Analyzing the Miami Heat’s Approach with Josh Richardson

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Update (7/28/15): 

Josh Richardson reportedly agreed to a three-year, $2.4 million minimum salary contract with the Miami Heat on Tuesday. Richardson will make a fully guaranteed $525,093 this season. The second year, worth $874,636, will reportedly be partially guaranteed. The third year, worth $1,014,746, will reportedly be subject to a team option.

The team option would provide the Heat the additional flexibility described below but, given the partial guarantee on the second year, the overall structure of the contract as presently constructed might not be optimal. If the second year is partially guaranteed and the third is subject to a team option, the third year must have the same guarantee percentage and schedule as the second year. By removing the team option, the guarantee percentage and schedule for each of the last two years can differ. Therefore, look for Richardson and the Heat to consider this and possibly change the structure before executing the contract.

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Original Post (7/17/15):

The Miami Heat has very much liked what it has seen thus far from Josh Richardson during summer league.

The Heat selected Richardson with the 40th overall pick in 2015 NBA draft, but the versatility and defensive prowess he displayed during summer league in many ways reflects the first-round grade placed upon him by general manager Pat Riley. Richardson was 24th overall on the team’s draft board.

So why has Riley yet to approach Richardson about a contract?

Well… The roster is still in flux. And as long as that holds true, there is no pressing need for Riley to do so… yet.

When a player is selected in the second round of the draft, he remains the exclusive property of the team that selected him until at least the September 5th immediately following the draft.

At that point, the team needs to make a decision.

In order for the team to retain draft rights to the player, it must submit to him a “Required Tender” by September 5th. The tender is an offer of a contract that affords the player until at least the immediately following October 15 to accept, has a term of one season, calls for at least the minimum salary applicable to the player, and can be fully non-guaranteed.

If the team does not issue a tender by September 5, the drafting team loses its exclusive rights to the player, and the player becomes an unrestricted free agent the following day.

The Heat really likes Richardson, and will not let that happen.

Once (or before) the tender is issued, the player has three primary options: (i) forgo the tender and instead negotiate with the team for a different contract, (ii) forgo the tender and instead seek employment outside the NBA, or (iii) accept the tender and play under its terms for the season to come. 

Which path the player chooses is predicated on the circumstances surrounding his decision.

Players can reject the tender and negotiate a different contract.

This is a path that is often taken by second round draft picks when there is a mutual interest in executing a contract between player and team.

Second round picks are not like first rounders. They do not have set salary scales. Teams cannot exceed the salary cap to sign them unless they are utilizing an available exception. They are often signed utilizing the minimum salary exception, which allows for a contract of up to two-seasons in length at the minimum salary. As an enticement for these players to accept a multi-year contract at the minimum (vs. accepting the required tender, which is a one-year contract) teams will sometimes offer partial guarantees (as the Heat did last year with James Ennis).

Players can forgo the tender and seek employment elsewhere.

This is a path often taken by second round draft picks who have been told that they have little chance of making the opening day rosters of the teams which have selected them and have not been engaged about a contract. If they accept the tenders their teams are ultimately required to make despite their teams’ recommendations otherwise, teams can keep them under contract all the way through training camp while evaluating whether or not they warrant a regular season roster spot, and ultimately release them in late October. By that time, most roster spots on teams around the world will have already been filled. They will have lost the opportunity to secure a roster spot elsewhere, without having earned a dime in the interim. Many simply cannot afford this option.

These players therefore elect to pursue employment elsewhere. By rule, once a draft pick signs a contract to play professional basketball somewhere other than in the NBA, the team retains the player’s draft rights for one year after the player’s obligation to the non-NBA team ends.

Players can accept the tender.

This is a path sometimes taken by second round draft picks who want to force the issue. The tender becomes a valid contract (almost certainly a one-year non-guaranteed contract at the minimum salary). If the player is subsequently waived, the team loses its draft rights to the player. He instead becomes an unrestricted free agent, free to sign with any team.

This can be a risky proposition for players. By taking one-year, non-guaranteed deals, they’d essentially be betting on themselves. They would be risking the possibility of having great difficulty finding work if they are ultimately waived (particularly if it happens right before the season starts or thereafter). And even if they ultimately make the regular season roster, they would be gambling that they would play well, put up strong numbers, and stay healthy. In return, if those things happen, they could put themselves in a position to earn more money as a restricted free agent the following summer than they would have earned had they signed a longer rookie contract. Essentially, they’d be accepting more risk to accelerate the timetable on a potential payday.

How the Heat chooses to proceed with Richardson will likely be determined by the composition of its roster. The Heat very much likes Richardson but, at this point, his ability to make the roster is largely a numbers game.

The Heat currently has 17 players signed, of whom 13 have guaranteed contracts. The four who don’t: Hassan Whiteside (who will certainly make the team), Tyler Johnson (who will almost certainly make the team), Henry Walker and James Ennis.

