Breaking Down James Harden’s Renegotiation and Extension

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Heading into the 2016-17 NBA season, extensions for veteran players had all but vanished for several years — the result of changes to the league’s Collective Bargaining Agreement that make it more beneficial for players to finish out their existing contracts and enter free agency thereafter, even if they plan to re-sign with their prior teams.

The rapidly rising salary cap – which has reached an all-time record $94.1 million this season, a whopping 34.5 percent increase from $70 million in 2015-16 – has, however, created a short-term opportunity for teams to leverage intricate salary cap rules to offer key players extensions that, in some cases, can be too tempting to pass up.

Many teams are finding themselves with more salary cap space than quality free agents on which to spend it. For these teams, that cap space can be used to simultaneously renegotiate and extend the contracts of its key players, giving them more up-front money in exchange for more seasons under team control.

This is exactly what the Houston Rockets elected to do with its key player, James Harden, in what to this point has been the most intriguing utilization of cap space thus far this summer.

Contract renegotiation is a concept largely attributed to various other sports. Only very rarely do they occur in the NBA. They can only occur on or after the third anniversary of the original signing date of a contract (or extension or renegotiation), and they can only increase a player’s salary. To do so, a player’s team must have salary cap space to cover the full amount of the proposed increase.

Heading into this season, Harden had two seasons remaining on his contract — $16,784,032 for this season, and $17,811,626 for next.

Though he signed a “maximum” five-year rookie-scale contract extension in October 2012 that ran through the 2017-18 season, the subsequent jump in the salary cap meant that he was set to earn far less than his current maximum salary for this season. 

Maximum salaries are calculated based on a percentage of the salary cap. There are three levels, depending upon a player’s tenure:

  • A player with 0-6 years of experience can make up to 25 percent of the salary cap
  • A player with 7-9 years of experience can make up to 30 percent of the salary cap
  • A player with 10+ years of experience can make up to 35 percent of the salary cap

Harden is currently a seven-year NBA veteran, which qualifies him 30 percent of the cap, or $26,540,100.

How big is that $26,540,100 max salary figure?

A whopping $9,756,068 bigger than what Harden was set to make.

With the Rockets possessing more than enough cap space to accommodate a potential increase in salary that large, and with more than three years having passed since the October 2012 signing date of his extension, Harden’s contract qualified to be renegotiated such that his current salary would increase all the way up to his maximum salary. That, ultimately, is exactly what happened.

Let’s break down Harden’s new contract year by year, to see exactly how it was calculated within the confines of NBA rules.

Salary in first renegotiated season (2016-17):

Rule: Player’s existing salary can be increased by up to the lesser of: (i) the team’s cap room and (ii) the amount which takes his salary to the maximum.

Details: The Rockets, at the time, had $10,299,539 of cap space remaining, but an increase of only $9,756,068 was required to increase Harden’s salary to the maximum. Therefore, the $9,756,068 increase applied.

Calculation: $16,784,032 (existing salary) + $9,756,068 (increase) = $26,540,100 total.

Salary in second renegotiated season (2017-18):

Rule: Player’s renegotiated salary is equal to his existing salary, plus the salary increase in the first renegotiated season, plus or minus up to 7.5 percent of the salary increase in the first renegotiated season.

Details: The Rockets gave Harden the maximum 7.5 percent increase.

Calculation: $17,811,626 (existing salary) + $9,756,068 (first renegotiated season increase) x 107.5 percent = $28,299,399 total.

Harden’s new salaries for the next two seasons are locked:

2016-17: $26,540,100 (a $9,756,068 increase)
2017-18: $28,299,399 (a $10,487,773 increase)

In addition to his renegotiation, Harden agreed to an extension.

Veteran extensions are limited to four seasons, including the seasons remaining on the current contract. A contract with two seasons remaining, as has Harden’s, may therefore be extended for up to two additional seasons.

Harden agreed to the full two-season extension, but with the final season subject to a player option.

Salary in first extended season (2018-19):

Rule: Player’s extended salary can vary widely; anywhere from the lesser of: (i) the maximum salary and (ii) between 60 percent and 107.5 percent of the player’s prior salary.

Details: The Rockets gave Harden 107.5 percent of his prior salary. However, his salary cannot be greater than what his 2018-19 maximum salary will otherwise become. He’ll be a nine-year veteran then, eligible for up to 30 percent of the salary cap.

