The Curious Case of Greg Monroe

December 18th, 2014 No comments

According to NBA rules, Pistons center Greg Monroe is now eligible to be traded. According to the Sporting News, he wants that, badly. The Heat have reportedly made an initial inquiry.

But, according to the Sporting News, teams seeking Monroe will need to cough up a first-round pick, and that’s a serious sticking point. It’s a rich asking price for a player who will become an unrestricted free agent at the end of the season, at which point any team can sign him without sacrificing anything in return.

Under normal circumstances, that’d be ok. Because the audience would be different. In free agency, the audience for a player would be limited to teams with the necessary cap room to sign him. The audience for a player in potential trade scenarios might include a handful of teams which don’t project to have the cap space to sign him the following summer, and might be willing to pay a hefty price to gain access to the Bird rights which give them the opportunity to do so. Bird rights are what allow a player’s prior team to exceed the salary cap to re-sign him, for up to as much as a maximum salary. Under normal circumstances, Bird rights tag along with a player in trade.

But Monroe’s predicament is anything but normal.

Monroe, selected by the Pistons with the seventh overall pick in the 2010 NBA draft, completed the fourth and final season of his rookie-scale contract last year. Players coming off rookie-scale contracts can be made restricted free agents – a more restrictive form of free agency whereby the player’s prior team gains a right of first refusal to match a contract he signs with any other team – but only if they first issue a qualifying offer. The qualifying offer is a standing offer for a one-year guaranteed contract, which becomes a regular contact if the player decides to sign it. This ensures that the team does not gain the right of first refusal without offering a contract itself.

Monroe’s representatives steered other teams away from presenting Monroe with any offers last summer because they didn’t want the Pistons to match, and keep Monroe for another four seasons. Instead, Monroe accepted his $5.5 million qualifying offer. Now, after playing out his one-year contract, Monroe will have the freedom to pick his new team in July, and that’s what he wanted: control of his future.  Read more…

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Josh McRoberts Tears Right Lateral Meniscus, Possibly Out for Season

December 15th, 2014 No comments

Update (12/22/14): Josh McRoberts had the torn lateral meniscus in his right knee repaired (versus partially removed). A repair approach has a significantly longer recovery time, but much better long-term prognosis. The surgery will be season-ending. The Heat has applied for a $2.65 million disabled player exception. 

The Miami Heat announced that Josh McRoberts has torn the lateral meniscus in his right knee.

McRoberts injured the knee late in the fourth quarter of the Heat’s win in Phoenix last Tuesday when he fell awkwardly to the court while pursuing a loose ball. He is scheduled to undergo surgery this week, and could miss the rest of the season.

“This will not be a short-term thing,” head coach Erik Spoelstra said. “He’ll be out a while, if he even does make it back this season.”

Injury Overview

Each knee has two menisci, which are C-shaped wedges of fibro-cartilage positioned between the femur (thighbone) and the tibia (shinbone), one on the medial (inside) compartment of the knee and the other on the lateral (outside) compartment of the knee.

The mensci serve several functions:

  • They safely transmit loads across the knee, the most weight-bearing joint in the human body. The forces across the joint can reach up to two to four times your body weight while walking and up to six to eight times your body weight while running. The lateral meniscus bears more of the load than the medial meniscus.
  • They act as shock absorbers that protect the femur and tibia from constantly pounding into each other, thus maintaining the health of the articular cartilage that resides at the ends of both of these bones. Articular cartilage is what prevents bone-on-bone interaction as the knee is flexed and extended, called osteoarthritis, which can be excruciatingly painful.
  • They act as secondary stabilizers for the knee (in conjunction with the ligaments which connect the tibia and femur), protecting it from abnormal front-to-back motion.

Proper treatment of a meniscal tear is therefore vital, in order to maintain the structural integrity of the knee and to preserve the health of the articular cartilage.

There are two recognized surgical treatments for meniscal tear: repair and removal (i.e., meniscectomy).  Read more…

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A History of Tax Sheltering For Sports Team Ownership

November 24th, 2014 No comments

It all traces back to a September 1934 court ruling that settled a battle between the Pittsburgh Pirates and the IRS.

In those days, MLB contracts had a one-year term with a standard renewal option (called a “reverse clause”). The reverse clause gave the player’s team the right to renew the contract each year upon expiration at a salary to be negotiated between the parties. If they were unable to agree on a salary, the team could, within certain limitations, fix the player’s salary. Although the team could not force the player to accept the renewal, it did hold the exclusive right to his services and could prevent him from playing for any other team. The player was, in effect, bound to his team for his entire professional career. For teams exercising their renewal options, players effectively had two choices: accept or retire from the game of baseball.

