Would the Big Three Take Less to Help the Miami Heat?
Update (6/28): I wrote the following article several weeks ago, and posted it exactly one week ago. Since that time, several things have changed (e.g., the Heat traded up in the draft to select Shabazz Napier, several Heat players opted out of their contracts, the Heat have been rumored to be seeking a trade partner for Norris Cole, etc.), which slightly alter the figures presented in this post. This table provides an updated depiction of the hypothetical situation described below.
The day LeBron James, Dwyane Wade and Chris Bosh agreed to join together with the Miami Heat in the summer of 2010, they laid out a plan. They would each play four years together, then re-evaluate. They each signed nine-figure, six-year deals containing opt out rights prior to the final two. They were expecting titles. We all were.
Through the first three of those years, all was as projected to be. Three straight NBA Finals appearances, two straight titles. But that was before this past year turned into a disaster, before they got throttled by the San Antonio Spurs.
James, Wade and Bosh are all on vacation now, a sort of rejuvenation for a trio who have played more basketball over a four year stretch than any other in league history. They will each take some time to consider their futures, to consider whether or not they wish to terminate their contracts.
The wait is unnerving. It is a reminder that the Heat and James, in particular, have a very uncertain future together, that his potential free agency, which could arrive in just days, looms over this city with as much significance as did Wade’s four years ago. It’s caused us to lose our equilibrium. It’s caused us to lose our perspective. We need to “get a grip” on reality. The Miami Heat, as presently constructed, can still be a championship-caliber team.
Sure, the team has it flaws. Lots of them. And they need to be addressed. But we, as fans, are hoping for much more than that. Cutting corners in the repair of a leaky dam will eventually cause it to burst. Like it did in 2006-07. Which caused 2007-08. Nothing short of a complete overhaul, then, will appease us.
A tear down and restructure requires sacrifice. It requires James, Wade and Bosh to each opt out of his contract and take less. Much less. It’s the only way. But is it possible?
The most thrilling scenario for Heat fans is one in which the Heat utilizes cap space to add a major free agent to the mix. This is the scenario under which the possibilities become endless. It’s also the most challenging.
In this scenario, the Heat, with a current payroll of $71 million for next season to just eight players, would be handcuffed by a $63.2 million projected salary cap. That could pose a serious challenge. How do you overhaul a roster, including the addition of new talent, all within the confines of a $63.2 million salary cap, when the current roster could cost you as much as $71 million?
Here’s the best way to think about this scenario: The salary cap is projected to be $63 million. The Heat has $9 million tied up in Udonis Haslem (if he exercises his option), Chris Andersen (if he declines his option), its first round pick and mandatory roster charges. Let’s assume Norris Cole could be traded if need be (after all, he has a $2.0 million expiring contract and the Heat, as of July, will have $3.3 million in cash available for trade). That leaves about $54 million remaining.
Now subtract out from $54 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 $5.3 million he could otherwise make if the Heat were to utilize the larger Mid-Level Exception, which would allow for a roster with a team salary at a far more elevated $81 million). That’s $49 million or less allocated to the Big Three.
So the question becomes: Could each member of the Big Three be convinced to take an average salary of $16 million to allow the Heat the flexibility to pursue a coveted free agent? Who might that free agent be?
Perhaps your target would be Kyle Lowry, Marcin Gortat, or Pau Gasol. Perhaps one would be willing to take a starting salary of $10 million. That would leave the Big Three with $44 million to split.
Perhaps your dreams are grander. Perhaps you’re envisioning Carmelo Anthony in a Heat uniform. Fifty-four million dollars split four ways is $13 million per player.
James, Wade and Bosh have long maintained that winning titles is their only goal for each and every season. Would they be willing to take a massive pay cuts to improve their odds of doing so? How far would they go?
Here’s the thing: They don’t necessarily need to go as far as you might think.
Miami has a trump card. It has what no other NBA team has. Full “Bird rights” to James, Wade and Bosh.
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.
You might be thinking to yourself that simply by manipulating the timing of the signing of free agents, then, the Heat could circumvent the salary cap rules to its benefit. The Heat could utilize all of its cap space to sign an outside free agent, and then utilize Bird rights to exceed the cap in signing its own free agents.
It might shock you to know that this is actually how it used to be. But this loophole was addressed many years ago with the concept of “free agent amounts.” A team’s ability to do this is now very limited. The team’s free agents now continue to be included in team salary. This charge is called the “free agent amount,” which is commonly referred to as a cap hold.
Cap holds are placeholder charges against team salary for a team’s own free agents. They are designed to protect against a team using all of its cap space to sign outside free agents and then circling back to its own free agents utilizing their Bird rights.
The amount of the cap hold depends upon several factors, including the player’s previous salary and what kind of free agent he is. Cap holds for players on minimum salary contracts are equal to the minimum salary for the upcoming season, but for most other players are generally between 120% and 250% of their previous salary.
The cap holds can be released in order to free up the cap space, but it comes at a cost. To release such cap holds, a team can either re-sign the free agent, at which point his cap hold is replaced with his new salary, or renounce him, at which point his team forfeits his Bird rights.
The cap holds for James, Wade and Bosh – if they were to opt out – would be set at the maximum salary. So there’s no chance of the Heat maneuvering around cap rules in creating cap space for an outside free agent. But their Bird rights could definitely come into play in future seasons, seasons during which the Heat might not be planning to utilize cap space.
