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The Death of The Free Agency Rebuilding Plan?

December 21st, 2016 Leave a comment Go to comments
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The NBA and the National Basketball Players Association announced last week that they have reached agreement on a new Collective Bargaining Agreement. If the deal is ratified by both sides, which is a formality, the league will be assured of labor peace for at least the next six years.

At the highest of levels, not much would change in the new deal.

The split of league-wide revenues will remain the same – the players will be virtually assured to receive a 51 percent share (as they are in the current agreement). The salary cap will be calculated the exact same way. The luxury tax will be calculated the exact same way, and teams will be penalized just as severely for crossing it.

Rather than pushing for sweeping changes, the NBA was clearly focused on one thing — stopping superstar players from leaving their teams in free agency. Since 2010, several top-tier players have left as free agents, including LeBron James and Chris Bosh (2010), Dwight Howard (2013), and Kevin Durant (2016). Carmelo Anthony (2011), Chris Paul (2011) and Kevin Love (2014) also forced trades under the threat of leaving their teams with nothing in free agency.

To stop the flow, the league created new rules that provide huge financial incentives for a select group of top-tier players to stay with their existing teams – rules with which the players (the union for whom was led by the players who would benefit the most) were more than happy to oblige.  

Designated Veteran Player Rules

In the NBA, all max salaries aren’t built equal. There are three levels based on a player’s tenure: those with 0-6 years of experience are eligible for up to 25 percent of the salary cap (a Tier 1 max salary), those with 7-9 years of experience are eligible for up to 30 percent of the salary cap (a Tier 2 max salary), and those with 10+ years of experience are eligible for up to 35 percent of the salary cap (a Tier 3 max salary).

The new deal will introduce a “Designated Veteran Player” concept, which will allow players who qualify to sign Tier 3 max salary contracts (that start at anywhere above 30 percent, but not greater than 35 percent, of the salary cap), even though they don’t meet the league’s tenure-based eligibility requirements for it. Such contracts must be for a full five-years, and can contain annual increases or decreases equal to 8.0 percent of the first-year salary. That’s up to an extra $6 million or so per year, relative to the Tier 2 max salary contract they’d otherwise get.

How big of an impact will that make?

Take Stephen Curry. He is going to be a free agent next summer. Under the new rule, the Golden State Warriors will be able to give him a new contract that starts at an NBA-record $36 million and totals $209 million over five years. If he wanted to sign with another team, the most he could get is a four-year deal that starts at $31 million and pays out $133 million. That’s a $76 million difference!

There’s simply no way he’s leaving that much money on the table – which means there’s no way any team has a realistic chance to poach him this summer.

And any player who gets one of these contracts can’t be traded for at least a year after signing it. So there’s no funny business allowed.

Of course, the new super-max contract will only be applicable to a few select players.

To qualify for it, a player must be entering his eighth or ninth season in the NBA (in the case of extensions) or have just completed his eighth or ninth season in the NBA (in the case of free agent signings), and must meet one of the performance criteria. Included on the list: Making one of the three All NBA teams in either the previous season or the prior two, winning Defensive Player of the Year in either the previous season or the prior two, or winning MVP in one of the previous three seasons.

You must also have never changed teams as a free agent. You could have only been traded during your first four years in the league. You must be a free agent (in the case of a free agent signing) or have one or two years left on your contract (in the case of extensions). And if it is an extension, three years have to have passed since you signed your original contract.

That’s a lot of restrictions. And not a lot of guys will qualify.

Only 15 players can be selected to one of the three All NBA teams each season, and the Defensive Player of the Year and MVP are likely to be among them. Now exclude those who don’t have the correct years of experience. Now exclude those whose contracts aren’t about to end. Now exclude those who changed teams as a free agent or were recently traded. There aren’t a whole lot left. In fact, if the same rules were in place last season, only three players would have qualified — Stephen Curry, Russell Westbrook and Kevin Durant.

But if so few players qualify, is it fair to say that the rule won’t have a material impact on free agency as a whole?

