Miami Heat of the Future Beginning to Take Shape

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The NBA announced on Wednesday that the salary cap for the 2015-16 season has increased by 11.0 percent to an all-time high of $70 million. The tax level for the 2015-16 season has increased by 10.3 percent to an all-time high $84.74 million.

These are substantial increases from the league’s previous projections issued just last April – $67.1 million for the salary cap, $81.6 million for the tax level – predicated on the basis of exploding revenues.

What does this mean for the Miami Heat? In terms of flexibility, not a whole lot.

But it does mean huge savings for owner Micky Arison.

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

If the Heat exceeds the tax threshold, 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.

The Heat entered the summer with two primary, and in many ways conflicting, objectives: Field a competitive yet cost effective team for the 2015-16 season, and maximize cap space for a 2016-17 season during which the salary cap is expected to explode higher on the strength of a new national TV rights deal.

The measure of success in those objectives was to be predicated on the Heat’s dealings with three men: Luol Deng, Goran Dragic, and Dwyane Wade.

Deng gave the Heat exactly what it wanted. He accepted his $10.2 million player option. He will be the team’s starting small forward for the 2015-16 season. He will be a wonderful mentor for first round draft pick, and possible eventual replacement, Justise Winslow. And, most importantly, his contract will expire before the summer of 2016.

Dragic gave the Heat more than expected. 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 were going to be to pay him his money. He was eligible for an up to five-year deal, with a staring salary of $19.7 million and a total payout of $113 million. The Heat snagged him at a substantial discount: Dragic took a five-year deal with a starting salary of $14.8 million and a total payout of just $85 million. That sacrifice saved the Heat $22 million for this season alone, and opened up $5 million to $6 million of incremental cap room for each of the next four. It was a huge gesture.

Wade was always going to be the biggest wild card. The star shooting guard hinted in April that he intended to exercise his $16.1 million player option, a heavily-preferred scenario for the Heat organization. The Heat desperately wanted the flexibility that the lone-remaining year on his contract would have provided for the summer of 2016. But the 33-year-old reversed course amid an understandable desire for long-term security, heading off a tense feud between competing philosophical positions. On one hand, loyalty and family. On the other, business and finance. What was best for Wade was not necessarily what was best for the Heat, and that’s where things got tricky.

Wade’s desire for one last lucrative long-term contract was easily justifiable: He has led the Heat to five NBA finals and three titles, he played a critical role in luring LeBron James and Chris Bosh to Miami, he has handled himself with dignity and class over the course of a brilliant twelve-year career, and he has sacrificed substantial salary in order to give the Heat flexibility over the past five years.

In theory, the Heat were more than happy to pay him back by giving him the money he sought. But in a world with salary caps and luxury taxes and impossible on-court performance standards, paying him what he sought presented significant challenges in practice.

Wade’s asking price: $60 million over three years. With it, a massive bite out of the Heat’s cap space for the summer of 2016, so big that it may have put at risk the ability for the Heat to retain budding young superstar Hassan Whiteside next summer, let alone make the kind of splash for which the Heat are hoping.

And so, with the ask price set at $60 million, the Heat were rumored to have registered a mere $30 million bid. Which, naturally, led to hurt feelings and tense times.

And so trudged on the intervening weeks.

Then came the bombshell: Wade will take a one-year, $20 million deal.

It was yet another remarkable sacrifice on the part of Wade.

We were all more than happy to give him a full six-year, $125.5 million contract in the summer of 2010. Over those six years, Wade will now earn $100.7 million. That’s a $24.8 million sacrifice – one that cut right through the heart of his prime.

Even the $20 million he took for this season was less than the $23 million maximum salary that we were all calling for him to accept, in the hopes that it would serve as an impetus for him to table discussions over a multi-year contract for one more season, at a point in time when the Heat would have more clarity as to what it could offer. That $3 million sacrifice saved the Heat a total of $13 million.

Wade’s deal, then, accomplished two things: It helped ease the financial burden that a full maximum salary would have caused for the 2015-16 season, and it preserves maximum flexibility for the Heat for the all-important 2016-17 season.

The Heat currently has a team salary of $94 million for the 2015-16 season (assuming a 15-player roster; the Heat currently has 16 players, but will need to drop to between 13 and 15 for the start of the regular season), about $9 million above the tax threshold. A team salary at that level would trigger a tax payment of $24 million, causing total payroll obligations of $118 million.

From there, payroll obligations can increase, decrease or stay roughly constant.

The Heat still has access to the $3.4 million mid-level exception which, if used, could raise total payroll obligations as high as $130 million. That, however, remains unlikely.

Trade scenarios could lower the team’s payroll obligations substantially. Chris Andersen and Mario Chalmers are on the market, and can surely be had for nothing. Trading either one would save the Heat $19 million and $16 million, respectively, as well as also open upon the roster for the potential addition of new players. But trade scenarios are equally unlikely.

Why? The cost of dumping salary is increasing substantially, and the Heat does not have much in the way of assets to sweeten a potential offer. Beyond player assets, it has just $3.4 million in cash considerations (cumulative for the season) and a small selection of second round draft picks (in 2018, 2020, 2021 and/or 2022) to offer. The Heat is restricted from trading any first round draft picks, no matter how far into the future.

The good news? Since the luxury tax is calculated as of the last day of the regular season, any potential trades don’t necessarily need to happen now (though the clarity would certainly be reassuring). It could be substantially easier to trade the contract of Andersen (or Chalmers) at the trade deadline, when his $5.0 million ($4.3 million) salary would have just $1.6 million ($1.4 million) on it left to be paid. However, the Heat would need to find a trade partner with enough cap room (or a large enough trade exception) to take on his entire cap hit without sending anything back in return, and that gets significantly harder to find as more time passes. And, of course, that does nothing for the Heat’s flexibility right now.

