Miami Heat Complete Buyout Agreement with Beno Udrih

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Miami Heat point guard Beno Udrih is out of commission for three months after undergoing surgery on Thursday to repair a torn plantar plate in his right foot. Apparently, however, that doesn’t mean he can’t still contribute.

The Heat has been locked in a seemingly endless on-again, off-again battle with the luxury tax thus far this season. On July 10th, it was $11.3 million over the threshold. Eight months and five trades later, Miami accomplished its season-long goal to drop below the tax threshold at the trade deadline, by a mere $218,000.

Then, on Thursday, Joe Johnson was released from his contract by the Brooklyn Nets. He cleared waivers two days later. Just over an hour after that, he was an official member of the Heat, signing a rest-of-season minimum salary contract. The $261,894 salary cap hit associated with the contract vaulted the Heat right back over the tax line, by $43,894. 

Earlier today, the Heat waived Udrih in conjunction with a buyout. According to Eric Pincus, Udrih agreed to give up $90,000, which again takes the Heat below the tax threshold, presumably this time for good. The Heat now officially stands at $46,106 below the tax level. The roster currently stands at 13, two players below the 15-player maximum. 

Udrih will be placed on waivers at 5:00 pm today, where he will remain for the following 48 hours.

During those 48 hours, any team with the necessary cap space or an available exception large enough to cover the $2.2 million face value of Udrih’s contract can claim him.

If a team makes a successful waiver claim, the buyout would be nullified. Instead, the claiming team would acquire Udrih and his existing contract, and would pay the $536,233 remainder of his salary. The Heat would be absolved of all remaining responsibility, and the entire $2.2 million face value of his contract would be removed from team salary. That, in turn, would put the Heat $2.1 million below the tax level.

Typically, there would be no incentive for a team to claim a player off of waivers who figures to be injured for the rest of the season (particularly one who has an expiring contract). But, given its unique circumstances, there is one team that could potentially be enticed to make such a claim: the Philadelphia 76ers(1).

That’s because the Sixers currently have a team salary below the league-mandated $63.0 million salary floor.

Teams which finish the season with a team salary below the salary floor are surcharged for their shortfall, with the money distributed among the players on that team. “Team salary” for the purposes of the floor is calculated based upon the sum of all salaries that underlie each team’s current and previously terminated contracts as of the last day of the regular season, independent of how much the team may have actually paid out on those contracts.

Teams below the floor can therefore save a great deal of money by claiming players off waivers who have been released by their teams late in the regular season. By doing so, the full value of the contract they will have claimed would count toward the minimum team salary calculation, thus reducing the shortfall, even though the vast majority of it will have been paid by the team which released the player.

The Sixers are currently $2.9 million below the salary floor.

Claiming Udrih would therefore save the Sixers $2.2 million in shortfall payments (equal to the face value of Udrih’s contract), at a cost of just the $536,233 remaining to be paid. That’s a total potential savings of $1.6 million. And because the Sixers would remain $687,427 below the salary floor, it would have the potential to save some or all of that by employing a similar strategy again.

Some have speculated that the Sixers could claim Kris Humphries, who was waived yesterday, by the deadline of 5:00 pm tomorrow, in order to achieve a similar type of savings. Doing so, however, would only save $1.7 million, with no possibility of more down the line.

The Sixers would therefore have a financial incentive to claim Udrih on Wednesday rather than Humphries tomorrow.

The Heat also owes the Sixers its 2016 first-round draft pick. The pick, which is top-1o protected in 2016 and unprotected in 2017, represents the final piece of the sign-and-trade agreement that sent LeBron James from the Cleveland Cavaliers to the Heat in July 2010. The Cavaliers later forwarded the pick to the Sixers as part of a three-team trade with the Minnesota Timberwolves that sent Kevin Love from Minnesota to Cleveland, Andrew Wiggins and Anthony Bennett from Cleveland to Minnesota, Thaddeus Young from Philadelphia to Minnesota, and Luc Richard Mbah A Moute and Alexey Shved from Minnesota to Philadelphia.

Since the quality of the pick the Sixers are to receive from the Heat is inversely proportional to the Heat’s regular season record, by claiming Udrih and thus helping the Heat to improve its roster by utilizing the resulting room below the tax to sign additional players, the Sixers would effectively be making the pick they are to receive less valuable.

The Sixers would therefore have a strategic incentive to claim Humphries tomorrow rather than Udrih on Wednesday.

The Sixers could also choose not to claim anyone off waivers. If they do, they would save significant money in forgone shortfall payments. But those shortfall payments aren’t directed to the league office. They’re directed to the players on the Sixers roster. Maybe Philly management won’t want to save such money at the expense of its own players.

No matter how things play out, the Heat will be in one of two positions at 5:00 pm on Wednesday: (i) $46,106 below the tax threshold if Udrih clears waivers, or (ii) $2.1 million below the tax threshold if he is claimed. Which of the two will have significant implications for the Heat as it contemplates if and when to fill the remaining two open roster spots.

If Udrih clears waivers, the Heat will have just $46,106 of room below the tax threshold. Such a tenuous position against the tax would mean it would be all but certain not to utilize the $2.0 million (and declining daily) balance on its taxpayer mid-level exception. Instead, if anything, Miami would dole out only prorated minimum salary contracts. Such contracts would count $5,572 per day against the tax threshold (no matter which player is targeted).

