Dwyane Wade and Luol Deng Player Option Decisions Loom

Update (7/1/15): Luol Deng has exercised his player option. Dwyane Wade declined his option but his return is all but assured. The larger question is to what type of contract the Heat will sign him.

Ken Berger at CBS reported yesterday that the 2015-16 salary cap could jump as much as $2 million higher than the league’s latest projection of $67.1 million, which was made some time ago. Such an increase could have a meaningful impact on the Heat’s plans for Wade.

If the 2015-16 salary cap increases from $67.1 million to as much as $69.1 million, the tax threshold would increase from $81.6 million to as much as $83.8 million.  

How much would a $2.2 million increase in the tax threshold help the Heat? If it were to offer Wade a one-year contract at the $22 million max, its payroll would reach into the neighborhood of $100 million. With an $100 million payroll, the tax obligation would fall from $58 million to $49 million. That’s a savings of $9.4 million! 

Layer in a potential trade of Josh McRoberts, Chris Andersen or Mario Chalmers and Heat’s total payroll obligations, including repeater tax obligations, could fall to $12X million. 

And since the luxury tax is calculated as of the last day of the regular season, any potential trades don’t need to happen now (though the clarity would certainly be reassuring). Trading, say, the $1.6 million in salary obligations remaining on the $5.0 million expiring contract of Andersen at the trade deadline — for which the Heat could offer up to $3.4 million in cash and/or a possible 2018, 2020 or 2021 second round draft pick — would save a whopping $18.4 million in taxes for a team with an $100 million payroll (plus the $1.6 million in salary savings, less any cash sent). However, the Heat would need to find a trade partner with enough cap room (or a large enough trade exception) to take on Andersen’s $5.0 million cap hit without sending anything back in return, and that gets harder to find as more time passes.

Winding up with total payroll obligations of $12X million is a hefty some of money, to be sure – a would-be all-time record in total payroll obligations for the Heat – but this is not your typical spending problem. It would be just a one-time issue. The Heat will become very affordable next year, all but assured not to cross the tax threshold. Which would guarantee it does not pay “repeater tax” rates again until at least the 2019-20 season (pending rule changes). Also bear this in mind: the new TV deal, which starts in 2016-17, will itself instantly increase owner PROFITS by an average of $18 million per year, and rising annually. So, would Arison be willing to endure the cost of giving Wade the max for one year?

What would offering Wade a one-year contract at the $22 million max mean for the Heat? The Heat could enter the summer of 2016 with Dragic (PG), Winslow (SG/SF) and Bosh (PF) under contract, and up to $42 million of cap space to spend on Whiteside (C) and another player (assuming a McRoberts trade and an $89.1 million salary cap). Of that $42 million, Whiteside’s max would be $21 million but, at this point, one could reasonably suspect he would command far less. Which leaves enough room for…

That has to be math that the Heat organization itself is doing, right? Would they offer Wade one-year at the max? Would Wade accept?

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The wait is almost over.

NBA free agency officially begins at 12:01 am on July 1. But for the Miami Heat, the uncertainty starts to be clarified 23 hours and 58 minutes before that.

Heat guard Dwyane Wade and forward Luol Deng have until 11:59 pm on June 29 to decide whether to exercise the player options – for $16.1 million and $10.2 million, respectively – on their contracts. If the deadline passes and the Heat has not heard back, both players by default will have chosen to join guard Goran Dragic in opting out and becoming unrestricted free agents.

If Wade and Deng both opt out, the Heat would start the summer with as much as $19 million of room below the projected $67.1 million salary cap. But, realistically, it won’t have any cap room at all.

That’s because the Heat is expected to quickly resolve the free agency status of Dragic.

Dragic has indicated that he enjoys Miami, and will remain with the Heat if his financial goals are met. The Heat paid a steep price to get him, headlined by two future first round draft picks, which tells you everything you need to know about how willing they will be to pay him his money. Dragic will be eligible to receive a five-year deal, with a total payout of as much as $108 million. If he gets it, his contract would start at $18.9 million, and rise to $20.2 million for the 2016-17 season.

