When Should Kevin Love Lock In His Long-Term Contract?

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With the Cleveland Cavaliers on the verge of completing a blockbuster trade for Kevin Love, the Minnesota Timberwolves granted permission for Cavs owner Dan Gilbert to meet with Love. Whatever was discussed at that lengthy July meeting in Los Vegas gave Gilbert enough comfort to finalize what became the biggest trade in franchise history.

The problem Gilbert had to overcome? Uncertainty.

Love has as few as one year remaining on his contract. To trade away a potential future superstar such as Andrew Wiggins in exchange for a man, perennial All-Star though he may be, who could walk away in just one year represents a substantial risk.

Did Love affirm his desire to remain with the Cavs over the long term in that meeting? Maybe. But you’re not going to hear about it. That’s because Love its still under contract. It’s technically against the rules (and among the most serious violations a team can commit) to strike a future deal. But something made both parties comfortable that this was a long-term arrangement. In the news conference to announce his arrival, Cavs general manager David Griffin welcomed Love by saying this was a “long-term relationship.” Moments later, Love himself said he was “committed to this team, committed long term.”

So when will Love lock in the long-term deal that solidifies his commitment? Love’s age, tenure and skill-set have created a perfect storm of interesting – a fascinating story that figures to be unlike any other in the NBA in the years ahead.

Stating the obvious: The higher the starting salary in a long-term contract, the higher the salary can be in all subsequent years of the contract as well. That’s because annual raises in any contract are limited to 7.5% of the starting salary. The maximum length of a contract is five years. In what summer, then, will Love strike the optimal balance for himself between locking in the highest starting salary and locking in a full five-year deal, while taking into account risks associated with such things as his health and inevitable basketball mortality?(1)

It won’t be this summer. That much we know. Why? Because he can’t. NBA rules prevent it.

In January 2012, Love signed a four-year, $60.8 million maximum contract extension(2) with the Wolves in which the last season, the 2016-17 season, was to be a player option. Love will make $15.7 million this season and his option for next season is for $16.7 million.

If Love wanted to sign with the Cavs today, it would therefore need to be an extension of his current contract. Contracts cannot be extended until the three year anniversary of their initial signing. That’s next January.

So if not this summer, which?(3) 

Summer of 2015

Love can make $16.7 million next year, in the final year of his contract, if he exercises his option. Will he? Or will he opt out? It all depends on how much he could earn if he does.

Maximum salaries fluctuate in accordance with fluctuations in the salary cap.

There are three maximum salary levels. Each level is based on a player’s tenure.(4)(5)

  • A player with 0-6 years of experience can make up to 25% of the salary cap
  • A player with 7-9 years of experience can make up to 30% of the salary cap
  • A player with 10+ years of experience can make up to 35% of the salary cap

Love is currently a six-year NBA veteran. But after next season, he will be a seven-year veteran – providing him a huge vault upward in his maximum earning power, up to 30% of the salary cap.

Current forecasts provided by the NBA call for a projected salary cap for the 2015-16 season of $66.5 million. That would imply a maximum salary(6) for a seven-year veteran of approximately $18.6 million.

How much is $18.6 million? It’s $1.9 million higher than the $16.7 million player option year he will have declined – making an opt out of his contract a virtual certainty next summer for Love.

But will he lock in his long-term contract next summer, with that $18.6 million starting salary? How much higher would his starting salary be if he waits just one more year?

Summer of 2016

2016 is when the NBA’s current national TV deal – an eight-year agreement that promises pro basketball a total of $930 million per year from ESPN/ABC and TNT, divided equally among all thirty teams – expires.

How big will the new deal be? Think huge!

Current projections for the new TV rights contracts to come are in excess of $2 billion per season on average, and possibly much more!

Of course, the impact of this added $1.1 billion is probably a bit less than you’d think. It is actually something of an illusion in that way. These contracts have escalator clauses built into them, to more directly align the payouts to the projected growth in the underlying advertising and subscriber revenues they produce – the current TV rights deal will probably pay out more than its $930 million average in its final season, just as it would probably pay out less than the average in the first season of any new deal that is executed. In that way, a $1.1 billion average increase might only produce a $750 million initial jolt (maybe less, maybe more, depending upon the term of the new deal and the annual increases it calls for), rising steadily in the years thereafter.

Still… A $750 million jolt to league’s TV revenue by itself would vault the salary cap by a whopping $11 million.

Imagine a salary cap soaring more than 20% in one year, from around $66.5 million (the league’s current projection for the 2015-16 NBA season) to around $80 million in 2016-17. That could happen!

An $80 million cap would mean a maximum 2016-17 salary for Love of about $22.5 million!

Love is making $15.7 million this season. He could take in around $18.6 million next season. Then, on the strength of a new national TV rights deal, he could take in $22.5 million the following season!

But will he lock in his long-term contract in the summer of 2016, with that $22.5 million starting salary? How much higher would his starting salary be if he waits just one more year?