With just $46,106 of room below the tax threshold, and each new contract costing $5,572 per day, the Heat would be able to offer such contracts for a total of no more than eight days. The Heat roster would therefore need to remain at 13 players until just prior to the end of the regular season.

If the Heat were to choose to sign only one player, it could do so the full eight days prior to the end of the regular season, on April 6th or thereafter. With two players, the Heat would be able to employ any combination of eight days of salary – whether that be the first signing with seven days left in the regular season and the second signing on the very last day, each signing with four days left in the regular season, or any other combination that totals to no more than eight days.

If Udrih is instead claimed off waivers, the Heat would have a full $2.1 million of room below the tax threshold. That’s so much room that Miami would essentially have no luxury tax issues for the rest of the season. It could sign whomever it wants, whenever it wants. It could even utilize the remaining $2.0 million balance on its taxpayer mid-level exception if the situation called for it(2).

While the Heat would clearly prefer that Udrih’s contract be claimed off waivers — something that would benefit him as well, since it would nullify the $90,000 give-back and instead require the claiming team to pay out his full remaining salary — it is now assured to be able to avoid the luxury tax either way.

By dropping below the tax threshold, in addition to whatever tax payments it would avoid paying,  the Heat now qualifies to receive a tax distribution – a pro rata payout given to non-taxpaying teams totaling 50 percent of the payments made by tax teams – currently projected at $2.6 million.

The total value to the Heat of Udrih’s generosity will therefore be, at least very least, $2.7 million(3).

It also assures that the Heat will not pay the repeater tax – which triggers if a team pays the tax for a fourth time in five years – until at least the 2019-20 NBA season. Assuming the team will avoid the tax next season as well, which is all but certain, the repeater tax would no longer be an issue in Miami until at least the 2020-21 season.

There is no obvious benefit for Udrih to have sacrificed in this way for the Heat. It is not imminently clear why a player who figures to be injured for the rest of the season would give up $90,000 of his salary which is guaranteed to him. It’s not as if he can replace it by playing elsewhere.

Riley does, however, manage to do this kind of thing.

In June 2010, all that stood in the way of Riley creating enough salary cap space for three full maximum contracts was the contract of James Jones, which was partially guaranteed for $6.0 million over three years.

If the Heat were to have waived him, the $1.9 million applicable to the 2010-11 season would have been counted against the cap, leaving the Heat approximately $300K shy of its goal. Instead, Riley convinced him to take a $5.0 million buyout, which counted $1.5 million against the cap for the 2010-11, freeing up the necessary cap space for a third full maximum contract.

In a spectacular display of selflessness for the greater good, Jones agreed to give up $1.0 million of what he was owed to a team that was simultaneously releasing him. He did it for reasons unknown, but perhaps including a genuine love for the Heat and the city of Miami, and because the Heat agreed to pay his buyout in one lump sum. Riley ultimately returned the favor by signing him to a minimum salary contract later that summer.

Some have speculated that Udrih may have made his sacrifice in return for the promise of a new contract next season.

Technically, it is a major violation of salary cap rules to promise a player a future contract. But that is not to say what is technically illegal in theory does not actually occur in practice. Such a promise, particularly if made orally, would be nearly impossible to prove. Udrih was, after all, a capable backup point guard for the Heat when he was healthy. There is every reason to believe the Heat would bring him back anyway.

Whatever the reason, Udrih was willing to help the Heat again drop below the tax threshold. It is something he certainly did not need to do, but apparently chose to do anyway, for the greater good of “Heat Nation.”

Thank you, Beno. All the best to you on your recovery!

Notes:
(1) The Portland Trail Blazers would also have a financial incentive to make a waiver claim if the Heat were to release a player. The Blazers are currently $840K below the salary floor. The strategy would save them $304K. 

(2) The only way the luxury tax would be an issue in this scenario is if the Heat were to utilize the full amount of the mid-level exception. If so, the Heat would have to wait a bit to sign a second player. The waiting period, however, would be no more than 18 days. 

(3) If Udrih is claim off waivers, then his generosity will have been meaningless. But it still wouldn’t change the gesture. 

4 Responses

  1. Great writeup as always, Monsieur Random. Beno Udrih did us a solid here. We owe him one for sure, especially because the league would have probably suspended Wade the whole playoff series for punching even Dellavedova (you know would have been him, right?)

    Do the right thing, Philadelphia. Pick up Udrih and save us both some skin.

  2. Albert says:

    @Michael realGom
    Not my best work. I had about 4,000 grammatical errors which I just corrected :).

  3. You wrote it really fast! LOL. I got the feeling that you were just as excited as I was. I have to say that every time I see Andy & Pat’s clever financial chicanery, I’m really humbled. I think I know this stuff and then poof! I know Wade is our perennial superstar, but there is no one like Pat Riley. I’m more worried about him leaving than Wade, but I bet he also has a great exit plan. Anyway, thanks again!

  1. April 3, 2016

    […] So why can the Heat now sign players without going over the tax? NBA cap expert Ahmad Nahmad: […]

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