Well… despite its limited applicability, it could still make it far more difficult for teams to rebuild through free agency.

The reasons are complex and varied.

Yes, the “designated veteran player” rules are limited. But if you’re a team maximizing cap room to make a run at a free agency rebuild, it’s often with precisely those players in mind. That alone could change your strategy.

Stephen Curry: Gone. Off the summer of 2017 free agent market. If he was part of your plan, that plan must now change.

Then there are the guys who don’t qualify, but think they might qualify in the future.

Take Gordon Hayward. He’ll be a prized free agent target this summer if he declines his $17 million player option. He would only have seven years of experience. He would need to have eight to qualify for a “designated veteran player” free agent contract. So all thirty teams could have a shot at him. But Hayward could qualify for the pay bump after either of the 2017-18 or 2018-19 seasons. But only if he stays with the Utah Jazz (and only if he is coming off an All NBA team selection). Which could entice him to sign a two-year max deal, which has an opt out after one year, with the Jazz this summer. That would give him $31 million next season and the right to shoot for a five-year deal paying out a projected $219 million with the Jazz next summer if he makes All NBA next season (a total of $247 million over the next six years), or $64 million over the next two seasons and the right to shoot for a five-year deal paying out a projected $231 million with the Jazz in the summer of 2019 if he makes All NBA in the 2018-19 season (a total of $296 million over the next seven years). That’s massively more than any other team could offer!

Wait. What just happened? A player who doesn’t even qualify for a “designated veteran player” contract has removed himself from free agency this summer because he might qualify in future summers.

Blake Griffin is another highly-coveted star player who might not qualify for a “designated veteran player” contract this summer, thanks to a knee injury that could cost him All NBA honors this season. But he could qualify next season. He, too, could take himself off the free agent market and re-sign with Los Angeles on a one-and-one deal if he believes he could snag All NBA Honors next season and that the Clippers would then give him the super-max deal for which he would then qualify. (Though, after tearing menisci in both of his knees, fracturing his left patella, and now having some of the shorn-away articular cartilage in his right knee cleaned up, I might hesitate before giving it to him.)

Gordon Hayward and Blake Griffin: Potentially gone. Off the summer of 2017 market.

Then there are the guys who don’t even make it to free agency.

It’s very difficult to make an All NBA Team. If you’re someone who does make it (and you otherwise qualify), you could be enticed to immediately push for a “designated veteran player” extension before you de-qualify. Your reasons for locking in your contract before you have a chance to have some fun with free agency could be as varied as you can imagine – injury, lack of performance, bad judgement by the selection committee, a concentration of stars who play the same position, you know you got lucky, etc.; any one of them could leave you off an All NBA team the following season, and de-qualify you for the super-max.

How enticing could the chance to lock in a “designated veteran player” extension before you de-qualify be?

Consider Gordon Hayward again. I previously made an assumption that he would decline his $17 million player option, because it’s way below his potential $31 million max. But if he were to make All NBA this season, which would be the first of his career, he could actually be tempted to exercise that option by his June 29 deadline. Why? Because while it wouldn’t qualify him for a “designed veteran player” free agent contract in July, it would qualify him for a “designated veteran player” extension. He’d be sacrificing as much as $14 million next season, but would lock in a five-year contract that kicks in for the 2018-19 season and pays out $219 million. Without the extension, if Hayward were to miss out on a second-consecutive All NBA honors, the five-year contract he’d be able to sign next summer would be reduced to $188 million. The most any other team could offer would be $139 million over four years. It could well be worth it to Hayward to sacrifice $14 million next season in order to protect the extra $31 million (with the Jazz) or $80 million (with any other team) thereafter(1).

