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Miami Heat on the Verge of Signing Joe Johnson

February 26th, 2016 Leave a comment Go to comments
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With the NBA trade deadline now behind us, buyout season is in full swing.

Players such as Anderson Varejao, David Lee, J.J. Hickson and Steve Novak have already secured their releases from their prior teams and signed with new ones. Others, such as Joe Johnson and Andre Miller, have reached buyout agreements and are in the process of being waived, and will become free agents shortly. Still others, such as Kevin Martin and Ty Lawson, are rumored to be negotiating buyout agreements with their existing teams and, if successful, would become free agents thereafter.

Buyout season is a frenetic time because it represents the last real opportunity for significant player moment. It can be loosely defined as the period of time that starts after the trade deadline expires, and ends on March 1st. Players must be waived by their existing teams by March 1st (whether in conjunction with a buyout or not) to be eligible for the playoffs with another team.

A buyout is essentially an agreement between a player and his team wherein the team agrees to terminate the player’s contract 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.

“Waivers” are a temporary status for players who are released by their teams. A team initiates the waiver process by “requesting waivers” on the player it is releasing. The player stays “on waivers” for 48 hours, during which time other teams may claim the player.

If a team makes a successful waiver claim, it acquires the player and his existing contract, and pays the remainder of his salary. Any negotiated buyout is nullified, and the waiving team is relieved of all responsibility for the player.

Waiver claims are rare, particularly for players with large contracts, for two primary reasons.

First, they require: (i) a claiming team to either have room below the salary cap to fit the player’s entire salary, a trade exception for at least the player’s salary, a disabled player exception for at least the player’s salary and that the player be in the final season of his contract, or (ii) that the contract be initially executed for two seasons or fewer at the minimum salary.

Second, they require a claiming team to pay out the remaining salary obligations under the contract in full.

If no team has claimed the player before the end of the waiver period, he “clears waivers.” The player’s buyout (if any) takes effect, his contract is terminated, and he becomes a free agent.

The Miami Heat has taken dead-aim at Joe Johnson.

Johnson is assured to clear waivers because no NBA team has enough room, or a large enough exception, to claim his $24.9 million salary.

According to Zach Lowe, Johnson, who reportedly agreed to give up a whopping $3.0 million of the $6.7 million remaining to be paid on his expiring contract in order to secure his release from the Brooklyn Nets, is expected to sign with the Heat, and will do so after he clears waivers on Saturday.

But Miami has a problem. 

Pat Riley and crew worked for eight long months to accomplish its season-long goal of dropping below the luxury tax, and in-so-doing avoid becoming the first team in NBA history to pay the dreaded “repeater tax.”

In accomplishing its goal, the Heat completed five trades, during which it utilized its full $3.4 million allotment of cash for the 2015-16 season, but traded away just one rotation player (Mario Chalmers) and three of its second-round draft picks.

The result? The Heat is now $218K below the tax threshold.

If Miami remains below the tax, which is not computed until the end of the regular season, it would not only avoid the repeater tax but also qualify to receive a tax distribution, which is currently estimated at $2.6 million.

In addition, it will be assured not to 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 not be an issue in Miami until at least the 2020-21 season.

The problem for the Heat, however, is that while it currently has two roster spots open below the 15-player limit, because it is so close to again tripping the luxury tax, it will not be able to immediately fill both of its available roster spots for the rest of the season and remain below it.

The Heat’s tenuous position against the tax means utilizing the $2.0 million (and declining daily) balance on its taxpayer mid-level exception will cause it to exceed the tax threshold. Instead, only prorated minimum salary contracts will allow it to remain below the tax. And even then, the Heat would need to wait to start utilizing them.

Prorated minimum salary contracts would count $5,572 per day against the tax threshold (no matter which player is targeted), and can be offered in the form of 10-day or rest-of-season deals.

With just $218K of room below the tax threshold, and each new contract costing $5,572 per day, the Heat can offer such contracts for a total of no more than 39 days.

The Heat roster would therefore need to remain at 13 players for at least nine of the remaining 48 days in the regular season.

If the Heat choose to wait out the nine days up front, it will not be able to add a player until at least March 6th, and longer if it intends to add two players (to reach the 15-player limit) at any given time. With two players, the Heat can employ any combination of 39 days of salary – whether that be the first signing with 38 days left in the regular season and the second signing on the very last day, one signing with 20 days left in the regular season and the other 19 days, or any other combination that totals to no more than 39 days.

If the Heat were to sign Johnson when he clears waivers on Saturday, that’d be 47 days. The Heat would be assured to again trip the tax.

The cost of Johnson’s contract would therefore effectively become: $262K in salary + $110K in luxury taxes + $2.6 million in tax distributions forgone = $2.9 million.

Consider this: This whole problem would be created because the Heat would’ve signed Johnson after he clears waivers on February 27th rather than March 6th. That’s a mere eight days!

But would you be willing to risk losing Johnson while waiting out those eight days?

On the other hand, would Johnson change the team for which he intends to spend the next four months (including the playoffs) because of a mere eight days? Would he not be willing to do the Heat the small favor of waiting just over a week?

But there’s also this: This all assumes that Johnson will accept a prorated minimum salary contract.

Johnson sacrificed $3.0 million in his buyout with the Nets. A pro-rated minimum salary contract signed on Saturday would only return him $414K (and declining by $8,819 daily if he signs thereafter). This is a player in high demand.

What if he has demanded more? The Heat can pay as much as $2.0 million if it utilizes the full remaining amount on its mid-level exception. Is that what is being discussed behind the scenes?

If that’s what has privately been agreed to, Johnson would effectively cost the Heat: $2.0 million in salary + $4.5 million in luxury taxes + $2.6 million in tax distributions forgone = $9.1 million.