For a player entering his age 29 season, however, it could prove to be an overpay, even with the cap due to rise dramatically next year. A smaller deal that pays out the max in the first year, declines by the max in the second year, before again maxing out for the final three years would be a nice concession by Dragic, in that it would give the Heat more flexibility for the summer of 2016 but still pay out a lofty $97 million. That may still seem like a hefty sum, but it would represent a 10 percent discount from a max contract, and a whopping 30 percent discount from a potential max contract a player of his tenure could sign the following summer. If he acquiesces, his contract would still start at $18.9 million, but his 2016-17 salary would fall to $17.4 million.

If the Heat re-signs Dragic, it would still be capped out even if Wade and Deng decline their options. Utilizing cap space, therefore, is not a realistic option for the Heat this summer. 

And that would limit the Heat’s spending to minimum salary contracts, a possible $2.1 million bi-annual exception, and a mid-level exception, which would be worth either $3.4 million or $5.5 million depending upon how things play out.

The problem with utilizing either the bi-annual or larger mid-level exception is that it automatically triggers a hard cap at the “apron,” the point $4 million above the projected $81.6 million luxury tax level. The apron is a brick wall on spending, one that cannot be crossed for any reason. A team cannot exceed it even for a moment, and even if it were to subsequently drop back down below it. Merely approach it, and it becomes harder to make trades that bring in more salary than they send out, or even sign minimum-salary players when injuries strike. It is a menace constantly floating in the distance.

For the Heat to utilize either the bi-annual or the larger mid-level, it would need to commit to a team salary of no greater than $85.6 million for the entire season. It seems unlikely that the Heat could drop that far down if Dragic and Wade both stay. Therefore, barring any trades that reduce team salary, the safe bet would be to assume that the Heat will have access to only the smaller $3.4 million mid-level exception unless Wade leaves, not matter what Deng decides.

Heat president Pat Riley would strongly prefer both to stay.

But there’s a giant catch: He would only prefer it that way if they both exercise their player options. If they decline their options, that’s where things start to get messy.

If Deng exercises his option, Riley seemingly gets exactly what he wants. Deng would be the team’s starting small forward for the 2015-16 season. He would be a wonderful mentor for first round draft pick Justise Winslow. And, most importantly, his contract would expire before the all-important summer of 2016.

If Deng instead declines his player option, Riley would likely choose not to re-sign him to the long-term contract he seeks, choosing instead to preserve cap space for the summer of 2016. Deng would be forced to sign elsewhere. The Heat would be forced to replace him for next season with a player signed to a contract no greater than the mid-level exception – almost certainly the smaller $3.4 million version, unless Wade also leaves – which if it is to be more than one season in length would itself eat into the Heat’s cap space for the summer of 2016.

At that point, you’d need to ask yourself: Would you really even want to utilize the $3.4 million mid-level exception to replace Deng, if it comes at the cost of reduced cap space for the summer of 2016? Or would you rather have Winslow compete with a player signed at the minimum salary for the vacated Deng role, knowing that you’ve preserved maximum cap space for the all-important summer of 2016?

Therefore, while Deng’s status is still uncertain, the Heat’s response is rather clear no matter what he decides: If Deng exercises his player option, great. If he declines it, he’s gone – which would mean big luxury tax savings for owner Micky Arison, but would almost certainly damage the Heat’s on-court product for next season. The Heat would have access only to the smaller $3.4 million mid-level exception – surely not enough to replace a player the caliber of Deng – but may elect not to utilize it at all if it requires a multi-year guarantee.

It is difficult to predict what Deng will do. The 30-year-old desperately wants a multi-year guarantee, but he knows that if he declines his option the Heat won’t give it to him. He also knows that he could be challenged to find a multi-year contract anywhere else at an average annual value approaching the $10 million he would be guaranteed to receive from the Heat for next season if he exercises his option. The extension of such logic would be to suggest that he will exercise it. But he knows that if he does exercise it, the Heat may not bring him back after next season. There does not seem to be an obvious choice, which is why he reportedly continues to struggle with a decision he has just one more day to make.

Wade’s contract situation, ironically, could be dictated by what Deng and Dragic do.