Teams can keep up to 20 players through training camp, but must reduce to between 13 and 15 players by the start of the regular season.

Walker earns $1.1 million but, when including the tax, he costs the Heat a total of $4.1 million. At this point, his release is all but certain. Expect him to be waived on or before August 1, after which his contract would become $100K partially guaranteed.

Tyler Johnson earns $845,059 but, when including the tax, he costs the Heat a total of $3.5 million. His contract becomes 50 percent partially guaranteed after August 1. Releasing him after his partial guarantee kicks in would cost the Heat $1.6 million when including the tax (unless his contract is claimed while he is on waivers). It is all moot. He will surely make the team.

James Ennis earns $845,059 but, when including the tax, he costs the Heat a total of $3.2 million. His contract becomes 50 percent partially guaranteed after August 1. Releasing him after his partial guarantee kicks in would cost the Heat $1.6 million when including the tax (unless his contract is claimed while he is on waivers). At this point, his future with the Heat organization would appear tenuous.

Any contract Josh Richardson signs could have a first year salary as low as his $525,093 rookie minimum. When including the tax, he would cost as little as $2.0 million.

Richardson would be the cheapest of the four, but the decision is about more than just cost. The Heat needs, and very much wants, to find a roster spot for him. And that means you can expect the Heat to pursue potential trade scenarios to free one up.

Miami has reportedly placed Chris Andersen and Mario Chalmers on the trade market, and either can surely be had for nothing. Trading either one would save the Heat $19 million and $16 million, respectively. But trading either one, even for nothing in return, will be difficult. That it COST the Oklahoma City Thunder a 2019 second round draft pick and cash considerations to get rid of Perry Jones III – who is just 23 years old, will earn just a $2.0 million salary next season, and will become a restricted free agent next summer – is a good indication of just how difficult.

If it proves too difficult, the Heat will likely pursue a trade of Shabazz Napier. Trading Napier would save the Heat $4.9 million. Replacing him with Richardson (Johnson) would cost $2.0 million ($3.5 million). Net savings: $2.9 million ($1.4 million).

Napier would be a logical trade candidate, and not just for monetary reasons.

The Heat is caught in something of a difficult situation with Napier. It has until November 2 to decide whether to exercise its $1.4 million team option on Napier for the 2016-17 season.

Declining Napier’s option for the 2016-17 season would maximize the Heat’s summer of 2016 cap space, but at the same time ensure he would not be back with the Heat if he has a quality season. Napier would become an unrestricted free agent that summer. If the Heat were to want to re-sign him, it would, by rule, be unable to offer him a starting salary higher than $1.4 million (the value of the option year it will have declined). Other teams would not face a similar restriction; they could offer anything up to a max salary. Therefore, if Napier were to have a solid 2015-16 season for the Heat, he would surely be lost to free agency the following summer. In this scenario, why not trade a player who will not be part of the Heat’s long-term future, particularly if it frees up a roster spot for someone who could be (Richardson) and saves some money ($2.9 million) in the process?

Exercising Napier’s $1.4 million team option for the 2016-17 season would subtract a net $806,649 from the team’s projected $37.7 million of cap space for the summer of 2016 ($43.0 million if McRoberts is traded). That isn’t a whole lot of savings, particularly if he has a solid season and the Heat want to keep him. But perhaps etched into the minds of Riley and Andy Elisburg is the questionable decision to exercise its team option on Daequan Cook in a similar situation, in advance of the summer of 2010. Every last dollar of cap space was needed back then, and it cost the Heat a first round draft pick to unwind. The Heat doesn’t have any such picks to offer this time around. In this scenario, is it likely that the Heat would trade Napier just to save: (i) up to $2.9 million in salary this season, and (ii) up to $806,649 in cap space for the summer of 2016? Probably not. The Heat would probably exercise his option. Which means a Napier trade would not be about the money or about the potential cap savings. Instead, it would simply mean that the Heat likes the potential of Richardson better, and would be willing to trade Napier to free up a roster spot for him.

If the Heat can free up a roster spot (which, given the Napier trade option, is all but certain), it would certainly then extend Richardson a contract offer, along with the promise of a regular season spot if he continues to impress during training camp.

How the Heat chooses to structure the contract would dictate its terms.

Option 1: It can utilize the minimum salary exception to offer Richardson an up to two-year contract at the minimum salary. Such a contract would pay out $525,093 in the first year and $874,636 in the second, and would perhaps contain a guarantee on the first year to serve as an enticement for Richardson to sign it (but perhaps no, or a staged, guarantee on the second).

Once the two years are up, in the summer of 2017, Richardson would become a restricted free agent and the Heat will have accrued his Early Bird rights. Restricted free agency would give the Heat the right to keep him by matching any contract he signs with another team and, since he would be subject to the Gilbert Arenas provision (which restricts the first year salary other teams can offer, his Early Bird rights would give the Heat the means to do so.