The NBA’s latest update, provided two weeks ago, calls for a projected 2018-19 salary cap of $108 million. That should be considered a rough estimate, which could increase or decrease substantially. However, if it proves correct, the maximum salary for a player who qualifies for up to 30 percent of the salary cap would be $30.4 million. With that in hand, let’s calculate.

Calculation: $28,299,399 (Harden’s prior salary) x 107.5 percent = $30,421,854 total.

Because the league cannot know what the 2018-19 salary cap will be, and thus the maximum salary for a player of his tenure will be, Harden’s 2018-19 salary can only be estimated. It will be no greater than $30,421,854, but can decline. Based on current max salary projections of $30.4 million for 2018-19, however, it doesn’t figure to do so.

It will decline, though, if the 2018-19 salary cap ultimately comes in below $108 million. How far down can it go? According to league rules, a player’s maximum salary in his first extended season can be no less than 105 percent of his salary from the prior season. That’s $28,299,399 x 105 percent = $29,714,369 total.

Thus, Harden has temporarily secured himself $30,421,854. It can’t go any higher. It can go lower if the projected 2018-19 salary cap falls from its $108 million current projection, but not any lower than $29,714,369.

Salary in second extended season (2019-20):

Rule: Player’s extended salary is equal to his prior salary, plus or minus up to 7.5 percent.

Details: The Rockets gave Harden the maximum 7.5 percent increase.

Calculation: $30,421,854 (Harden’s estimated 2017-18 salary) x 107.5 percent = $32,703,493 total.

Thus, Harden has temporarily secured himself $32,703,493. It can’t go any higher. It can go lower if the projected 2018-19 salary cap falls from its $108 million current projection, but not any lower than $31,942,947.

***

Harden’s new contract therefore looks as follows:

2016-17: $26,540,100 (a $9,756,068 increase)
2017-18: $28,299,399 (a $10,487,773 increase)
2018-19: $30,421,854 (estimated, but no lower than $29,714,369)
2019-20: $32,703,493 (estimated, but no lower than $31,942,947, and subject to a player option)

Was this a good deal for Harden?

Over the next two seasons, Harden will now receive an extra $20,243,841. It’s locked in. It’s his money. That’s awesome.

In the third season (2018-19), Harden’s gets between $29,714,369 and $30,421,854 in salary, depending upon the value of the salary cap that season. Those amounts could ultimately work out as higher, equal to or lower than the maximum payout he would have otherwise been able to achieve as a free agent that summer. Based on the current $108 million cap projection for 2018-19, he would get the higher $30.4 million payout, which would be equal to the maximum salary he would otherwise have been able to get as a free agent that summer.

The beauty of this extension for Harden is that it provides him not only the updated maximum payout in each of the next three seasons but also the ability to opt out prior to the fourth season (2019-20). He will be a 10-year veteran at that point, eligible for the more elevated maximum salary tier equal to 35 percent of the salary cap. That equates to a payout of $35.8 million based on the league’s current $109 million cap projection, well in excess of his current $32,703,493 projected payout. And still at just 29 years old, there’s every reason to believe he could get it. As things currently stand, therefore, an opt out seems inevitable.

Was this a good deal for the Rockets?

The Rockets already had Harden under contract through the 2017-18 NBA season. As a result of the deal, Houston is now assured of keeping its star player for one additional season (through 2018-19).

The cost of that additional season, however, is substantial: When including the increased salary for each of the next two seasons, it comes to a total of $50,665,695.

Is one extra season of James Harden worth what is effectively a frontloaded $50,665,695?

It’s not a question that can be answered in a vacuum, but rather in connection with the options for that money that are no longer available.

What might have the Rockets done with an extra $9,756,068 this season? Not much, perhaps, other than pocket the savings. With an upcoming signing of Donatas Motiejunas likely, Houston figures to have been over the salary cap and under the luxury tax either way.

What might have the Rockets done with an extra $10,487,773 next season? Adding that to the cap space the Rockets currently project to have for next summer gets you, based on current salary cap projections, to at least $24 million before accounting for Motiejunas’ new deal, with millions more to potentially be created by jettisoning then expiring contracts. That’s max salary money in what figures to be an exceedingly strong, star-studded free agency summer.

What that could’ve attracted in free agency with all that cap space next summer, we may never know. But it makes you wonder whether the renegotiation and extension was as wise for the Rockets as it was for Harden.

 

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