Summer of 2017

2017 is the lone summer during which the NBA’s current 10-year CBA can be terminated prior its expiration, by either the players or owners. If neither side terminates the agreement, it will continue on through the 2020-21 season. Will the contract be terminated?

Owners who once claimed $300+ million in supposed annual losses as the impetus to renegotiate their take of league-wide revenues from 43% to around 50% are now experiencing $300+ million of profitability. And it’s only going to get better.

Think about this: An incremental $750 million in national TV money would by itself add another $370 million of seemingly cost-free revenue for owners in 2016, and rising steadily thereafter(7). Owners who were crying poverty in 2010 on the strength of just a $1.6 billion split of league revenues could be generating an incremental $1.3 billion in revenues, $3 billion total, to offset it by 2017!

Of the extra $1.3 billion the owners would be generating, about $920 million would be coming from the overall growth of the league. The extra $360 million would be coming from the adjusted revenue split. Do owners really need to take an extra $360 million from the players, on top of the $920 million and rising they’d already be getting?

The players are bound to want to renegotiate. They’re bound to want to get a little back on the revenue split.(8) If they don’t, they will have effectively locked themselves into the current CBA until its expiration after the 2020-21 season. By then, the $360 million annual give-back will have rocketed to more than $425 million. Over the course of the 10 years, the players will have given back a whopping $3.3 billion as a result of the adjusted revenue split!

At a projected $6 billion in league-wide revenues, every percentage point recapture would equate to a reallocation of roughly $120 million, which, in turn, would increase the salary cap by about $1.8 million. Imagine a hypothetical scenario where the players were to negotiate for three of the then-six lost percentage points back. That change alone would increase the cap by more than $7 million.(9) The league could be looking at the following type of scenario — starting with a $66.5 million cap for 2015-16; seeing it increase a whopping 20% to around $80 million in 2016-17 on the strength of a new national TV rights deal; and then seeing it rise sharply again, to around $91 million in 2017-18, based largely on a potential shift in the revenue split between players and owners.

A $91 million cap would mean a maximum 2017-18 salary for Love of about $25.7 million!

Think about how massive these salary jumps are: Love is making $15.7 million this season. He could rake in $18.6 million next season. Then, on the strength of a new TV rights deal, he could rake in $22.5 million. Then, on the strength of a new CBA, he could rake in 25.7 million!

But will he lock in his long-term contract in the summer of 2017, with that $25.7 million starting salary? How much higher would his starting salary be if he waits just one more year?

Summer of 2018

In the summer of 2018, Love will be a ten-year veteran – providing him a huge vault upward in his maximum earning power, up to 35% of the salary cap.

If we’re figuring that the salary cap will increase from $63.1 million this year to $66.5 million next year, as the league is forecasting, to around $80 million in 2016-17 on the strength of the new TV rights deal, to around $91 million in 2017-18 on the strength of a potential renegotiation of the current CBA, maybe a cap projection of around $96 million for the 2018-19 season seems reasonable.

That would imply a maximum salary for a ten-year veteran of approximately $31.4 million!

In just four years, Love’s max salary could be DOUBLE the $15.7 million he’s making this season. Are you going to be the one to tell him to lock in a long-term deal before that happens?

***

Of course, age and effectiveness will play critical roles in whether Love is actually able to get a full maximum contract over any or all of the next four summers to come. But there is reason to think he will. He is among the best power forwards in the game today. His skill-set doesn’t rely upon supreme athleticism. And he is just 26 years old – even by the summer of 2018, prior to the start of the 2018-19 season, he will be just 30 years old, about the same age as LeBron James is today!

The earlier Love chooses to lock in his long-term deal, the more potential upside he sacrifices in exchange for the certainty of a guaranteed contract.

The upside produced by stringing together a series of one-year deals, until such time as Love deems appropriate to sign a long-term deal, is massive. But it comes with a great deal of risk – risk of injury, risks associated with age or declining skill, risks associated with the projected growth of the salary cap, risks associated with the inevitable lockout to come, and various other risks we can all undoubtedly hypothesize. How much risk, then, would Love be willing to tolerate in order to squeeze the biggest possible return out of his NBA career?

It’s not an easy decision.

To summarize:

  • If he were to sign his long-term deal in the summer of 2015, his first year salary would be around $18.6 million. It would mean a long-term contract of $107 million, and a total payout (starting from 2014-15) of $123 million, extending through the 2019-20 NBA season.
  • If he were to sign his long-term deal in the summer of 2016, his first year salary could be around $22.5 million. It would mean a long-term contract of $129 million, and a total payout (starting from 2014-15) of $164 million, extending through the 2020-21 NBA season.
  • If he were to sign his long-term deal in the summer of 2017, his first year salary could be around $25.7 million. It would mean a long-term contract of $148 million, and a total payout (starting from 2014-15) of $205 million, extending through the 2021-22 NBA season.
  • If he were to sign his long-term deal in the summer of 2018, his first year salary could be around $31.4 million. It would mean a long-term contract of $181 million, and a total payout (starting from 2014-15) of $263 million, extending through the 2022-23 NBA season.