The Gilbert Arenas provision greatly limits the amount an outside team can offer. Teams are limited in the salary they can offer to another team’s restricted free agent with one or two years in the league. The first-year salary in the offer sheet cannot be greater than the Non-Taxpayer Mid-Level exception. Limiting the first-year salary in this way enables the player’s original team to match the offer sheet by using the Early Bird exception. Therefore, by rule, assuming the rules of the current CBA remain intact through a potential lockout, the most any team could offer Richardson if he were to become a restricted free agent in the summer of 2017 would be $5.8 million, and the Heat would be guaranteed the opportunity to leverage his Early Bird rights to match it.

Offer sheets issued to Gilbert Arenas players can be up to four years in length. The second-year salary is limited to the standard 4.5 percent raise. The third-year salary can jump considerably — it is allowed to be as high as it would have been had the first-year salary not been limited by this rule to the Non-Taxpayer Mid-Level exception. The salary in the fourth season may increase (or decrease) by up to 4.1 percent of the salary in the third season. The offer sheet can only contain the large jump in the third season (i.e., larger than the standard 4.5 percent raise) if it provides the highest salary allowed in the first two seasons, it is fully guaranteed, it contains no bonuses of any kind, and the team has room to fit the average salary in the entire contract under the salary cap.

Given these restrictions, teams only very rarely execute offer sheets with Gilbert Arenas free agents (two notable examples are Jeremy Lin and Omer Asik), potentially giving the Heat an inside track to re-sign Richardson to a reasonable contract in the event he becomes rather valuable in the years ahead.

Option 2: It can utilize a portion of its $3.4 million taxpayer mid-level exception to offer Richardson an up to three-year contract. Such a contract would likely pay out the $525,093 minimum in the first year (though it can be higher), followed by the $874,636 and $1,014,746 minimums thereafter, and would perhaps contain a guarantee on the first year to serve as an enticement for Richardson to sign it (but perhaps no, or staged, guarantees thereafter).

Once the three years are up, in the summer of 2018, Richardson would become a restricted free agent and the Heat will have accrued his full Bird rights. Restricted free agency would give the Heat the right to keep him by matching any contract he signs with another team (even up to the max), while full Bird rights would give the Heat the means to do so.

Option 3: The best approach, however, could be to utilize a portion of its $3.4 million taxpayer mid-level exception to offer Richardson a two-year contract with a team option for a third. Adding the option would allow the Heat to control when Richardson would become a free agent – either three seasons from now by exercising it, or two seasons from now by declining it.

This approach would allow the Heat the opportunity to subject Richardson to the Gilbert Arenas provision after two seasons of playing at or near the minimum salary or, if it suits the team’s wishes better, to keep him at or near the minimum salary for the full three years. In either case, he would be a restricted free agent. The only catch of which the Heat would need to be mindful: the guarantee percentage in the option year would need to equal the guarantee percentage in the year before. This effectively means that this approach would really only make sense for the Heat if Richardson’s contract were to be fully non-guaranteed in the second year.

On the other hand, if the Heat is not prepared to release all of Johnson, Ennis and Walker, and is not able to complete a trade that frees up a roster spot, the Heat may issue Richardson its required tender by September 5, but encourage him to look for employment overseas.

If he agrees, the Heat would retain his exclusive negotiating rights for another year. This is an approach the Heat has taken in previous years with Ennis, Justin Hamilton, Jarvis Varnado and Patrick Beverley, among others.

But here’s the thing: Richardson doesn’t need to oblige.

He has played well in summer league. He could be a player who has attracted interest from around the league. That gives him a certain degree of leverage. He could use that leverage, as did Beverley before him, to force the issue. He could potentially demand that the Heat to give him not just a contract but rather a favorable one. He could provide a list of demands — perhaps a contract that provides a full guarantee in the first year and perhaps even partial guarantees thereafter, or a contract with a shorter length that allows him to hit free agency sooner, etc. He could use as his threat the prospect of accepting his tender.

Richardson would theoretically be issuing the threat with the knowledge that it backs the Heat into a corner. If he refuses to play overseas, the Heat would be forced to give him some type of contract – whether it be the one-year tender or a longer-term contract to which both parties agree. And that has implications for Walker, Johnson and Ennis.

The credibility of such a threat would be for the Heat to decide.

If the Heat responds by refusing to offer Richardson anything more than the tender (a one-year, non-guaranteed contract at the minimum salary), he could simply accept it. That, in turn, would give the Heat the ability to evaluate him all the way through training camp. If the Heat cuts him at any point, he would immediately become an unrestricted free agent, free to pursue a contract with any team he wishes. If the Heat retains him for the full season, he would become a restricted free agent next summer, free to pursue a larger contract (though subject to the Gilbert Arenas provision).

If the Heat responds by offering Richardson a favorable contract, an unlikely scenario without an open roster spot, it could mean the end for Johnson, Ennis and Walker.

Whatever the outcome, we should have perfect clarity as to the future of Josh Richardson by the start of training camp.

No player can participate in training camp without a valid contract.

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