Paul George, who is under contract through 2017-18 (with a player option for 2018-19), would also qualify to sign “designated veteran player” extension this summer if he makes an All NBA team this season. The extension would enable him to secure an additional five years and $219 million, which would start with the 2018-19 season. That’s $80 million more than any other team could offer in free agency in the summer of 2018. Best of all, it wouldn’t matter if he didn’t make All NBA next season, before the extended term kicks in. That could be a huge relief for him. Particularly after watching what happened with Anthony Davis last year. Davis is perhaps the best player in the NBA, and he lost his super-max to injury. Something to which George has been prone.

And even if he doesn’t make All NBA honors this season, George would have the same opportunity in the summer of 2018 if he makes all NBA honors next season.

And the whole sign-the-super-max-extension-before-you-de-qualify thing can come at you from multiple angles.

DeMarcus Cousins, who is under contract through 2017-18, could actually be incentivized to sign a five-year, $219 million “designated veteran player” extension this summer that would kick in for the 2018-19 season if he doesn’t make an All NBA team this season. He would still qualify for the super-max extension this summer because he’s earned it in each of the past two seasons. But if he doesn’t make All NBA honors this season and he doesn’t sign super-max extension this summer, he would no longer qualify if he were to again miss All NBA honors again next season.

Cousins could very well sign a five-year, $219 million “designated veteran player” extension this summer even if he does max All NBA honors this season (thus ensuring he would qualify for the exact same “designated veteran player” free agent contract one year later), if only just to lock in his massive guaranteed payday. The most any other team could give him: four years, $139 million. That’s an $80 million difference!

And the list of potential super-max extension eligible players expands even further in the summer of 2018.

Kawhi Leonard could qualify for one. So could Kyrie Irving. As could Jimmy Butler. Each would be eligible for a five-year, $231 million “designated veteran player” extension that would kick in for the 2019-20 season. Other teams could only offer four years and $147 million, and only in free agency a full year later. That’s an $84 million difference!

So could either Klay Thompson or Draymond Green. But not both. The new rule only allows two such players per team. With the Warriors presumably giving one to Curry, perhaps they’ll give the other to the one who makes All NBA(2).

Paul George and DeMarcus Cousins: Potentially gone. Off the summer of 2018 market.

Kawhi Leonard, Kyrie Irving, Jimmy Butler and Klay Thompson: Also potentially gone. Off the summer of 2019 market.

Then there’s the guys who wouldn’t financially benefit from the “designated veteran player” rules, but the rules would allow them to lock in their contracts sooner – eliminating the risk of waiting.

Russell Westbrook can become a free agent after the 2017-18 season. He wouldn’t qualify for a “designed veteran player” contract in the summer of 2018. But it doesn’t matter. He’ll be a 10-year veteran by then. He’ll meet the NBA’s tenure requirement to sign the very same Tier 3 max contract — five years, $219 million that starts in 2018-19 and runs through 2022-23.

But Westbrook will qualify to sign a “designated veteran player” extension this summer. It would start with the 2018-19 season, and it wouldn’t give him any more money than if he had waited to sign the contract as a free agent in the summer of 2018. But he would be able to lock it in one year early. For a player who throws his body around as he does, that could be a major enticement.

James Harden can do the same thing. He can become a free agent after the 2018-19 season. He wouldn’t qualify for a “designed veteran player” signing in the summer 2019. But it doesn’t matter. He’ll be a 10-year veteran by then. He’ll meet the NBA’s tenure requirement to sign the very same Tier 3 max contract — five years, $231 million that starts in 2019-20 and runs through 2023-24.

But Harden can lock in that same contract via the “designated veteran player” rules in the summer of 2018. In fact, he can lock in a shorter “designated veteran player” extension as early as this summer — four years, $179 million that starts in 2019-20 and runs through 2022-23. He’d be giving up some big money on the back end (that forgone year would pay out an estimated $53 million) but, then again, it’s hard to complain about $237 million over the next six years (when adding the two years and $55 million remaining on his existing deal to the four years and $179 million he’d be getting).

Russell Westbrook and James Harden: Also potentially gone. Off the 2018 and 2019 markets, respectively, if they want to eliminate their risk.