Despite the rumored massive gulf between Wade and the Heat in its contract negotiations, it seems highly unlikely that the Heat would part ways with the biggest star in its history. Neither Wade nor the Heat would want such an outcome. Nor is there likely to be a big market for an injury-plagued 33-year-old demanding big dollars. But there are real concerns that underlie the division.

The Heat is preparing for a future around Dragic, Chris Bosh, and Hassan Whiteside, or at least for the possibility of doing so if Whiteside should have a second consecutive breakout season next year. The Heat therefore cannot make any decisions this summer that would compromise its ability to retain Whiteside when he becomes a free agent the following summer.

If he continues to progress along his current trajectory, Whiteside can expect a massive payday. That includes the possibility of anything up to a maximum contract (It does not matter if Whiteside ultimately gets the max; the Heat need to protect against the possibility that he might). And because the Heat will not have accrued his full Bird rights (explained in detail here), they’ll need to set aside cap space to give it to him.

Only after securing Dragic and ensuring that it will have adequate cap space to retain Whiteside can the Heat circle back to demands of Wade.

The league issued initial salary cap guidance for the 2016-17 season of $89.0 million.

The Heat, as of now, only has two players under guaranteed contract for the 2016-17 NBA season: Bosh at $23.7 million and Josh McRoberts at $5.8 million. To that, add $2.6 million to account for the contract that Winslow will ultimately sign. Then add the second year salary in whatever contract you think Dragic will ultimately sign.

Let’s assume Dragic takes the $97 million contract proposed above. His 2016-17 salary would be $17.4 million. That’s four players, at $49.5 million. (If Dragic winds up taking less than $97 million, the total would drop accordingly).

So: $89.0 million – $49.5 million = $39.5 million of cap space remaining.

We can now subtract a potential maximum salary for Whiteside in order to see what’s left over for Wade. A max for Whiteside is currently projected at $21 million. After incorporating roster charges, that leaves $15 million of 2016-17 money for Wade.

Wade says he wants $60 million over three years. The Heat’s initial offer was reportedly in the range of $30 million over three years.

The constraints of a Wade contract therefore become clear: Three years in length. A 2016-17 salary of no greater than $15 million (an estimated amount, which will be finalized when Dragic finalizes his contract). A total payout of between $30 million and $60 million.

So pick a number between those figures. Let’s say $45 million over three years.

The Heat can offer three basic contract structures which would maximize cap space for the summer of 2016 while still leaving more than enough room for Whiteside, even at the max. At $45 million, they would work out as follows (shown in italics are highest total payouts each alternative would allow):

1. Exercise the player option, and sign a two-year $31 million contract the following summer, with a total payout as follows: $16.1 million in 2015-16, $13.9 million in 2016-17, and $15.0 million in 2017-18.

   The highest total payout this alternative would allow, while keeping Wade’s 2016-17 salary to $15 million, would be $47.3 million.

2. Reject the player option, and sign a three-year contract with a total payout as follows: $15.4 million in 2015-16, $14.2 million in 2016-17, and $15.3 million in 2017-18.

   The highest total payout this alternative would allow, while keeping Wade’s 2016-17 salary to $15 million, would be $47.4 million.

3. Reject the player option, sign a one-year $22 million max contract this summer, and sign a two-year $23 million contract the following summer, with a total payout as follows: $22.0 million in 2015-16, $11.1 million in 2016-17, and $11.9 million in 2017-18.

   The highest total payout this alternative would allow, while keeping Wade’s 2016-17 salary to $15 million, would be $53.1 million.

The first approach would appease the Heat in that it would provide additional flexibility for the summer of 2016. But Wade can, and likely will, eliminate this approach as a possible alternative simply by refusing to exercise his player option by tomorrow at midnight.

Wade has said that he prefers the certainty of the second approach – a fully guaranteed three-year contract. Perhaps, however, he would be wiling to forgo that certainty in exchange for the $22 million full maximum salary that the third alternative would provide him for next season – a $6 million windfall over the player option he will have declined.

The Heat, for its part, prefers to lower Wade’s salary for the summer of 2016 as much as possible. It has been rumored that Riley would like to pin Wade’s salary at just $10 million that summer. The third approach would lower Wade’s salary all the way down to $11 million.

