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Clearing Up Some Sign-and-Trade Confusion

July 9th, 2010 3 comments

The following was reported today in the South Florida Sun Sentinel:

Should the Heat be able to pull off the maneuver, it would give Heat President Pat Riley unlimited resources to re-sign remaining current Heat free agents such as Udonis Haslem, Dorell Wright and Quentin Richardson — whichever are not included in such a sign-and-trade — without having to make those agreements work within the confines of the NBA’s “soft” salary cap.

In addition, such a maneuver would allow the Heat to retain its mid-level salary-cap exception for 2010-11, which it then could utilize to complete its planned signing of Washington Wizards free-agent swingman Mike Miller.

For the benefit of any dual readers who would certainly be confused and prematurely excited, allow me to clarify this ridiculous and impossible scenario.

Read more…

Breaking down the trade bonus

June 20th, 2010 3 comments

Well, I didn’t get many readers yesterday. So today I will offer this somewhat less stimulating post on the impact of trade bonuses for the technically savvy few who happen to care. After all, in my heart I enjoy helping to explain the intricacies of the salary cap most.

There seems to be a common perception floating around that Turkoglu, after a forgetful season in Toronto, is washed up. The perception is that he is an aging malcontent, whose inflated salary will be a boon the Raptors for the next four seasons. For a man over thirty years of age with just one solid regular season under his belt, it’s reasonable to understand why. But perhaps it’s just a little harsh for man who produced such a wonderful 2009 NBA Finals.

When Turkoglu arrived in Toronto, having turned away the Trail Blazers in his wake, he received a hero’s welcome. And for good reason. He had just completed an NBA Finals run during which he averaged 15.8 points, 4.5 rebounds, 4.8 assists, not to mention his crunch-time leadership, game-winning shot-making and one impressive block from behind on Kobe Bryant. He even the Heat’s own Dwyane Wade pushing to grab him for mid-level money.

Things soured quickly. Turkoglu showed up to training camp overweight and out of shape, and never seemed eager to do much of anything. By the end of the season, he finished with just 11.3 points per game, far and away his fewest over the past six seasons, on just 41% shooting. Turkoglu was unhappy, the fans were booing him, and management was left with the shame at having grossly overvalued him on the free agent market.

The end result wasn’t necessarily an indication of what Turkoglu may be able provide a team next season, if he were to be put in the right situation. But for any of us holding out any lingering hope of acquiring the 6’10” point-forward, I would have you consider his contract. Read more…

The True Cost of Extending

June 9th, 2010 4 comments

Christopher Reina, executive editor of RealGM, published this article yesterday – suggesting that free agency will cost each member of Wade/James/Bosh trio millions of dollars.

Huh?

If it didn’t shock the heck out of you, it should have. Because it’s wrong!

The minute Wade becomes a free agent, deciding against exercising his player option with the Heat in order to sign an extension, he will be leaving money on the table. This is true. But only in the first year, and only in the amount of $580,335. Every year thereafter, this number begins to shrink. Until year four, when it vanishes completely.

There is no mysterious $1.9 million cost. It doesn’t exist. Forget you ever read it.

I’m guessing most of you don’t care why. But if you’re curious, click away… Read more…

Categories: Learning Tags:

Calculating the Salary Cap

June 5th, 2010 No comments

We’ve all been operating under the assumption of a $56.1 million projected salary cap, which was provided by Commissioner Stern prior to the playoffs. How did he come by that figure?

During July Moratorium, the league will project both basketball-related revenues (“Projected BRI”) and player benefits for the upcoming season. They will then look at the previous season’s Projected BRI to see if it was below the actual results (“BRI”). They will use these two data points to calculate the salary cap.

The league will take 51% of Projected BRI, subtract projected benefits, and make adjustments if the previous season’s BRI was below projections. They will then divide the result by the number of NBA teams to arrive at the cap.

( Projected BRI * 51% – Projected Benefits – (Projected BRI – BRI from last season, only if positive) ) / 30

This season’s BRI is almost certain to fall below original projections. I estimate that last July the league projected BRI growth of 1.6%. At the same time, they issued a warning that BRI could fall as much as 5%-10%, leading to original salary cap forecasts of $50.4 million to $53.6 million. The revised BRI decline of 0.5% then led to a bump in forecasts to $56.1 million.

Why would the league forecast BRI growth of 1.6% and issue a warning it could fall by as much as 10% at the same time?

The answer lies in how Projected BRI is determined. Read more…

Categories: Learning Tags:

Exceeding the Salary Cap

June 1st, 2010 2 comments

Given the constraints imposed by the number $56.1 million, we’re all searching for ways in which the collective bargaining agreement would allow the Heat to exceed the salary cap.