Round everyone up and it totals to a ton of players, the exact players a rebuilding team would potentially target in free agency, that could now be gone if they negotiate super-max deals with their current teams. Of course, that they CAN now get five-year super-max deals is certainly no guarantee that they WILL get them. But it would be a major incentive for them to stay!

These guys could potentially demand trades, in certain circumstances. But the threat these players would levy of leaving in free agency could be far less credible, and far more expensive for the player. Teams aren’t obligated to trade anyone. They could always refuse, and force the player to decide for himself whether he’s unhappy enough to give up all that extra money. There aren’t many who will pass it up!

***

The new “designated veteran player” rules have a ton of implications – and not only for those players who qualify or think they might qualify, but also for how top players structure their previous contracts to prepare them to qualify.

First-round draft picks will surely be considering these new rules as they structure their post rookie-scale deals.

Some could choose full five-year deals, with an opt out after four that would qualify them for a “designated veteran player” Tier 3 max contract if they meet the performance requirements.

Others might be tempted to sign four-year deals that would qualify them for “designated veteran player” deals if they meet the performance requirements, but with an opt-out after three if they feel they won’t get it – which would still set them up for a Tier 2 max deal as a seven-year veteran.

None of the better players will be signing three year post-rookie-scale deals anymore.

Particularly intriguing is how the new “designated veteran player” rule will interact with the existing “designated player rookie scale extension” and corresponding “Fifth Year 30% Max” rules.

The “designated player rookie scale extension” rules allow a team to designate up to two players to receive five-year extensions coming off their rookie-scale contracts.

The “Fifth Year 30% Max” rules allows players with four years of experience to sign Tier 2 max salary contracts (that start at 30 percent of the salary cap), even though they don’t meet the league’s tenure-based eligibility requirements for it, if they meet the same performance criteria listed above. The contracts must be between four and five years.

The league has structured the new rules to seamlessly integrate into existing rules to ensure top-level players are always ahead of the curve with their pay, but only if they remain with their existing teams. A first-round draft pick would sign a four-year rookie-scale contract. He could then transition right to a five-year “designated player rookie scale extension” (and even tack on the super-max salary bump to a Tier 2 max contract if he meets the “Fifth Year 30% Max” performance qualification). He could then transition right into a five-year “designated veteran player” extension if he qualifies. He could wind up being with his team for 14 years, potentially without ever having hit free agency.

The league has also structured the new rules to better align these outsized payouts with a player’s prime productivity.

Why? The players who qualify for these contracts are only the very best in the NBA, players who without this new rule would likely target Tier 3 super-max deals in normal course as 10-year veterans. The new rule essentially frontloads these contracts by two years, which has a multiple positive ripple effects:

A player who enters the NBA at 19 would be 29 years old as he negotiates for a Tier 3 max contract as a 10-year veteran, which, if granted, would cover the five seasons from age 29 through age 34. With the new rule, the same player could achieve the Tier 3 max contract covering the five seasons from age 27 through age 32. That very likely covers more of the player’s prime, and less of the player’s post-prime, the point in time when these contracts become toxic.

A player coming off a designated veteran player contract will be at least 32 years old. Teams will be well-armed to refuse long-term deals, those that are most toxic, to players at that age.

So, while pushing a player’s ability to get a Tier 3 max contract forward two years makes that player more expensive, but it better aligns the higher payouts with his maximum productivity, and helps to alleviate the toxic nature of their tail ends.

But that’s not all the league did to help these top-level players.

Shifting From Over-36 to Over-38

It used to be that certain older players couldn’t sign a four- or five-year deal, if they were shooting for a max value payout.

The “Over-36” rules automatically frontloaded the cap hit of certain four- and five-year deals. They essentially removed the cap hits associated with those final years and instead allocated them over the first years. And with more of the cap hit getting added to the first year, it became impossible to get a max deal. The post-allocation cap hit in the first year would blow past the max, which isn’t legal.