For the Heat, James, Wade and Bosh all qualify for the Larry Bird 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).
If each member of the Big Three were willing to make a sizable leap of faith, the Heat might have the tools they need to manipulate the salary cap — within the rules — to an extreme advantage. They could each take a large pay cut, but for a term of just one year. After a year with each playing at the discounted rate, the Heat would still retain their Bird rights, enabling the team to pay them anything up to a maximum salary for the 2015-16 season and beyond.
How powerful is this tool?
Pick two players. Any two you want.
Maybe you choose Kyle Lowry and Marcin Gortat. Maybe the grand design in your tear-down scenario calls for a starting unit that features Lowry, Wade, James, Bosh and Gortat.
Would Lowry and Gortat have any interest in playing for the Heat? How much might they demand to make it happen? Maybe each a starting salary of $9 million? Does $39 million over four years, after factoring in annual raises, sound fair?
If so, subtract $18 million from $54 million. You get $36 million. That leaves $12 million each for James, Wade and Bosh. More if Udonis Haslem would help. He, too, has a player option.
While it’s a steep discount, it’d only be $12 million for one year(1). James, Wade and Bosh could each be rewarded for their generosity with as much as a maximum salary in 2015-16, either in the form of a second consecutive one-year deal or as the start of a long-term contract. That’s as much as $22 million.
Let’s recalibrate: James, Wade and Bosh are each owed approximately $42 million over the final two seasons of their current contracts. If they were to instead terminate their contracts, they could each take consecutive deals totaling to $34 million over that same time period. That’s an $8 million discount. Not per year. Total.
Through creative financial maneuvering, the Heat could perhaps add not just one but two players – Kyle Lowry and Marcin Gortat if you choose – on long-term contracts, at a cost to the Big Three of just $8 million per player.
It’s not a trick. It’s not illegal. It is possible.
There is a catch. The Heat won’t be able to promise James, Wade or Bosh that second year at the maximum. Any pre-arranged deal 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, Wade 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.
Again, let’s recalibrate: You’ve now got Lowry, Wade, James, Bosh and Gortat all under hypothetical contract. You’ve got Cole, Haslem and Hamilton under actual contract. You’ve got “Early Bird” rights to Chris Andersen, who’d at this point be eligible for a Joel-Anthony-type raise(2). You’ve got the first-round pick from this coming draft, and during a Thursday press conference, Riley mentioned that James Ennis, a 2013 second-rounder whom the Heat acquired in a draft-day trade, might join next season, after a year playing overseas. Toss in a Michael Beasley, James Jones, and/or Rashard Lewis at the minimum if you wish. And, of course, you’d still have access to the $2.732 million Mid-Level Exception for Room Teams once every last drop of the Heat’s cap space is all used up: Perhaps an all out push for Anthony Morrow?
There’s no one better at turning a vision into reality than Pat Riley. This could be the tear down and rebuild scenario. And it wouldn’t even be a taxpaying team. At least not in Year 1.
By Year 2, things could get rather expensive for Heat majority owner Micky Arison. But Riley made it quite clear last Thursday that he and Arison are willing to do “whatever it takes” for them to move forward and contend for championships for several more seasons.
Perhaps Riley made those comments because he is aware of what lies ahead.
The league’s national TV rights come up for bid when its current arrangements with ABC/ESPN and TNT, which pay out a collective $930 million per year on average, expire after the 2015-16 season, and rumors are that revenues could more than double, to around $2 billion per year. NBA teams split that money equally.
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 the game’s best player and some of the league’s best viewership.
Is such a scenario likely? No.
It is possible? With the tampering rules as they exist today, James, Wade, Bosh and any others could all start planning for it among themselves, if they so choose, right now.
(1) For Dwyane Wade, the initial contract doesn’t need to be a one-year contract. It could instead be one final four-year contract paying out between $50 million and $55 million to close out his career.
For LeBron James and Chris Bosh, singing a one-year deal represents a significant risk in the event of injury. To mitigate this risk, the deals could technically be two-year deals, but subject to player options on the second year. That way, in the unlikely and unfortunate event that they do get injured while on their one-year deals, they’d at least guarantee themselves another $12 million in year two. LeBron is almost certain to sign a two-year contract anyway.
(2) Chris Andersen has a player option for next season. If he exercises his option, he will earn $1,448,490 (the minimum salary for a player of his tenure), and that amount will charged against the Heat’s team salary. If he declines his option, a cap hold of $915,243 (the minimum salary for a player with two years of experience) will be charged against the Heat’s team salary, and the Heat will maintain his “Early Bird” rights.
“Early Bird” rights is a weaker form of the Larry Bird exception. It also allows teams to exceed the cap to re-sign their own free agents, but with more limited contracts than the Larry Bird exception. To qualify for this exception the player must play for two seasons without clearing waivers or changing teams as a free agent. A team may use the Early Bird exception to re-sign its own free agent for up to 175% of his salary in the previous season or 104.5% of the average salary in the previous season (currently estimated at $5.6 million for the 2014-15 season), whichever is greater. Early Bird contracts must be for between two and four seasons in length with raises up to 7.5% of the salary in the first season of the contract.