There are four primary mechanisms which the Heat will be able to utilize to exceed the cap: Read more…

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Q&A: Under-the-table-agreements

May 27th, 2010 No comments

The following question to Ira Winderman has piqued some interest from my shockingly tiny reader base:

“In all your posts, you are undermining and flat out discarding one very real possibility for the Heat to round out the roster. That is, for veterans like U.D., J.O. and Q, and even possibly Dorell, to sign a one-year minimum deal and keep their Bird Rights.”

It is easy to understand the connotation behind this question, though it is not explicitly stated. The concept would be for the Heat to sign any or all of the players mentioned to one-season minimum contracts. Doing so would allow the Heat to maximize cap space this summer and, with Bird rights intact, exceed next year’s salary cap to grant them significant raises for their troubles.

While this is quite a creative concept, the premise is inherently flawed.

This approach is illegal. Teams are not permitted to make direct agreements with a player that are not reported to the league. If they do, the penalties can be severe. Such a violation is considered by the league to be among the most serious a team can commit. A violation can result in a fine of up to $5.0 million, forfeiture of draft picks, voiding of the player’s contract, and/or the suspension for up to one year of any team personnel who were involved. In addition, the player himself can be fined up to $100,000, and prohibited from ever signing with that team.

You might be saying to yourself that the easier solution would be to report the agreement to the league in order to avoid any allegations of wrong-doing. Future contracts, however, are also illegal.

You might also be saying to yourself the league would never find out. This is very risky business – particularly for complementary players – with the penalties being so severe.

In the summer of 1999, the Minnesota Timberwolves tried this approach with Joe Smith. Smith left the Philadelphia 76ers to sign with the Timberwolves. The two sides made an under-the-table agreement that Smith would play under three consecutive one-year contracts at below market value ($1.75 million, $2.1 million and $3.6 million), and the Timberwolves would reward him by using their Bird rights to sign him to a much larger contract beginning with the 2001/02 season (reportedly worth between $40 and $86 million over seven years, dependent on performance clauses).

The league discovered the arrangement the following season, and responded by fining the team the maximum (at the time) $3.5 million, taking away their next five draft picks (two were later returned), and voiding Smith’s then-current contract. Owner Glen Taylor and GM Kevin McHale also agreed to leaves of absence (in lieu of suspensions). Most interestingly, the league also voided Smith’s two previous, already-completed contracts. This essentially stripped the Timberwolves of any Bird rights to Smith.

If Riley were to be found in violation, leniency would not be something that would be afforded. Pat has a history of violations of league rules. Read more…

The Sign-and-Trade Approach

May 9th, 2010 No comments

You may not realize that the Miami Heat will start the offseason with a team salary in excess of the new salary cap threshold. This is caused by intangible charges, called “cap holds,” created by the Heat’s own free agents.

The Heat can very easily get rid of these cap holds in order to create the huge cap space we’ve all been reading about, but does it want to?

While teams with cap space can only spend up to the amount of the salary cap, teams that are over the cap are virtually unlimited in what they can spend through trade.

But the Heat only has two players, Michael Beasley and Daequan Cook, under contract. It doesn’t really have anybody to trade.

Enter the concept of the sign-and-trade.

You may have heard local beat writers discussing the possibility of sign-and-trade agreements as a means for the Heat to increase the total amount of dollars it can spend. They’re right. And they’re wrong. Let me explain. Read more…

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Mechanics Behind the Miami Heat Vision

January 29th, 2010 No comments

Fans are frequently tripped up by the idea of cap room. The premise is pretty straightforward – there’s a salary cap, and if the team’s payroll is at or above this amount, they don’t have any money to spend on free agents. But if they’re below it, they do. In practice it’s not so simple. Teams below the cap typically have less cap room than it might appear, and can actually be considered to be over the cap. Let’s take a look at how all this works.

First the basics: the NBA has a “soft” cap, which means teams can be over it and still function – albeit with restrictions. In fact, a team being over the cap (especially during the season) is far more common than being under it. There are mechanisms called exceptions which allow teams to sign players or make trades while they are over the cap. For example, the Mid-Level exception allows teams over the cap to sign a player or players for up to five years starting at the league average salary. Another well known exception is Bird rights, which allow teams to re-sign their own players while they are above the cap.

The system is designed so that teams may have either cap room or exceptions, but never both at the same time. In order to accomplish this, the league applies the following rules:

  • When a team is below the cap, they add additional amounts to their team salary. This includes the value of any unused exceptions, the scale amount for any unsigned first round draft pick, a cap hold for any free agent to which the team has Bird rights, and a charge equal to the rookie minimum salary for any roster spots fewer than twelve otherwise unaccounted for. This keeps the team from using its cap room on other teams’ free agents, spending right up to the salary cap, and then using their exceptions to spend above the cap. A team really has cap room only when their payroll and all these extra charges add up to a value that is below the cap.
  • An exception is a mechanism that lets a team function while they’re over the cap – a concept that doesn’t apply when the team is below the cap. So if the team is ever far enough under the cap that their payroll plus all these added charges are still under the cap, then they don’t get their exceptions. If they start out above the cap per these rules and they later drop below the cap, then they lose any unused exceptions.
  • A team can renounce its exceptions or free agents at any time. By renouncing an exception a team gives up its right to use that exception, but potentially gains an equivalent amount of cap room (if the team is under the cap without the exception). When a free agent is renounced the team clears the player’s cap hold off their books, but gives up its right to sign the player using the Bird exception.