Player contracts were therefore valuable assets, which were bought and sold for cash amongst MLB teams. For tax purposes, the Pirates expensed the cost of the contracts they bought in the year incurred.

The IRS disagreed. Its position was that the Pirates were purchasing not only the right to use the services of the player for a year, but also the right, at its option, to continue to use his services for the entirety of his career. Therefore, the cost of the contracts should not be deducted in full in the year of purchase, but rather capitalized onto the balance sheet and then depreciated over the length of his projected career (contracts at the time had an average life of three years).

The court sided with the Pirates on the grounds that there was no guarantee that the purchasing team would be able to utilize its renewal rights, as nothing could prevent the player from quitting pro baseball(1).

More than a decade later, the ruling would give flamboyant baseball entrepreneur Bill Veeck an idea that would forever change the economics of team ownership, not just in baseball, but in all team sports. He would employ the ruling to fabricate a tax shelter designed exclusively for sports team owners, and then utilize specious logic to convince the IRS of its legality.  Read more…

Salary Cap Smoothing Is As Complicated As It Is Necessary

November 17th, 2014 No comments

Update (2/13/15): The National Basketball Players Association officially rejected the NBA’s salary cap “smoothing” proposal on Friday. NBPA executive director Michele Roberts said the union hired two forensic economic teams to evaluate the league’s proposal and both recommended the union not accept it.

The league’s proposal apparently contained some elements of artificially suppressing the salary cap (the second scenario described below) and increasing the salaries in all existing contracts (the third scenario described below). The union is opposed to artificially suppressing the salary cap.

The league and union can still negotiate, but time is running increasingly short.

“At first glance, [it] is not that attractive, I won’t lie. But we’re studying it to figure out if there really is some advantage for players.”

That was NBA players’ union executive director Michele Roberts last week, describing her aversion to salary cap “smoothing” in the wake of the league’s massive new national TV rights deals.

The new deals with Disney and Turner will pay out $23.4 billion over nine seasons, starting with 2016-17 and running through 2024-25, an average of $2.6 billion per year. That’s a huge increase from the current deals, which pay out $7.44 billion over eight seasons, an average of $930 million per year.

The new deals escalate over time, starting at $2.1 billion and climbing to $3.1 billion. The current deals will pay out just over $1.0 billion in their final season in 2015-16, which means the league’s national TV revenue will jump by nearly $1.1 billion in 2016-17.

The salary cap is tied directly to league revenues, and this will be the largest injection of revenues in NBA history. It alone will cause a $16 million spike, above and beyond any increases from sources other than national TV money.  Read more…

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NBA Strikes Partnership Deal With Daily Fantasy Sports Operator FanDuel

November 13th, 2014 No comments

Fantasy sports is a huge business – 41.5 million people in the U.S. and Canada spend $3.6 billion on fantasy league and related fees each year.

A relatively small(1) but fast-growing sub-segment of the industry is daily fantasy sports. As that part has grown, sports leagues are taking notice and looking to get in on the trend. With that in mind, the NBA announced yesterday that it has signed a four-year strategic partnership with venture-backed FanDuel, the largest player in the space with an estimated 75 percent market share, to promote the one-day fantasy sports website.

The agreement establishes FanDuel as the NBA’s official daily fantasy basketball outlet. FanDuel will unveil the first “Official One-Day Fantasy Basketball Game of the NBA,” that will be free to all fans on NBA.com and FanDuel.com, the prizes for which will include regular-season tickets, unique NBA experiences, NBA merchandise and memorabilia. While the NBA and its properties will only promote the site’s free fantasy games, FanDuel retains the right to have pay-to-play versions of such free games as well, with cash prize payouts. Other fantasy sports websites will still be able to offer fantasy basketball to customers, but FanDuel will be the only such company featured on the league’s digital properties, including its official website and mobile apps.

The NBA is hoping the partnership will drive more engagement with, and more interest in, the league among its fan base. Fantasy participants spend an average of 8.7 hours per week on fantasy and, after placing a bet, increase their weekly intake of sports TV programming from 17.5 hours to 24 hours. The NBA will also receive an undisclosed ownership stake in FanDuel as part of the deal.  Read more…

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NBA Reaches 9-Year, $24 Billion Media Rights Deal with ESPN/ABC, TNT

October 6th, 2014 No comments

The central question of the 2011 lockout, endlessly paltered, parsed and probed was whether the league was actually losing money. While it was a key point of negotiation, its importance was somewhat overstated. A new CBA shapes the future of the league; it doesn’t necessarily need to address the past. It must be asked: How much of the lockout, then, was about owners feeling poor in 2011, and how much of it was about owners trying to get rich in 2016?

