Understanding the Charges

January 15th, 2010 No comments
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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…

Calculating Maximum Salaries

January 13th, 2010 No comments
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The bidding war for LeBron James, Dwyane Wade and Chris Bosh will be coming soon to an N.B.A. front office near you.

Following years of anticipation and salary cap maneuvering, one of the most anticipated dates in N.B.A. free agency history – July 1, 2010 – is approaching.

Lots of teams will have cap room to throw at him. Miami Heat fans, and fans around the country, have logical arguments as to why one, two or even three of them will choose to lead their teams. Here’s a look at how much it will take to get them.

Unlike in other professional sports, N.B.A. salaries are capped.

Maximum N.B.A. salaries fluctuate in line with fluctuations in the salary cap.

The salary cap is set by calculations based on projected amounts for revenue and benefits for the upcoming season. Barring any adjustments that are necessitated, they typically use the set amount for national broadcast rights (which is determined in advance), plus the revenues for the previous season (other than national broadcast rights), increased by 4.5%.

The salary cap calculation takes 51% of the league’s projected revenue, subtracts projected benefits, and divides by the difference by the number of teams in the league. Adjustments are then made if the previous season’s revenues were below initial projections.

For maximum salaries purposes, a slightly different cap calculation is used, one that is based on 48.04% of the league’s projected revenues (rather than 51%). The calculations are otherwise the same.

There are types of maximum salaries. Each is based on a player’s tenure.

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

A year of experience is earned for every prior season in which a player was on the active or inactive roster of an N.B.A. team for at least one day during the regular season.

These maximum salary rules only apply to the first year of a player’s contract. All remaining years are governed by the rule regarding contract lengths and annual raises.

The league builds in a backstop, however, to protect the maximum salary levels for players in decreasing (or minimally increasing) salary cap environments. A player’s maximum salary in the first year of any new contract can never be less than 105% of the salary he earned in the last season of his previous contract.

The salary cap is expected to decline for the 2010-11 N.B.A. season from the $57.7 million level at which it is today. Therefore, the backstop will apply to James, Wade and Bosh.

Each player earned $15,779,912 last season. Thus, each player will be entitled to 105% of that amount, or $16,568,908 in the first year of any new contract signed this summer.

While the starting salary is the same no matter where each of these player sign, the N.B.A.’s Collective Bargaining Agreement gives the home team a financial advantage when it comes to re-signing its own players.

Each of the three player’s home teams can offer him one more year (six instead of five) and bigger annual raises (10.5% of the salary in the first season of his new contract instead of 8%). This translates to an offer of $125.5 million over six years, versus the $96.1 million over five years that other teams can offer.

That difference, $29.4 million, is very real. But it is also something of an illusion.

The first five years of a home team’s maximum contract offer would total $100.2 million, which isn’t too far away from $96.1 million. In most circumstances, unless a maximum contract player suffers a catastrophic injury, he will make a large salary in the sixth year no matter where he signs -– so locking in that sixth season now simply provides additional peace of mind.

So, for a player like James, that sixth season shouldn’t matter too much. Conversely, for a player like Wade, whose playing style and injury history place him at risk for breaking down, locking in that sixth year guarantee could be quite important.  Read more…

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Preliminary 2010-11 Salary Cap Projections

January 11th, 2010 No comments
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Miami Heat president Pat Riley is squarely focused on the summer of 2010.

He is attempting to structure the biggest free agent coup in N.B.A., perhaps sports, history.

The economy isn’t helping him.

When Riley stepped down as coach to focus squarely on his duties as president in April 2008 – before the global economic downturn that, as with most businesses across the world, hit the N.B.A. hard – some teams around the league were projecting a 2010-11 salary cap in the range of $63 million.

It seems liked a reasonable projection at the time. The league was in the midst of the biggest expansion in its history. Commissioner David Stern was about to announce a record $58.68 million salary cap for 2008-09 season, a massive $3.0 million jump from the prior season. The future was looking bright.

Since the N.B.A. instituted a salary cap starting with the 1984-85 season, the cap had only ever declined one time from the previous season, in 2002-03, and that was only due to the allocation of a massive new ABC/ESPN television contract which was to pay out $4.6 billion over six years, far more than the previous NBC contract, but allocated less to 2002-03 than NBC paid in 2001-02.

Projecting the cap to grow from $58.68 million to $63 million in two years seemed like a relatively safe bet.

Then came the global economic meltdown.

In July of 2009, Stern announced the league’s second ever drop in the cap, to $57.7 million in 2009-10. He also delivered shocking projections for the following season, warning that the cap was estimated to drop a second consecutive time, this time to somewhere between $50.4 million and $53.6 million for the 2010-11 season pending league-wide revenue performance during the upcoming 2009-10 season. The high end of the range was predicated on a 2.5% drop in league-wide revenues (technically termed “Basketball Related Income,” or BRI), and the low end on a 5.0% drop.

Teams had been bracing for such significant reductions in the cap heading into the 2010-11 season, fully aware of the crumbling economy, but seeing such numbers circulate was still jarring for many team officials.

“Teams should be aware of this projected BRI decrease and plan accordingly” said the memo that was distributed to each team.