For 32-year-olds, the Over-36 rules reallocated the fifth year of five-year deals. For 33- and 34-year-olds, it reallocated the fifth year of five-year deals, as well as the fourth year of four-year deals signed without Bird rights. For 35-year-olds, it reallocated the fourth and fifth years of any deals they signed.

Shifting the rule back two years, from Over-36 to Over-38, conveniently accommodates the likes of Chris Paul this summer and LeBron James and Carmelo Anthony next summer.

Chris Paul has said he’s gunning for a max deal this summer. Under the old rules, he’d be eligible for a four-year, $162 million deal with the Los Angeles Clippers – not a substantial difference from the four-year, $155 million he’d be eligible for with any other team. With the new rules, he’ll be eligible for an extra year. That’s five years and $209 million, or $48 million more than the 32-year-old can get with any other team. And unless you can see a team paying a 36-year-old $48 million (if it were even possible), he’s not going to make it up on the back end.

LeBron James gets the same benefit next summer. Under the old rules, he’d be eligible for a four-year, $162 million deal with the Cleveland Cavaliers. With the new rules, it’s five years and $219 million!

Of course, that they CAN now get five-year deals at or near the max is certainly no guarantee that they WILL get it. But they’re still performing at an elite level. Which could take them both off the market.

***

Enough of the real world. Let’s deal with a hypothetical world for a second.

Let’s walk through an example of how these rules can be combined to entice a future player to stay with the team that drafted him throughout his career.

The NBA raised its 2020-21 salary cap projection to $120 million yesterday, which represents 5.2 percent annual growth from its current $103 million projection for next season. That seems like a reasonable growth rate. Let’s assume the salary cap continues to grow at 5.0 percent each season for the purposes of our example. Let’s start with a new player. Let’s pretend his name is “Albert.”

Let’s say Albert is the top pick in the 2017 draft. His rookie-scale deal would pay him $37 million over four years. Let’s say he becomes a star – a perennial All NBA player.

Albert, having met the qualifying standard, could then elect to sign a “designated player rookie-scale extension” with a “5th Year 30 Max” salary bump that kicks in for the 2021-22 season: That’s 5 years, $219 million. He’s enticed to take it because the most he could get anywhere else is $135 million over 4 years.

Albert, having again met the qualifying standard, could then elect to sign a “designated player veteran extension” with a Tier 3 max salary bump that kicks in for the 2026-27 season: That’s 5 years, $326 million. He’s enticed to take it because the most he could get anywhere else is $207 million over 4 years.

As a result, Albert has now played 14 seasons in the league, potentially never once having hit free agency. He’s exceeded his wildest expectations. He’s won a few NBA titles. And he’s earned $583 million!

But he’s still just 32 years old. If he’s a Chris Paul type, he could shoot for one last five-year max deal, thanks to the Over-38 rule change. If he gets it, he could become the first player ever to cross the mythical $100 million per year in salary threshold. Total value of the contract over five years: $452 million.

Albert has now played 19 seasons. He’s 37 years old. And he’s earned nearly $1.1 billion!

To get it, he was enticed to stay with the team that drafted him his entire career!

***

Let’s get back to the real world.

Because of the new rules, Stephen Curry, Russell Westbrook, Chris Paul, Kyrie Irving, Klay Thompson, James Harden, Jimmy Butler, LeBron James, Gordon Hayward, Kawhi Leonard, Paul George, Blake Griffin, and DeMarcus Cousins could all potentially be taken off the market over the next three summers.

The younger stars will surely follow. Anthony Davis. Giannis Antetokounmpo. Karl-Anthony Towns. They’re next.

But even that’s not all.

The new CBA includes other changes that greatly impact lower-caliber players as well.

Other Changes

All players, not just the best players, can now sign extensions sooner (after two years under contract, versus three) and with larger payouts (first year salary of up to 120 percent of the greater of their previous salary and the league average salary, versus 107.5 percent of their previous salary in the current deal). So it’s not just the best players who could be enticed to stay off the free agent market. This could also have a huge impact on free agency.

