Did the Brooklyn Nets Structure the Andrea Bargnani Buyout Correctly?

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This is a temporary post which I may remove because it has nothing to do with the Miami Heat. I just found it interesting enough about which to write. However, it is such a minute issue that it may well be interesting to nobody else.

On July 17, 2015, Andrea Bargnani signed a two-year minimum salary contract with the Brooklyn Nets. The contract called for a payout for this season of $1,362,897, and for next season, which was subject to a player option, $1,551,659 if the option were to have been exercised.

Unfortunately, things didn’t go as planned. Bargnani proved to be something of a disappointment in Brooklyn, averaging just 6.6 points in 13.8 minutes per game over his 46 games.

On Saturday, the Nets waived Bargnani under the terms of a buyout.

A buyout is an agreement between a player and his team wherein the team agrees to terminate the player’s contract, granting the player his freedom, in exchange for a reduction in the remaining guaranteed salary he is owed.

Technically, a buyout constitutes an amendment to an existing player contract in which: (i) the team will request waivers on the player, and (ii) if the player clears waivers, the remaining portion of his guaranteed salary will be reduced or eliminated. If the player is claimed off waivers, the buyout does not take effect; the player is awarded to the claiming team, along with his existing contract.

When Bargnani cleared waivers on Monday, the buyout took effect. According to Eric Pincus, Bargnani’s salary cap hits for this and next season after applying the buyout will be $1,039,298 and $323,599, respectively.

Subtract those figures from his original salary payouts and you get this: Bargnani agreed to give up $1,551,659.

That’s not a random figure. Look up the page. You will notice that Bargnani essentially sacrificed the exact amount of his would-be salary for next season.

But if Bargnani agreed to give up his salary in full for next season, why did the Nets incur a dead-money cap charge for that season?

According to salary cap rules, the amount of the buyout is allocated to team salary pro rata over the then-current and each remaining season covered by his contract on the basis of the remaining salary to be paid in each such season.

On the day he cleared waivers, Bargnani was still owed $408,869 (30 percent) of his salary for this season and the full $1,551,659 for next season.

The prorated amount of the buyout applicable to next season was therefore: $1,551,659 (buyout amount) x $1,551,659 (salary for next season) / ($408,869 + $1,551,659) = $1,228,060.

The dead-money cap charge for next season was therefore: $1,551,659 (salary for next season) – $1,228,060 (buyout allocation) = $323,599. 

The unfortunate reality of the NBA’s salary cap rules is that when players on multi-year guaranteed contracts are bought out for less than every last penny remaining to be paid, their teams will incur multi-year dead-money cap charges, regardless of whether or not the player essentially agrees to forego any salary for the latter seasons. So the Nets were forced to live with that small dead-money cap charge for next season, because there was nothing they could do to avoid it.

Or was there?

There are very few ways in which a player and his team can agree to modify a player contract.

The most common way, as described above, is in conjunction with a buyout.

Another less common way, however, is to eliminate an option season.

Since the second year on Bargnani’s contract was subject to a player option, and since the salary he gave up in the buyout was exactly equal to his would be second-year salary, it begs the question:

Instead of structuring his release as a buyout, why didn’t Bargnani and the Nets instead modify his contract to eliminate his player option prior to his release?

In either scenario, Bargnani would be giving up the exact same amount of money. But, by taking the approach of eliminating the option, the Nets would endure no dead-money cap charge for next season.

Was this simply an oversight, that would up costing the Nets $323,599 potential cap space for next summer?*

Notes:

* I tend to believe that Brooklyn made a minor oversight that will cost the team $323,599 in cap space for next season, which is why I wrote this post, but I could certainly be wrong. So I will provide you with all the relevant information, so you can decide for yourselves. 

There are three primary reasons as to why a buyout approach would be beneficial to an elimination of option approach:

1. If a player makes a certain amount of money, that amount of money will be ultimately be charged to team salary. So what we’re really talking about here is a matter of timing. In structuring it how they did, the Nets chose to take a small dead-money cap charge next season. That, however, also had the net benefit of decreasing Bargnani’s cap hit that corresponds to this season (which applies for both salary cap and luxury tax purposes).

