member of the Big Three will need to make his opt-out decision by June 30. The Heat can’t approach free agents – neither its own free agents nor outside free agents – until July 1. That could present a problem. They’ll all need to opt out of their contracts without knowing whether Riley would intend to re-sign them, at what level Riley would intend to re-sign them, or who Riley would intend to target with any concessions they’d be willing to make.

But if they trust in Riley, it shouldn’t be a problem at all.

Why? Because the Big Three are all scheduled to make marginally less next season on their current contracts than for what the currently projected maximum salary would allow. Therefore, if they each trust in Riley, they can all simply opt out of their current contracts and wait to see how free agency develops. If they, in conjunction with Riley, are jointly able to successfully recruit a player they like to South Florida in early July, they could all jointly discuss what kinds of discounts they’d be willing to take to make it happen, in an “Option 2″ or “Option 3″ scenario. If they can’t, Riley could simply give them all back contracts virtually identical to those from which they’d have opted out, and the Heat can simply press on with an “Option 1″ scenario.

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There are lots of possibilities, but no easy decisions, ahead for the Miami Heat and its players. If you were Pat Riley, or a member of the Big Three, how would you proceed?

Notes:

This post was written for purposes of simplicity. It does not describe, but takes into account, all necessary salary cap rules, including the impact of roster charges and cap holds, in arriving at its figures and explanations. A more thorough explanation can be provided as requested. 

(1) You want to start a riot? Imagine if Riley’s statement were true. Imagine if the Heat had chosen to preserve the amnesty provision for utilization prior to the 2014-15 season. Miller, who just completed a stellar year, would still be on the Heat’s roster. Imagine, then, if the Heat were to choose to amnesty Wade in a couple of weeks, keep Miller, and redeploy the $14 million in salary cap savings next month. 

(2) As a sort of ironic twist, while this option would allow the Heat to sign a higher-priced free agent, for owner Micky Arison, it would actually be a less expensive alternative. Including both incremental and repeater tax obligations, it can, by rule, cost the Heat organization no more than $10 million in luxury taxes (i.e., with a payroll no more than $4 million above the tax threshold, the lowest possible incremental tax rate of $1.50-per-dollar would apply, in addition to another $1.00-per-dollar in repeater tax obligations). For perspective, the Heat will pay $14.4 million in taxes this season.

(3) Udonis Haslem, Chris Bosh and Dwyane Wade all share the same agent. If Wade and Bosh are to opt out, something Haslem’s agent Henry Thomas would by default know, Haslem very well too could opt out as part of a coordinated plan of attack. Haslem could sign a contract with a lower annual salary but a longer term to help free up cap space. But doing so doesn’t change the story materially. Even if he were to opt out and sign a minimum salary after all of the team’s cap space is used up, it couldn’t produce savings of any more than $1 million each, spread across four players. And it would probably be significantly less. 

(4) Chris Andersen, for example, would be eligible for a Joel-Anthony-style salary increase after the team’s cap space is used up. The Heat would retain his “Early Bird” rights, which allows for a contract of up to 104.5% of the average NBA salary in the previous season, currently estimated at $5.6 million. 

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