2016 is when the NBA’s current national TV deals expire – eight-year agreements that promise pro basketball a total of $7.44 billion from Disney (ESPN/ABC) and Turner (TNT) starting with the 2008-09 season and running through 2015-16, an average of $930 million per year. The deals were originally signed in June 2007.

The NBA was cratering back then. New stars had struggled to grow in the darkness of Michael Jordan’s ever-enveloping shadow. The Shaq-Kobe drama had breathed temporary life into the league, but their eventual break up left the NBA to slowly wither in its wake. Big market teams like the Lakers, Knicks, Celtics and Bulls were brands lacking a product, with no signs of future improvement. The Spurs had just pummeled LeBron’s Cavaliers in the finals, a dismal four-game extermination that limped its way into the record books as the lowest-rated series in NBA Finals history. Things were getting ugly.

An eight-year, $930-million-per-year combined deal? Sold!

Then-commissioner David Stern had negotiated for an increase of more than 20% from the previous average of $767 million despite declining viewership (which itself represented a nearly 25% increase over the $614 million per-year deal signed in 2002, then, also, despite declining viewership). The networks were more than willing to comply with what amounted to a modest 2.5% compounded annual growth rate in rights fees in exchange for an atypically long eight-year deal. The preceding six-year 2002 deal had been the longest one Stern had ever signed.

The agreement looked even better for Stern and the league as the economy got even worse. In 2008, credit froze because mortgage insanity stirred by (us) Wall Street evil-doers planted massive hidden debts packaged in complex synthetic financial products throughout the business world. The ensuing global economic meltdown blazed its way into the NBA, spurring widespread layoffs and igniting fears that league revenues could collapse by, as Stern described it, “maybe as much as 10%.” The league seemed fortunate to be able to cling to a $930 million lifeline every year.

Times have certainly changed.  Read more…

When Should Kevin Love Lock In His Long-Term Contract?

September 15th, 2014 No comments

With the Cleveland Cavaliers on the verge of completing a blockbuster trade for Kevin Love, the Minnesota Timberwolves granted permission for Cavs owner Dan Gilbert to meet with Love. Whatever was discussed at that lengthy July meeting in Los Vegas gave Gilbert enough comfort to finalize what became the biggest trade in franchise history.

The problem Gilbert had to overcome? Uncertainty.

Love has as few as one year remaining on his contract. To trade away a potential future superstar such as Andrew Wiggins in exchange for a man, perennial All-Star though he may be, who could walk away in just one year represents a substantial risk.

Did Love affirm his desire to remain with the Cavs over the long term in that meeting? Maybe. But you’re not going to hear about it. That’s because Love its still under contract. It’s technically against the rules (and among the most serious violations a team can commit) to strike a future deal. But something made both parties comfortable that this was a long-term arrangement. In the news conference to announce his arrival, Cavs general manager David Griffin welcomed Love by saying this was a “long-term relationship.” Moments later, Love himself said he was “committed to this team, committed long term.”

So when will Love lock in the long-term deal that solidifies his commitment? Love’s age, tenure and skill-set have created a perfect storm of interesting – a fascinating story that figures to be unlike any other in the NBA in the years ahead.

Stating the obvious: The higher the starting salary in a long-term contract, the higher the salary can be in all subsequent years of the contract as well. That’s because annual raises in any contract are limited to 7.5% of the starting salary. The maximum length of a contract is five years. In what summer, then, will Love strike the optimal balance for himself between locking in the highest starting salary and locking in a full five-year deal, while taking into account risks associated with such things as his health and inevitable basketball mortality?(1)

It won’t be this summer. That much we know. Why? Because he can’t. NBA rules prevent it.

In January 2012, Love signed a four-year, $60.8 million maximum contract extension(2) with the Wolves in which the last season, the 2016-17 season, was to be a player option. Love will make $15.7 million this season and his option for next season is for $16.7 million.

If Love wanted to sign with the Cavs today, it would therefore need to be an extension of his current contract. Contracts cannot be extended until the three year anniversary of their initial signing. That’s next January.

So if not this summer, which?(3)  Read more…

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Los Angeles Clippers: Salary Cap Maneuvering In Action

August 11th, 2014 4 comments

Update #2 (01/16):

The NBA answered my question: They would’ve allowed the Clippers to exceed the hard cap by virtue of Jared Dudley’s unlikely bonus. That means, after the Clippers triggered the hard cap by signing Spencer Hawes (MLE) and Jordan Farmar (BAE), they could’ve signed one more minimum salary player, along with Glen Davis, to slip under the hard cap with a 13-player roster.

The Clippers instead effectively traded away their 2017 first round pick and incurred a $950K dead-money salary cap charge for five years to get rid of Dudley’s contract. The Clippers then used the resultant cap space to sign four players: Chris Douglas-Roberts, Epke Udoh, Hedo Turkoglu and Jared Cunningham (and Joe Ingles, who was later waived).