But if this were Brooklyn’s rationale, my questions would be: Why does a lower cap hit for this season even benefit the Nets? They are way over the salary cap anyway, and won’t have any cap space with which to sign other players. And do the Nets need to worry about their tax position? They are currently $1.7 million below the tax, rather than the would-be $1.4 million, in either case well below the threshold. And they’re about to get even further below it with the rumored Joe Johnson buyout. 

2. Bargnani has $408,869 remaining to be paid on his now-terminated contract. Structuring his release as a buyout allowed the Nets to stretch out those payouts over a long period of time. Bargnani will receive another $85,270 for the rest of the season, which will be paid to him in full by October 30, 2016. The other $323,599 will be paid to him in 72 equal, semi-monthly installments of $4,494 each, starting on November 15, 2016 and ending on October 30, 2019. Had his player option simply been removed, the full $408,869 would be owed to him by October 30, 2016.

But if this were Brooklyn’s rationale, my question would be: Is the benefit of stretching out that last $323,599 over three additional years (i.e., time value of money) truly worth incurring the $323,599 dead money cap charge for next season? Does Brooklyn really care about stretching out such a small amount of money?

3. Structuring Bargnani’s release as a buyout allows the $323,599 which will be owed to him over the next three years to potentially be reduced, or even eliminated, by set-off. That amount will be reduced by amount equal to half the difference between Bargnani’s salary for next season (whatever that may be) and $845,059. That effectively means that even if he gets paid just the minimum salary, Brooklyn’s $323,599 obligation will get completely eliminated. Therefore, if you believe that Bargnani will command at least the minimum salary next season, Brooklyn’s savings by structuring his release as a buyout will increase by $323,599.

But if this were Brooklyn’s rationale, it would require that Bargnani did not force Brooklyn to surrender its rights to set-off. While it certainly does not need to be so, in the vast majority of cases, set-off rights are surrendered in conjunction with buyouts. If the Nets did so in this case, they would not get to reduce their payout to Bargnani at all (which, in turn, would completely eliminate the validity of this rationale).

And even if they did retain their rights to set-off, my question would be: Would you rather save $323,599 but incur a $323,599 dead-money cap charge for next season, or save nothing at all but incur no dead-money cap charge for next season?

Of course, the obvious counter-argument to my point of view is that a $323,599 dead-money cap charge is so small as to not even really matter. But I nonetheless find it interesting. 

MORE INTERESTING SALARY CAP MACHINATIONS:

Boston Celtics: David Lee agreed to a buyout which was for less than the amount of set-off the Celtics would have received when he signed his $2.1 million contract with the Mavericks. I would therefore hope the Celtics weren’t forced to waive set-off.

Orlando Magic: The Orlando Magic claimed Chris Copeland off of waivers for reasons that might not be so apparent. The Magic were $634K below the $63.0 million salary floor. Claiming Copeland’s $1.2 million salary will put the Magic above the salary floor, which actually makes taking on his contract less than free free of charge. The Magic will save $634K in shortfall payments, and owe Copeland just $331K in remaining salary payouts, for a net profit of $303K! The move also has the net effect of increasing the 2016-17 salary cap by approximately $20K.

3 Responses

  1. Robert says:

    I might be missing something here, but if the Nets and Bargnani agree to eliminate the 2nd year player option, would Bargnani’s contract then fall under the category of being a one-year minimum salary contract? The implication being that the League reimburses the Nets for salary above the 2-year veteran minimum ($947,276), but Bargnani would still be entitled to his $1,362,897.

  2. Albert says:

    @Robert
    The language of the CBA specifically states that the player has to sign a one-year, 10-day or rest-of-season contract for his team to qualify for reimbursement. In this particular case, he will have amended a multi-year contract.

  3. Robert says:

    Thanks Albert, option years give me fits for when they do or do not count.

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