Josh Richardson Signs Three-Year Contract with the Miami Heat

Josh Richardson, the Miami Heat’s 2015 second-round draft pick, officially signed a three-year, $2.4 million minimum salary contract with the team on Monday.

The parties had reached agreement on the general terms of the deal last Tuesday, but needed the extra few days to iron out a few details with regard to the third year of the contract.

Richardson’s first year salary, $525,093, will be fully guaranteed. As of right now, including the associated luxury tax ramifications, it would cost the Heat an estimated $2.0 million. However, that amount could be reduced if the Heat accomplishes its goal to reduce, or even eliminate, its tax burden before the tally is finalized at the end of the regular season.

Richardson’s second year salary, $874,636, is completely non-guaranteed unless he is kept on the roster past August 1, 2016. The contract structure therefore provides the Heat maximum flexibility for the summer of 2016. The August 1 guarantee date ensures that the team will have all of July to pursue its free agency plans before deciding whether to either keep Richardson or waive him at no cost. Keeping him would subtract just $331,165 from the Heat’s summer of 2016 cap space.(1)

Richardson’s third year salary, $1,014,746, was the source of the week-long delay. It was originally to be both non-guaranteed and subject to a team option. Instead, it will not contain a team option but will be initially non-guaranteed. However, it will become fully guaranteed if not waived on June 30, 2017. 

To understand why the Heat wanted Richardson’s third year to be both non-guaranteed salary and subject to a team option, one needs to understand why adding a team option provides more flexibility than just a non-guarantee.

Negotiating for a salary that is both non-guaranteed and subject to a team option can perhaps be seen as redundant, in that both effectively accomplish the same thing – allow the team to get rid of the player for nothing if it wants (in the case of a team option, by declining it; in the case of a non-guaranteed salary, by waiving the player).

However, there are two significant differences between a team option and non-guarantee:

First, team options must be decided upon by no later than the second to last day of the previous season. Seasons change over on July 1st, and thus team option decisions are due by June 29th. Once a team option season is exercised, assuming it does not also include a non-guarantee, it becomes fully guaranteed for the season.

This is not the case with non-guaranteed contracts, which can have predefined guarantee dates, or even no guarantee dates at all. Some non-guaranteed contracts have salaries that become increasingly guaranteed upon several future dates. Common dates include July 15th (two weeks after free agency starts) or August 1st (a month after free agency starts), giving teams time to pursue other free agency options before needing to make a decision. All salaries become fully guaranteed for the rest of the season on January 10th.

Second, declining a team option allows a team to terminate a player’s contract without waiving him. That, in turn, means the team would still get to keep his Bird rights and, if applicable, would still be able to extend a qualifying offer(2) to make him a restricted free agent.

This is not the case with non-guaranteed contracts. To recognize the savings associated with a non-guaranteed salary, the player must be waived. In so doing, the player’s Bird rights would be lost.

For the Heat, having the team option would therefore have allowed it to control when Richardson was to become a restricted free agent – after two years at the minimum salary (by declining it) or after three years at the minimum salary (by exercising it).

If the team option were to be declined, Richardson would become a restricted free agent in the summer of 2017 after his two years at the minimum salary.

In addition, he would be subject to the Gilbert Arenas provision: This would limit what any other team could offer him, all the way down to an amount that the Heat, by rule, would be able to match.

The Arenas provision limits teams in the salary they can offer to another team’s restricted free agent who has accrued one or two years in the league. The first-year salary in the offer sheet cannot be greater than the Non-Taxpayer Mid-Level exception, and the contract must span two to four seasons in length.(3)

Limiting the first-year salary in this way enables the player’s original team to match the offer sheet by using its own Non-Taxpayer Mid-Level exception or Early Bird rights (provided they are applicable, which for the Heat with Richardson it would have been).

Early Bird rights are weaker form of Bird rights, which allow a team to exceed the cap to re-sign its own free agents, provided that the player has played with the team for all or parts of two seasons without changing teams as a free agent and finishes the second season on the team’s roster. A team may use Early Bird rights to re-sign its own free agent for up to 175 percent of his salary in the previous season or 104.5 percent of the average salary in the previous season, whichever is greater. Early Bird contracts must be between two and four seasons in length, with raises up to 7.5 percent of the salary in the first season of the contract.

However, only very rare is the instance in which a team would decline a team option season at the minimum salary only to pay him a higher salary as a restricted free agent. Therefore, having a team option on top of a non-guaranteed salary for a given season represents a nice flexibility for a team to have, but only if it has limited associated cost.

Contract discussions, however, are a negotiation between two parties. And for Richardson, allowing the Heat the flexibility of a team option would have come at a cost he was unwilling to concede.