The most likely scenario is that payroll obligations remain relatively constant. Because of the technicalities of salary cap rules, any new free agent the Heat would bring in would likely be on a one-year minimum salary contract (unless the player is a rookie or sophomore, who might receive a non-guaranteed second season), would have an identical tax charge (the only exception would be Josh Richardson, who would have a lower tax hit), and would not significantly impact the Heat’s payroll if he replaces one of the Heat’s three players with non-guaranteed contracts (Henry Walker, James Ennis and Tyler Johnson). Using payroll software, like those found at Zenefits or Gusto, could be utilized by Heat to help make any changes that happen with regards to the payroll easier to handle. Trade scenarios for players on lower-end contracts (e.g., Shabazz Napier) wouldn’t have much effect either, assuming such player is ultimately replaced on the roster.

Wherever it winds up, the Heat’s total payroll obligations are likely to be an all-time record. The previous record was $103 million for the 2013-14 season. Last year, the Heat paid just $81 million.

All that cost has a purpose: It creates enormous salary cap flexibility for the summer of 2016.

How much? Let’s do the math.

The league on Wednesday re-affirmed its salary cap guidance for the 2016-17 season, at $89.0 million.

The Heat, prior to yesterday, only had three players under guaranteed contract for the 2016-17 season: Bosh at $23.7 million, McRoberts at $5.8 million, and Winslow at $2.6 million. That’s three players, at $32.1 million.

To that, let’s add the now-executed contract of Dragic.

Dragic received $85 million over five years. The contract will pay out $14.8 million next season and $15.9 million for 2016-17. So, we’ll add $15.9 million for Dragic.

So: $89.0 million – $32.1 million – $15.9 million = $41.0 million.

After incorporating roster charges, that leaves $37.7 million left over for Wade, Whiteside and any other free agent the Heat may target.

If the Heat were to successfully trade McRoberts, that total can increase to as much as $43.0 million.

(If the Heat were to trade Winslow as well, the total could increase further to $45.0 million.)

A maximum salary for Whiteside is currently projected at $20.9 million, though the Heat will surely look to pay him less. Which leaves at least $17 million, but possibly $20 million, $25 million or maybe even $30 million left over of cap room for the summer of 2016!

Wade certainly did not create this windfall possibility for the Heat without coming to some sort of understanding about his future. He will surely command part of that money.

But that is where the importance of the flexibility he has provided the Heat organization is so critical: How much he takes for 2016-17 will likely depend on who the Heat targets that summer. If the Heat attracts someone like Kevin Durant, he could take a very low salary (possibly with a very large contract the following summer to close out his career). If the Heat attracts nobody, it could allocate a very large portion of its cap space to Wade. Or anything in between.

Picture this scenario: Imagine if Wade took a discount for the 2016-17 season, all the way to his $1.6 million minimum salary, in order for the Heat to maximize its $43.0 million. If things were structured properly, that would leave the Heat with as much as $42.5 million to split between Whiteside and another player. Perhaps enough for, say, Durant (his max would be $25.0 million).

Why might Wade do that? Well… It could get the Heat Durant. But that’s not all. The league is projecting another blast higher in the salary cap for the 2017-18 season, which could leave the Heat with substantial cap space for that summer as well. But Wade’s cap hold would be so low (just $1.0 million) that the Heat could use up all of that cap space elsewhere and then, when all the cap space is used up, turn back to Wade and leverage his Bird rights to pay him a salary (even up to the max) that exceeds the cap. Imagine this Heat team with enough cap room for Whiteside and Durant next summer, another premium free agent in 2017-18, AND Wade making back most or all he sacrificed by not taking his long-term deal.

But Wade doesn’t even necessarily need to take the $1.6 million minimum salary to make this scenario plausible. If things were structured properly, the Heat could pay Wade up to $2.9 million, using the mid-level exception for room teams, and still leave the Heat with the exact same $42.5 million to split between Whiteside and another player. Even in this scenario, the Heat could reward Wade’s sacrifice in 2016-17 by leveraging his Bird rights to pay him a 2017-18 salary (even up to the max) that exceeds the cap. Wade’s cap hold, however, would increase to $5.5 million (vs. $1.0 million) until that happens.

It was speculated that before he accepted his one-year deal, Wade’s bottom-line asking price over three years was $45 million. In this approach, the Heat would pay Wade $20 million in 2015-16 and between $1.6 million and $2.9 million in 2016-17, and be in position to pay him way more than the $22.1 million to $23.4 million in 2017-18 that would get him to his $45 million three-year total.

Is the approach even remotely likely? No. But that’s not the point. The point is that, with the Heat’s current flexibility, the possibilities are endless.

And so, the Heat’s team of the present and vision for the future have seemingly come into clearer focus.

For the 2015-16 season: Dragic (PG), Wade/Winslow (SG), Deng/Winslow (SF), Bosh/McRoberts (PF) and Whiteside (C). With some depth to be added in the form of minimum salary contracts.

For the 2016-17 season: Dragic (PG), Winslow (SG/SF), Bosh (PF), and up to $43.0 million(1) for Wade, Whiteside and another. With some depth to be added in the form a player making the $2.9 million mid-level exception for room teams and others making the minimum salary.

Is that a strong enough foundation?

Is it enough to compete for championships?

Is it enough to attract a top-tier free agent in the summer of 2016?

Only time will tell.

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Notes:
(1) This amount assumes Josh McRoberts is traded. It can increase to as much as $45.0 million if Justise Winslow is traded as well.