The third approach, therefore, could seemingly work for both sides. But it is an approach not without its challenges.

The Heat is likely to be a taxpayer next season. And that will carry with it severe consequences.

If the Heat exceeds the tax threshold next season, it would become the NBA’s first team to ever pay the “repeater tax,” which adds an extra $1 for every dollar a team is over the luxury tax threshold, over and above the incremental tax rates that would apply. The repeater tax is triggered when a team has paid the tax in four of the previous five seasons. The Heat has paid the tax in three of the last four years.

For every dollar by which the Heat exceeds the tax level next season, it will need to pay at least $2.50 in taxes. That rate increases to $2.75 per dollar for any incremental amount by which the Heat exceeds the tax by $5 million, increasing further to $3.50 per dollar for any incremental amount by which the Heat exceeds the tax by $10 million, increasing further to $4.25 per dollar for any incremental by which the Heat exceeds the tax by $15 million, and increasing an additional $0.50 for each $5 million increment thereafter.

If Deng exercises his player option for next season and Dragic re-signs at or near the max, granting Wade such a raise to the max would push the Heat’s team salary to as much as $100 million or more (excluding potential trade scenarios). A team salary at that level would trigger a tax payment of more than $58 million.

The total payroll obligation — $158 million – would shatter the team’s previous all-time record of $103 million from 2013-14, and that’s before accounting for the possible utilization of the mid-level exception.

Whether Arison would be willing to spend at those elevated levels remains unclear.

But if Deng declines his player option for next season, shedding his $10 million salary could lower the Heat’s team salary to just $90 million even if it were to pay Wade the max. A team salary at that level would trigger a tax payment of $22 million, leaving the team’s total payroll obligation at a much more palatable $112 million. In exchange for Arison paying out that all-time record amount, the Heat would gain an additional $3.4 million of cap space on Wade’s contract for the summer of 2016.

The Heat’s approach with Wade could therefore be dictated not only by Dragic but also by Deng: If Deng exercises his player option, Wade and the Heat could strike a three-year contract paying out as much as $47 million (the finalized figure, as noted above, would be dependent upon the contract that Dragic signs). If Deng forgoes his player option, the team could avoid a gigantic tax bill even if it were to offer Wade a one-year contract at the $22 million max, which would represent a huge gesture on the part of the Heat organization and could serve as an impetus for Wade to return the favor by tabling his discussions over a multi-year contract for one more season.

If Dragic does ultimately sign the $97 million contract proposed above, the Heat would be left with just $36 million of 2016-17 dollars to allocate to Wade, Whiteside and another player (that amount would increase to $41 million in the Heat found a taker for McRoberts). Common logic would dictate that the more you give Wade in a one-year deal for next year — potentially up to the $22 million max — the less of that $36 million he would demand in 2016. A three-year deal(in which subsequent season salaries are only allowed to deviate by 7.5 percent of the first year salary, alternatively, would eat up a significant amount of that $36 million.

Whichever structure the Heat chooses, it would leave the team with a future core of Dragic, Wade, Winslow, Bosh, Whiteside and whatever is left over of that $36 million for the summer of 2016. Is that a championship caliber roster?

In the unlikely event that Wade leaves, things change substantially. Barring anything radical, the Heat would likely have just the $5.5 million mid-level exception and the $2.1 million bi-annual exception with which to replace him (and Deng as well, if he chooses to leave as well). You can’t replace the talent of a Wade with $5.5 million, which in turn would produce a rather ugly situation for next season.

But things start to look a whole lot better the following season. The Heat would enter the summer of 2016 with Dragic, Winslow and Bosh under contract, enough cap room for Whiteside even up to the max, and, depending upon whether McRoberts is traded and whether the Heat elected to utilize the mid-level exception the previous summer, as much as $20 million or more of cap room with which to pursue a premium outside free agent. A pitch to Kevin Durant that features the tax, weather and social benefits of South Florida, to go along with a starting rotation that features Dragic, Winslow, Bosh and Whiteside might not look so bad.

The scenarios are seemingly endless. But, starting tomorrow at midnight, the Heat will start to get clarity, which in turn will dictate how it chooses to move forward with one of the most convoluted free agency periods in recent history.