By rule, salaries for option salaries must have the same guarantee amounts and dates as in the season prior. Richardson’s second year salary has a guarantee date of August 1, 2016. Therefore, in order to allow the third year to be subject to a team option, his third year salary would have needed to have a guarantee date of August 1, 2017. That’s a full month after free agency starts. Richardson was not willing to allow the guarantee date to be pushed that far back. Instead, he secured a June 30th guarantee date on his third year salary. That essentially means that if the Heat does not want to guarantee his $1,014,746 salary in full for the 2017-18 season, it’ll need to release him by June 30, 2017, which would put him on par with all other free agents in the summer of 2017 in seeking out a new deal.

Including the team option on the third year of the contract would therefore have provided a wonderful bit of flexibility for the Heat, even if it was unlikely to have ever been utilized, but Richardson was apparently unwilling to concede.

Nonetheless, the finalized contract to which Richardson did agree was a spectacular outcome for the Heat organization.

The Heat has now secured Richardson for the next three years at the minimum salary, with the final two seasons fully non-guaranteed.

How good is that?

No other team in the entire NBA was able to secure its 2015 second-round draft pick for three years at the minimum salary, let alone with the supreme flexibility of non-guaranteed salaries for the second and third years.

What degree of flexibility does the contract afford the Heat?

If things ultimately do not go as planned, the Heat can choose to waive Richardson at the end of either of the next two seasons with absolutely no additional cost.

If, however, things do go as planned, the Heat will have secured Richardson on the least expensive contract allowable by the NBA for the next three years.

And perhaps just as exciting as that is what would happen when those three years are up.

At the end of those three years, in the summer of 2018, Richardson would become a restricted free agent(2), allowing the Heat the right to leverage his Bird rights match any contract he were to sign with another team (even up to the maximum).

To maintain the right to do so, the Heat would need to issue a qualifying offer(2) in the amount of just $1,288,038(4).

To put that into perspective, at the cost of just a $1,288,038(4) charge against the salary cap, the Heat can utilize any cap space it is able to free up in order to pursue any other free agents it wants, and then, when all of its cap space is used up, circle back to Richardson in order to either: (i) match any offer sheet he signs with another team or (ii) sign him to a new deal outright(5).

The Heat has therefore signed Richardson to an ideal contract that provides maximum flexibility. And that, in turn, could mean he will be with the Heat for a very long time.

The three-year term on the contract will require the Heat to utilize a portion of its $3.376 million taxpayer midlevel exception (the most that could be offered utilizing the minimum salary exception is two years). The Heat will now have $2.85 million remaining on that exception, which it will likely choose not to utilize.

Notes:

(1) The Heat now projects to have Goran Dragic, Josh Richardson, Justise Winslow, Josh McRoberts and Chris Bosh under contract, and, at a projected $89.0 million salary cap, up to $37.4 million of cap space for Dwyane Wade, Hassan Whiteside and another player. If McRoberts is traded, that amount would increase to $42.6 million. If Richardson is waived, it would increase further to $43.0 million. If Winslow is also traded (i.e., most aggressive case plausible), it would increase further to $45.0 million.

(2) There are two types of free agency: unrestricted and restricted. An unrestricted free agent is free to sign with any other team, and there’s nothing the player’s original team can do to prevent it. Restricted free agency gives the player’s original team the right to keep the player by matching a contract the player signs with another team. This is called the “right of first refusal.”

Restricted free agency exists only on a limited basis. It is allowed following the fourth year of rookie “scale” contracts for first round draft picks. It is also allowed for all veteran free agents who have been in the league three or fewer seasons.

In order to make their free agent a restricted free agent, a team must submit a qualifying offer to the player between the day following the last game of the NBA Finals and June 30. 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 themselves.

(3) The second-year salary in such an offer sheet is limited to the standard 4.5 percent raise. The third-year salary can jump considerably – it is allowed to be as high as it would have been had the first-year salary not been limited by this rule to the Non-Taxpayer Mid-Level exception. The salary in the fourth season may increase (or decrease) by up to 4.1 percent of the salary in the third season. The offer sheet can only contain the large jump in the third season if it provides the highest salary allowed in the first two seasons, it is fully guaranteed, and it contains no bonuses of any kind.

If the raise in the third season exceeds the standard raise (4.5 percent of the salary in the first season of the contract), then an additional restriction exists. In order to determine how large the offer can be, the team doesn’t just have to fit the first-year salary under the cap. Instead, they must fit the average salary in the entire contract under the cap. Rather than his actual salary, the player’s average salary counts as team salary over the life of his contract.

If the player’s prior team matches the offer and keeps the player, then the actual salary in each season counts as team salary.

(4) The amount of the qualifying offer could increase to $2,957,858 if he meets the “starter criteria.” The starter criteria would require Richardson to starting 41 games or playing at least 2,000 minutes in the regular season in either the previous season or the average of the previous two seasons.

(5) If the Heat were to come to an unofficial agreement with Richardson on a contract, it could even renounce the $1,288,038 qualifying offer and replace it with a $1,088,038 cap hold, while maintaining his Bird rights. The process would save an additional $200,000 of cap space.