Tyler Johnson Is a Big Part of Miami Heat Future

Update (6/21/16):

As expected, the Miami Heat has formally extended a $1.2 million qualifying offer to Tyler Johnson. The Heat can now match any offer sheet Johnson signs with any other team, which cannot have a starting salary higher than $5.6 million. Johnson now officially reduces the Heat’s cap space by $1.2 million. If it times everything correctly, the Heat can now exceed the salary cap to retain him, whether it be by matching an offer sheet with a starting salary as high as $5.6 million or by signing him outright to a contract starting as high as a projected $6.2 million (the final figure will be determined at the end of July Moratorium).

—————————————–

Original Post (05/20/16):

I have a request. I try to write posts which I believe are unique, in depth and insightful. I hope you agree. I therefore ask that you please not simply copy my work without providing proper credit. It feels rather awful to see my work being exploited. If just you ask, I am more than willing to help out anyone and everyone in any way I can.

As an example, the $6.2 million figure presented in this post is my own personal estimate. It has not yet been set by the NBA, nor can it be until the season is complete. It has been projected by various other salary cap experts at wildly different amounts, with recent figures ranging from as little as $5.6 million to more than $8 million.  

Tyler Johnson and Hassan Whiteside have some intriguing parallels.

Both were mid-year signees during the 2014-15 NBA season. Both have been playing under partially guaranteed, two-year minimum salary contracts that expire at the same time. Both will be free agents this July. And both represent a potential future of youth and athleticism at positions of critical need for the Miami Heat.

Despite the similarities, however, their free agency statuses are very different. Johnson’s future in Miami is far more secure, and the price it will take to retain him is far less expensive.

Johnson, like Whiteside, will be a free agent this summer, having accrued two years of service with the Heat. However, Johnson, unlike Whiteside, has accrued just two total years of NBA service, to Whiteside’s four. As such, he will face two critical restrictions that will ensure he remains in Miami.

First, Johnson will be a restricted free agent: This will give the Heat the right to keep him by matching a contract he signs with any other team.

Restricted free agency exists only on a limited basis. It is allowed only for players coming off rookie-scale contracts, and for players who have been in the league three or fewer seasons (as has Johnson). In order to make their free agent a restricted free agent, a team must submit a qualifying offer to the player between the day following the last game of the NBA Finals and June 30. The qualifying offer is a standing offer for a one-year guaranteed contract, which becomes a regular contact if the player chooses to accept it. The amount of the qualifying offer for Johnson will be $1,180,431. If the Heat extends Johnson a qualifying offer, it will have the legal right to match any contract he signs with any other team.

Second, Johnson will be subject to the Gilbert Arenas provision: This will limit what any other team can offer him, all the way down to an amount that the Heat, by rule, will be able to match. 

The Arenas provision limits teams in the salary they can offer to another team’s restricted free agent who has accrued one or two years in the league (as has Johnson). The first-year salary in the offer sheet cannot be greater than the Non-Taxpayer Mid-Level exception, and the contract must span two to four seasons in length.

Limiting the first-year salary in this way enables the player’s original team to match the offer sheet by using its own Non-Taxpayer Mid-Level exception (provided they have access to it, which the Heat likely won’t) or the Early Bird exception (provided it is applicable, which for the Heat with Johnson it will be).

The Early Bird exception allows a team to exceed the cap to re-sign its own free agents, provided that the player has played with the team for all or parts of two seasons without changing teams as a free agent and finishes the second season on the team’s roster. A team may use the Early Bird exception to re-sign its own free agent for up to 175 percent of his salary in the previous season or 104.5 percent of the average salary in the previous season, whichever is greater. Early Bird contracts must be between two and four seasons in length, with raises up to 7.5 percent of the salary in the first season of the contract.

The beauty of Johnson’s contract situation, therefore, lies in the intersection of four distinct truths about the summer of 2016: (i) he will be a restricted free agent, (ii) he will be subject to the Gilbert Arenas provision, (iii) he will be an Early Bird free agent, and (iv) he will enter the summer having played at the minimum salary the season prior.

So what protections do the Heat have with Johnson this summer?

Because he will be a restricted free agent, the Heat will have the right to match any contract he signs with another team.

Because of the restrictions of the Gilbert Arenas provision, the largest starting salary any outside team will be able to offer is $5.6 million (the value of the Non-Taxpayer Mid-Level exception).

Because the Heat will have accrued his Early Bird rights, the Heat will have the means to match any contract he signs with another team.

Because he will enter the summer of 2016 having played at the minimum salary in the prior season (2015-16), his cap hold will be just $980,431, the minimum salary for a two-year veteran for the 2016-17 season. If the Heat extends Johnson a qualifying offer, and it will, his cap hold would increase slightly, to $1,180,431.

These four truths, taken together, produce one powerful result: Whatever the Heat has planned for the summer of 2016, at a cost of no more than $1,180,431, it can use up all of its cap space to do it. Then, after all of its cap space is used up, the Heat can circle back to Johnson, utilizing his Early Bird rights to give him a contract that exceeds the salary cap.

So, given these limitations, what type of contracts can Johnson solicit this summer?

Johnson has three primary choices.

First, Johnson can re-sign with the Heat.

The Heat can leverage his Early Bird rights to sit on his tiny cap hold while it uses up all of its cap space elsewhere, then circle back to Johnson to dole out a contract with a starting salary as high as $6.2 million. The contract can range anywhere from two to four seasons in length, creating a maximum payout over four seasons of $27.6 million (a $6.9 million average)(1).