So in the best-case scenario outlined by the league that day, Miami would have roughly $10 million less in spending money this summer than it originally planned for, although the memo did include a disclaimer stressing that these were “early” projections that could “change based on economic conditions and as more information on league-wide business performance becomes available.”

Things have changed for the better in the intervening six months, if only slightly.

With N.B.A. gate receipts down less than anticipated, the doomsday scenario of an $8 million drop in the salary cap for the 2010-11 season now seems overly pessimistic.

Everyone still expects the cap to drop heading into the summer of 2010, when the league will have its strongest free agent class ever, but by how much is the critical question.

The Heat are apparently the most conservative of all teams in their estimates, reportedly basing their planning for next summer’s cap at $52 million. That could have serious ramifications for how they plan to utilize the upcoming N.B.A. trade deadline. It could make the goal of acquiring three maximum contract free agents virtually impossible. The Heat could, in turn, seek to short-circuit the process and start the rebuild early. Amare Stoudemire has emerged as a prime focus for the Heat after it became clear earlier this month that he would be unable to work out an extension with the Suns.

The league office told teams on the eve of the season opener to expect the cap to come in somewhere around the $52 million range, but agents who have been briefed on updated financial figures now are using $54 million as their operating number. Such estimates have re-invigorated hopes of a potential Big Three scenario for the Heat.

Gate receipts over the remainder of the season will impact the cap calculations going forward (the other primary source of league-wide revenues, national and local television contracts, are locked-in prior to each season), so the numbers listed above are merely the best available estimates at this time.

But one thing is certain: the Heat is desperately hoping that ticket sales and gate receipts continue to come in stronger than originally forecast, which will give them more money to throw around when Dwyane Wade, LeBron James, Chris Bosh, Amare Stoudemire, and a host of others become unrestricted free agents.

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Welcome, Miami Heat Fans!

January 9th, 2010 No comments
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We are exactly six months away from what could be one of the most exciting spectacles in sports history.

A spectacular convergence of talent and salary-cap space will finally take place next summer when Dwyane Wade, LeBron James, Chris Bosh, Amare Stoudemire and other sought-after players all become unrestricted free agents.

So will begin the most highly anticipated and significant free-agency period in N.B.A. history. With it comes the potential to reshape the N.B.A.’s power structure for the next decade.

What makes 2010 stand out is the number of teams that cut their payrolls in anticipation of this year’s free-agent class. A half-dozen teams — an unusually high number — have created substantial cap space for themselves. At least a few of those teams are looking to sign not just one free-agent star, but two.

Only one team has positioned itself to possibly sign three: the Miami Heat.

Next summer will be the culmination of a Pat Riley vision which will have been nearly three years in the making.

The Heat won the title in 2006, it’s first ever, but had since suffered through a season and a half of disappointing basketball, due in large part to an aging supporting case, injuries to star players, complacency throughout the rotation, lack of conditioning, and whatever other excuses could be found.

Going nowhere fast, the struggling Heat launched a divine plan in the winter of 2008 to clear off enough cap space to sign two maximum level free agents. In the midst of a 15-win season, Riley stepped down as head coach and launched a large-scale rebuilding process predicated entirely on the summer of 2010, even though it came at the expense of two lost seasons during Dwyane Wade’s prime.

It was a huge risk to mess with Wade as he headed toward his own free agency, but Riley had been watching and doing research. He knew what nobody else seemed to know – that for any struggling team in a desirable market, the summer of 2010 was the next best chance to built a perennial powerhouse. He knew he had a glamour destination to offer, the lack of a state income tax in Florida, a history of stability and success, seven championship rings to leverage, and Dwyane Wade. Riley crunched the numbers and thought he could get close to clearing three maximum salary spots, or at least get so close that he could sell it.

He has now gotten close enough to make it possible to pull off the major score. The Heat could be on the verge of something truly special.

And so, with that, I have decided to start this blog to show Miami Heat basketball fans, and fans of the N.B.A. in general, exactly how the salary cap works, how it will impact the Heat in the summer ahead, and explain all the machinations that transpire as we careen toward the biggest few months in South Florida sports history.

I am nobody special. I have no inside sources. I have no direct relationship with any member of the Heat organization.

I am just a huge Miami Heat fan who has leveraged nearly a decade of experience as an investment banker, specializing in large-scale mergers and acquisitions advisory to many of the world’s leading technology companies, to read through and understand the N.B.A. Collective Bargaining Agreement and utilize all league contacts and resources to make myself as much an expert on technical matters of the N.B.A. as possible.

In the months ahead, there will all kinds of speculation, rumors and reports. Some will be true. Most will not. Questions will surface about what is possible, what needs to be done to make it possible, and how everything will need to be done to make it all work. It is my goal to provide the necessary clarity. I will undoubtedly start slow, with no reader base, with some awful and unfocused postings, but I hope to eventually catch my stride as we get closer to the start of free agency.

It is my hope to keep this blog up and running just long enough to take you through the crazed summer of 2010, and terminate it with a post that attempts to express that which cannot be expressed with the written word – the unimaginable vindication of Pat Riley’s vision, the creation of a basketball dynasty, and the shear joy of helping to produce some of the most knowledgeable N.B.A. basketball fans in the country.

I will kick things off by showing you exactly how the salary cap is calculated, and exactly how the Heat is positioned against it for this year and beyond.

Go Heat!

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