Better yet, here it is in picture form:

Kevin_Love_Potential_Contract_Amounts

If you were Kevin Love, which would you choose?

***

Having written this entire post, my advice is quite simple: I believe Kevin Love should and will choose to opt out of his current contract next summer, then execute a one-year contract with a player option for a second year that he won’t exercise, then lock in his long-term contract in the summer of 2016 – right alongside fellow teammate LeBron James, on the strength of the new national TV rights deal, and prior to the uncertainty that comes along with a potential lockout.

If I were his agent, I would suggest Love sign a five-year contract with an early termination option on the final year, allowing him to opt out as a then-soon-to-be 32-year-old and lock in one final long-term contract to close out his career, in whatever city that may be.

But bear in mind that it’s still early. Love will certainly know more about the performance of his new team, about the potential size of the new national TV contract to come, and about the potential impact of a possible lockout, among many other things, in the months and years ahead. Things, as they say, are subject to change.

Notes:

(1) The five-year contract with raises equal to 7.5% of the starting salary applies to players with full Bird rights, as the Cavaliers have with Kevin Love. The maximum applicable annual raises and/or contract length can vary for various players depending upon the specific set of circumstances.

(2) Rookie scale contracts may be extended for up to four seasons beyond the last option season in the contract, bringing the total contract length to five seasons. Kevin Love signed a maximum length four-year contract extension to his rookie-scale contract in January 2012. However, teams can also select one player (called their “Designated Player”) who can receive a five-year extension, bringing the total contract length to six seasons. Love was very angry at the time that he was not given this distinction. Ironically, it actually turned out to help him greatly.

Love was reportedly prepared to accept a five-year extension with no early termination option. One could speculate that the Wolves may not have granted him the trade he sought this summer if he still had three years remaining on his contract. As far as the finances are concerned, Love would have been locked in on his existing contract until after the 2016-17 season. As this post details, he would have lost roughly $6.6 million in maximum earning power during that stretch. 

Because the Wolves refused to give Love the larger contract, he instead negotiated for a four-year contract with a player option after three. The shorter contract ultimately benefited Love by facilitating a trade which allowed him to play alongside LeBron James. It also benefited the Cavs by allowing them to acquire Love. And, it could be argued, it benefited the Wolves by allowing them to acquire Andrew Wiggins. The team it ultimately hurt the most: the Miami Heat? Did LeBron leave the Heat knowing a Wiggins-Love trade was likely? 

(3) If you are wondering why Kevin Love wouldn’t just sign an extension when he becomes eligible on January 25, 2015, the reasons are numerous.

If he signs an extension prior to February 23, 2015, the six month anniversary of his trade to the Cavs, he would only be eligible for an extension of up to three years, including the two years remaining on his current contract. The salary in the first year of the extension could be no greater than 104.5% of his previous salary, and raises would be limited to 4.5% of the salary in the first year of his extension. His annual payouts would therefore be no more than $16.7 million in 2015-16 and no more than $17.4 million in 2016-17.

If he signs an extension after February 23, 2015, he would only be eligible for an extension of up to four years, including the two years remaining on his current contract. The salary in the first year of the extension could be no greater than 107.5% of his previous salary, and raises would be limited to 7.5% of the salary in the first year of his extension. In this case, he would surely terminate his player option season in conjunction with the extension. His annual payouts would become no more than $16.9 million in 2015-16, no more than $18.2 million in 2016-17, and no more than $19.4 million in 2017-18.

The shorter term and significantly smaller payouts of signing an extension vs. signing a new contract as early as this coming July make it realistically impossible that Love would choose the former under any circumstance. 

(4) The league builds in a backstop to protect the maximum salary levels for players in decreasing (or minimally increasing) salary cap environments. A player’s maximum salary in the first year of any new contract can never be less than 105% of the salary he earned in the last season of his previous contract.

(5) The salary cap is set by calculations based on projected amounts for revenue and benefits for the upcoming season. The cap calculation takes 44.74% of the league’s projected revenue, subtracts projected benefits, and divides by the difference by the number of teams in the league. Adjustments are then made if the previous season’s revenues were significantly above or below initial projections. 

(6) For maximum salaries purposes, a slightly different cap calculation is used, one that is based on 42.14% of the league’s projected revenues (rather than 44.74%). 

(7) Collectively, the players are guaranteed to receive 50% of forecasted revenues, plus (or minus) 60.5% of the amount by which revenues exceed (or fall short of) the forecasts, with a lower limit of 49% and an upper limit of 51% of actual revenues. If the new TV rights deal adds an incremental $1 billion in revenues, the players’ share will surely increase to the maximum 51%.

(8) There is far more complexity to the decision of whether the players (or owners) should to opt out, including the comparison to percentage of league-generated revenues that players are receiving in the other major North American pro sports leagues. These issues are discussed in further detail here.

(9) 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.

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