The size of the contract to which Johnson has agreed will therefore have a profound impact on Miami’s financial statements.

One would presume that it would be the former (prorated minimum salary). Either way though, the Heat will have assured itself to pay the repeater tax.

But here’s the thing: It’s not as big a deal as you might think.

If the Heat is able to avoid the tax this season (and assuming it will avoid the tax next season as well, which is all but certain), the repeater tax – which triggers if a team pays the tax for a fourth time in five years – will not be an issue in Miami until at least the 2020-21 season.

But even if it does pay the tax this season, the repeater tax still won’t be an issue for the Heat until at least the 2019-20 season. So, avoiding the repeater tax this season really only has an impact on one future season (2019-20). And if the Heat doesn’t pay the tax in any one season beyond 2016-17, then paying the repeater tax this year will have no bearing on the future at all!

So… maybe the Heat, realizing this, is willing to pay the repeater tax to take on Johnson.

Even still, there is a way in which the Heat can counteract this reality and again drop below the tax even if it were to sign Johnson this weekend, and it comes care of the Philadelphia 76ers.(1)

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 $2.86 million below the salary floor.

They are clearly aware of their fate. At the trade deadline, the Sixers acquired Joel Anthony as part of a three-team trade that involved the Houston Rockets and Detroit Pistons. The primary motivation for the Sixers’ involvement in the trade was to pick up an extra second-round draft pick (in 2017, from the Denver Nuggets via the Rockets) as well as to acquire the $2.5 million salary of Anthony, a player they never intended to play.

Taking on Anthony’s salary would have saved the Sixers $2.5 million in shortfall payments, at a cost of only the $808K then remaining to be paid on his contract.

The Pistons, however, voided the trade.

As a result, Philadelphia lost Anthony, and the associated savings for claiming him.

It, in turn, did two things that could benefit the Heat: it made the strategy again viable (Philly would’ve had limited need for it if they had successfully accomplished it with Anthony), and it showed that the Sixers are willing to take this type of approach to achieving savings.

In fact, it is not uncommon.

Two days ago, the Orlando Magic, who at the time were $634K below the salary floor, claimed the $1.15 million contract of Chris Copeland off waivers. They waived him mere moments later.

By doing so, Copeland’s $1.15 million salary will put the Magic above the salary floor (assuming he is not re-claimed, which would be downright hilarious), which actually made taking on his contract less than free of charge for the Magic. Orlando will save $634K in shortfall payments, and owe Copeland just $331K in remaining salary payouts, for a net profit of $303K!

The Heat, by waiving a player, could make a similarly enticing proposition for the Sixers to consider.

The most obvious candidate for such treatment would be Beno Udrih, who is out three months after undergoing surgery earlier today to repair a torn plantar plate in his right foot.

Udrih has a $2.2 million salary on his expiring contract. The vast majority of that amount has already been paid out by the Heat and Memphis Grizzlies.

If the Heat were to waive Udrih, the Sixers might be enticed to claim him.

Claiming Udrih would save the Sixers $2.2 million in shortfall payments, at a cost of just the prorated salary remaining on his contract. If he were waived today, that would be just $562K.

The net savings for Philadelphia by claiming Udrih if he were waived by the Heat today: $2.2 million (shortfall payments) – $562K (salary payouts) = $1.6 million!

And the Heat wouldn’t necessarily need to waive Udrih today. In fact, the longer it waits to do so, the more attractive Udrih’s contract would become to the Sixers. That’s because Udrih’s remaining salary obligations decline by the day.

If the Heat were to theoretically waive Udrih just before the end of the regular season, the Heat would have effectively already paid his entire salary, leaving the Sixers with virtually the entire $2.2 million in savings!(2)

That sounds great for the Sixers, but why might the Heat be interested in such an approach?

When a player is claimed off waivers, the waiving team gets to remove the player’s contract off the books entirely.

In the case of Udrih, the Heat will have cleared his entire $2.2 million off the books for the purposes of the tax calculation.

What would that do? The Heat is currently $218K below the tax threshold. Add another $2.2 million to that total, and you get to $2.4 million below!

That, in turn, would mean that no matter what the Heat offers Johnson – whether it be a prorated minimum salary contract paying out as much as $414K or the full remaining mid-level exception paying out $2.0 million – the Heat would remain below the tax threshold. And, in either case, by enough to add two additional players as well (beyond just Johnson), to build back up to the 15-player max!

Kevin Martin? Marcus Thornton? A point guard?

Of course, nothing is guaranteed.

Nothing would require the Sixers to claim Udrih if the Heat were to waive him. If they do, the Sixers 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.

On the other hand, it also does not harm the Heat to try. If it chooses to waive Udrih and the Sixers don’t claim him, Miami would simply be where it was prior to waiving him: a tax-paying team as the result of the Johnson signing, if he’s not willing to sign for the prorated minimum salary and wait an extra eight-plus days.

And that, given the relatively minor future consequences, may not be such a big deal after all.

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. 

(2) On the other hand, the longer the Miami Heat waits to waive a player it hopes the Sixers or Blazers will claim, the more risk it takes that Philadelphia or Portland could instead claim another player who happens to be waived. So time could be of the essence! 

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  1. Mike Cupino
    February 27th, 2016 at 12:56 | #1

    Great article as always. I hope this means you are back. I was totally destroyed to read your post about leaving. As an artist I can sympathize with how it feels to have your hard work stolen and others reap the benefits. But always know your fans know what you do and truly appreciate it. You have helped bring my love for the Heat to a knew level of understanding. Please keep it up 😉

  2. February 27th, 2016 at 18:50 | #2

    Yeah, what Mike Cupino said. I really appreciate your sensible contributions. It’s vastly different than most of the media “analysis” we get.

  1. February 28th, 2016 at 19:47 | #1

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