And if that isn’t enough to make you feel it’s be much harder to acquire a premium player in free agency, there’s also the fact that your favorite team will now have less cap space to make it even possible. Maximum salaries are going up (as a percentage of the salary cap). Rookie-scale contracts to first-round draft picks are going up. The Mid-Level and Bi-Annual exceptions are going up. Minimum salaries are going up. Roster charges are going up. Cap holds to players who haven’t signed their rookie-scale contracts are going up. Cap holds to players coming off their rookie-scale contracts are going up. The financial incentives for teams to stay below the minimum team salary are going down. All of which will cause teams throughout the league to increase their payroll and operate with less salary cap space.

***

The league has wanted to go back to the “good ol’ days,” the way it used to be, for some time. More continuity. Less drama. Where star players remained with their teams for the entirety of their careers. Heck. It’s precisely why the NBA’s “soft cap” was invented.

They thought they were encouraging it in the last CBA — where punitive luxury tax rules made it prohibitively expensive for teams to retain multiple top-tier players. The theory being that if teams can’t afford to consolidate stars, players would be incentivized to stay with their existing teams.

They doubled-down on their approach this time around – in addition to making it just as punitive for teams to poach and consolidate stars, they made it far more lucrative for stars to remain with their existing teams. And, of course, given that the stars were the ones at the negotiating table, they were more than happy to oblige.

So what will happen?

Players will still get their 51 percent of revenues. But it’s a set payout each year. It’s a zero sum game. Stars will get more. So others will get less. There will still be several quality players available on the free agent market every summer, and they will still get paid a hefty sum. But many others will get left behind. Minimum salary players will get a huge raise (45 percent), but there will be far more of them.

Overall, there will be far less cap space available for rebuilding teams, and far fewer star players who become available to give it to.

If you’re a team planning to rebuild through free agency, what do you do?

That’s the way most teams want it.

That’s the way it will be.

Notes:

(1) On the other hand, the whole approach makes an inference which is illegal. Hayward would only exercise his option if he knew a super-max contract was coming the following month; it is not legal to discuss a future deal like that. It’s actually one of the most serious violations a team can commit. Which doesn’t mean it doesn’t happen all the time anyway.

(2) Draymond Green’s “designated veteran player” extension would kick in for 2020-21. If he were to sign it in the summer of 2018, it would pay out $188 million over four years. If he were to sign it in the summer of 2019, it would pay out $244 million over five years. That’s because a “designated veteran player” extension can only cover six total years, including years remaining on a player’s existing contract. Green would have two years remaining on his existing contract in the summer of 2018, and just one year remaining on his contract in the summer of 2019. 

  1. Jorge F
    December 22nd, 2016 at 07:23 | #1

    Albert…before your article I had the impression that the new CBA would negatively impact the Heat’s free agent options. After reading it, I am convinced that the rebuild will need to rely on the draft and player development. Considering that they don’t have a lot of future draft picks it might be a long dreary road ahead.

  2. December 22nd, 2016 at 09:31 | #2

    @Jorge F
    I would say that the new CBA only magnifies what is always a low-likelihood prospect. I think the prospect of relying upon acquiring a top-tier free agent for a rebuild is always dicey, and now is far more so. But there are several players who can help make this a solid playoff team.

    I tend to feel that what the Heat need most is better floor spacing. Serge Ibaka could potentially provide an intriguing (if not Bosh-level) combination of floor spacing and defense at the power forward position — enabling the Heat to run its primary offense through a Dragic-Whiteside pick-and-roll, with Johnson, Richardson and Ibaka to provide maximized floor spacing around it. Paul Millsap could be another available power forward option.

    Others seem to feel what the Heat needs is play-making. Rudy Gay could provide it at the small forward position. Danillo Gallinari could be another possibility.

    There are also trade scenarios and, as you mention, the draft pick.

    While it may be more difficult to acquire a star player in free agency, there is a path toward improvement.

  1. December 28th, 2016 at 03:12 | #1
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