Let’s look at how these cap rules will apply to the Miami Heat this summer, assuming the cap comes in at the current $56.1 million estimate.  Read more…

Categories: Commentary, Learning Tags:

How Bird Rights Work

January 17th, 2010 No comments

In 1983, with the health of the league in serious doubt with numerous franchises suffering from significant losses, the N.B.A. gained a great deal of attention due to its ground-breaking Collective Bargaining Agreement (CBA), which instituted a salary cap for the 1984-85 season that guaranteed the players between 53% and 57% of the N.B.A.’s gross revenues (gate receipts, local and national television and radio revenue and preseason and postseason revenue). Neither the National Football League, nor the National Hockey League, nor Major League Baseball had a salary cap at the time.

While the most intuitive form of a salary cap was a “hard cap,” in which there is a set limit to how much teams can spend on salaries that cannot be exceeded for any reason, the N.B.A. instead adopted a “soft cap.” The “soft cap” allowed teams to exceed the cap (which was initially set at $3.6 million), but only under certain circumstances.

The basic idea of the soft cap was to promote players’ ability to stay with their current teams. Nobody likes it when a player plays with a team his entire career, the fans love him, he wants to stay, and the team wants to keep him, but he has to leave because the team is unable to offer him a large enough contract.

The league figured that it would be better for teams to be able to retain their stars if they so chose. Rather than force teams to let their players leave simply to stay under the cap, they instituted exceptions to the soft cap that would allow them to keep their players under these kinds of circumstances. They could do so either directly, by giving their own free agents contracts that exceeded the cap, or indirectly, by matching offer sheets given to their free agents by other teams.

The 1983 agreement would prove to be a major turning point for the league, and brilliant young players like Magic Johnson, Larry Bird and Michael Jordan excited the fans.

While the exception was technically called the “Qualifying Veteran Free Agent Exception,” the exception has long since been referred to as the “Larry Bird Exception,” as it was supposedly developed so that Larry Bird, a free agent after the 1983-84 season, could be re-signed by his team, the Boston Celtics.

That might very well have been the intent of the rule (to specifically make sure that Larry Bird did not have to leave the Boston Celtics). However, the rule was not actually used on Bird! At least not back then!  Read more…

Categories: Learning Tags: ,

Understanding the Charges

January 15th, 2010 No comments

After a wild ride through a doomsday scenario that would have made it impossible for the Heat to achieve its goal of acquiring thee maximum contract free agents this summer, things have somewhat stabilized.

The economy is slowly bottoming. Salary cap projections for next season are slowly rising.

The cap is still, by all accounts, expected to fall from this season’s $57.7 million level. But agents who have been briefed on updated financial figures now are using $54 million as their operating number, a stark improvement from previous league-issued projections as low as $50.6 million.

Unfortunately, the upcoming drop in the salary cap will not take the maximum salary amounts for the league’s most coveted free agents with it.

Max salaries are determined as a percentage (either 25, 30, or 35 depending upon a player’s tenure) of the cap (1). Therefore, when the cap declines, so too do all the maximum salary calculations. But there’s a fail safe. A free agent’s maximum salary in the first year of a new contract is never less than 105% of his salary in the last year of his previous contract. In this declining salary cap environment, the fail safe will apply to each of Dwyane Wade, LeBron James, Chris Bosh, and Amare Stoudemire.

The latter player is currently earning slightly more than the former three. So if the goal is to acquire the former three within the confines of the cap, we can already definitively know how much it will cost. Each player will command a salary of up to his $16,508,968 maximum. Add three together, and you get $49,706,724.

So for every dollar the cap declines, that’s one less dollar the Heat will be able to apply to the $49,706,724 goal.

There are plenty of teams positioning themselves to sign two maximum contract free agents, and plenty of them in desirable perhaps equally desirable markets – teams like the Knicks and Nets in New York, the Clippers in Los Angeles, and the Bulls in Chicago. What most differentiates the Heat from the pack is its potential to sign three.

The Heat only has on its books for next season Beasley’s $4,262,436 salary, Cook’s $2,169,857 salary, and Jones’ partially-guaranteed salary which can be reduced to $1,856,000 if he is waived. That’s a total of $8,288,293, producing a net difference of $45,717,707 at an assumed $54 million cap level.

Trade away Michael Beasley and it increases to $49,974,143.

So that’s it. Trade away Beasley and the Heat are sure to have enough cap space to sign three maximum contract free agents, right? Wrong.  Read more…