The best implementation of this strategy, one that maximizes the team’s cap space, would be for the Heat to hold off on officially executing the contract that requires the last of its cap space (whomever that may be) until it has agreed on the framework of a new contract with Johnson. At that point, the Heat could rescind Johnson’s $1.2 million qualifying offer and replace it with a $980K cap hold, in the process recovering an additional $200K of cap space, and then instantly thereafter sign that contract that requires the last of its cap space followed immediately by Johnson. (This strategy, however, requires an advanced level of creativity the Heat organization did not show the last time such an opportunity was applicable, with Joel Anthony in the summer of 2010. It ultimately would up costing Dwyane Wade $2 million. I am still stunned as to how Wade and his agent could let this happen.)

Second, Johnson can sign an offer sheet with another team.

Other NBA franchises can offer Johnson a starting salary only as high as $5.6 million under any and all circumstances. The contract can range anywhere from two to four seasons in length. The second season can pay him up to $5.9 million. His salary for the third and fourth seasons, however, can (but certainly does not need to) jump beyond the standard raises of $6.1 million and $6.4 million, respectively, and, instead, rather massively, to as much as $23.6 million and $24.4 million, respectively. To make an offer with a raise beyond the standard $6.1 million in the third year, the offering team would need to fit the average payout of the entire contract within its available cap space for this summer. That’s a total of up to $59.5 million ($14.9 million on average).

If Johnson were to sign an offer sheet with any other team, the Heat would have three days to decide whether to match. During those three days, the offer sheet would subtract cap space from the team offering it — in the amount of $5.6 million if the payout in the third season is the standard $6.1 million or less, and at the average of all years of the contract if the third season payout is beyond the standard $6.1 million – but would still only subtract cap space from the Heat in the amount of the $1.2 million qualifying offer.

If the Heat were to match, the cap hits would be equal to Johnson’s payouts. If they were to decline to match, the other team’s cap hits would depend on the type of contract executed. If the contract contains the standard bump in the third year (to no higher than $6.1 million), the cap hits would be equal to his payouts. But if the third year payout is greater than the standard $6.1 million, the cap hits in each season of the new contract would be equal to the average salary over the life of the contract. In the latter case, because the salary cap is projected to jump so high in both the 2016-17 and 2017-18 seasons, to $92 million and $107 million respectively, the Heat would gain the advantage of maximizing cap space for each of the next two summers before the large increases in his cap hits kick in, while the offering team’s cap-maximizing advantages would come in seasons during which the cap is projected to normalize, at which point the attractiveness of the lower cap hit would be mitigated by the fact that the team would actually owe a much higher salary payout.

The earliest Johnson can sign an offer sheet is July 7, which means the Heat would have at least until July 10 before it needs to take any action with Johnson. The Heat can start negotiating with free agents on July 1. Therefore, if Miami times everything correctly, at a cost against the cap for Johnson of just his $1.2 million qualifying offer amount, it can utilize all of its cap space elsewhere before deciding whether or not to exceed the cap in matching a potential Johnson offer sheet.

Because such offer sheets subtract cap space from teams offering them (but not from teams deciding whether to match) for three days during a critical part of the offseason, teams generally hesitate to dole them out unless they have reason to believe the player’s prior team may not match.

The Heat will surely match whatever reasonable contract any other team would offer. Therefore, while it could prove more financially lucrative for Johnson to accept another team’s offer sheet (a payout of up to $59.5 million) and cause the Heat to match it than for Johnson to sign with the Heat directly (a payout of up to $27.6 million), another team signing Johnson to an offer sheet would be unlikely unless it is willing to pay out such a large amount that it is confident the Heat simply will not match.

Third, Johnson can accept his $1.2 million qualifying offer.

If Johnson proves unhappy with the contracts he is able to solicit from both the Heat and other NBA teams, he can simply accept his $1.2 million qualifying offer and play under its terms for one season.

At the end of that season, the Heat could again make Johnson a restricted free agent. Johnson, however, would then be in a position to solicit any contract, up to the max, on the open market in the summer of 2017. At that time, based on current league projections, Johnson’s maximum first-year salary would rise to a whopping $25.2 million, with a full max contract paying out up to $107.9 million.

Such an approach, however, would require Johnson to have a tremendous belief in his future earning power, so much so that he is willing to take the risk of signing a single-season below market contract and forgo as much as a guaranteed $27.6 million or more to have the opportunity to get it. Johnson doing so is possible, but unlikely.

***

Johnson’s most likely outcome is perhaps to re-sign with the Heat for four additional years, at an amount no greater than $27.6 million. But with some much cap space around the league, and so few quality players on which to spend it, it is certainly possible that a team could offer him more and require the Heat to match.

Whatever happens, this much is clear: If the Heat want him back, he’ll be back. Maybe on a one-year, $1.2 million deal if he accepts his qualifying offer. Maybe on an up to four-year deal paying out as much as $27.6 million in a direct signing with the Heat. Or maybe on a four-year deal paying out up to $59.5 million signed with another team, which the Heat would be given the chance to match. Which option is yet to be determined.

Notes:

(1) The Heat can technically give Tyler Johnson a starting salary higher than $6.2 million (in fact, all the way up to the $21.6 million max) but doing so would require it to utilize cap space. Given its limited cap space and the restrictions Johnson faces on the open market, doing so would be unnecessary. It won’t happen.