The question then became: Would you have rather had (i) those four players OR (ii) Dudley + one of those four players + the 2017 first round pick back + no $950K dead-money charge for the next five years? This is the question I posed as the conclusion to my first update. 

Since that time, the Clippers traded away $300K in cash to get rid of Jared Cunningham and then traded 2013 first round draft pick Reggie Bullock, Chris Douglas-Roberts and a 2017 second round draft pick for the expiring contract of soon-to-be unrestricted free agent Austin Rivers (son of coach Doc Rivers). 

So… After being hard-capped, the Clippers essentially traded Bullock + Dudley + a 2017 first round pick + a 2017 second round pick + $300K in cash AND incurred a $950K dead-money salary cap charge for five years in exchange for Rivers, Turkoglu and Udoh.

The Clippers could have instead kept Bullock, Dudley, its 2017 first round pick, its 2017 second round pick and its $300K in cash; kept either of Turkolgu or Udoh (but not Rivers); and avoided the $950K charge for the next five years; and still remained below the hard cap. 

The two players who caused the hard cap issues? Hawes: Hasn’t worked out thus far. Farmer: Bought out (giving back $950K of the $3.2 million remaining on his contract for this and next season), with next year’s remaining cap hit stretched over three three seasons at a cost against the salary cap of $510,922 per season.  

Read more…

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A View Into the Miami Heat’s Local TV Deal

August 4th, 2014 No comments

“This is a hobby of passion, it’s not a business… The reality is we’re not a big market team. Where we find ourselves struggling is our local TV revenue is smaller than big markets…”

That was Heat owner Micky Arison in July of 2012, describing the difficulties of sustaining a winning basketball team while maintaining some semblance of profitability under the auspices of the new and far more restrictive Collective Bargaining Agreement.

Local rights deals for sports franchises are in the midst of a tremendous boom in the television landscape that social media sculpts, as regional sports networks (RSNs) bid up prices to secure access to one of the few remaining DVR-proof properties. And when I say “boom,” I want to do more than just evoke the idea of growth: In 2011, the Los Angeles Lakers signed the richest local television rights deal in NBA history; the 20-year contract with Time Warner Cable included the launch of two new regional sports networks – one English channel and one Spanish channel – and averages a payout to the Lakers of approximately $200 million per year, for a total value of $4 billion!

To give you an idea of just how astronomical that is: It’s roughly 10x the $20 million payout the Heat currently generates from its own longstanding TV rights deal. In fact, the average annual payout on the Lakers’ deal is more than what the Heat currently generates in total revenues!

The Heat is at a substantial disadvantage when it comes to negotiating the payout on its TV rights deals. That’s because the size of a team’s local television rights deal is directly proportional to the projected number of television households tuned into its broadcasts. The Heat, by the NBA’s own definition, is a small-market team. Read more…

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NBA Sets Salary Cap and Tax Level Numbers for 2014-15

July 9th, 2014 No comments

On Thursday July 10 at 12:01 a.m. ET, the NBA’s 2014-15 season begins. That’s when the league’s salary cap, luxury tax threshold, maximum salaries and other figures all adjust to their new values.

Most NBA business ceases for the first several days of July as the league conducts its annual audit to determine the league’s revenues from the previous season. With that figure in hand, the league huddles with the players association to project revenues for the coming season, and uses it to calculate the new cap, tax and related figures.

Revenues on the season came in at an all-time high $4.52 billion, up 5.3% from the previous year and more than $50 million higher than initially projected. On that basis, the league then projected revenues for next season to increase another 4%, to $4.71 billion.

To get the salary cap for the season ahead, they took 44.74% of that projected amount, subtracted projected benefits, and divided by 30 (the number of teams in the league). Adjustments are then made to the cap if players received too much (or too little) in salaries and benefits for the completed season relative to the finalized revenue figure; this serves as a mechanism to maintain the integrity of the agreed-to revenue spit between owners and players. The luxury tax uses a similar formula, but is based on 53.51% of projected revenues.

The finalized figures were announced at 5 p.m. Wednesday in a memo distributed by the league to all member teams.

The new salary cap has been set at $63.065 million, a 7.5% increase from last season. That is slightly less than the $63.2 million estimate teams had been using since April, but higher than previous forecasts. Last year at this time, the league initially forecasted a cap of $62.5 million, before increasing it to $62.9 million in November and again in April.

The new luxury tax line will be $76.829 million, a 7.1% increase from last season. Tax projections started at $76.1 million last year at this time, before rising to $76.6 million in November and $77.0 million in AprilRead more…

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