Miami Heat’s Deadline Trade Provides Current Improvement, Future Flexibility

Update (December 21, 2020): How this offseason played out is a perfect encapsulation of why I hated the Heat’s decision to extend Andre Iguodala’s contract so much (notwithstanding the fact that I like the player and locker room presence). 

Miami wound up operating as an over-the-cap team, which was the only realistic option if they wanted to bring back Goran Dragic. They ultimately did re-sign Dragic, as well as Meyers Leonard and Udonis Haslem, and split the NT-MLE between Avery Bradley and Maurice Harkless. That may sound OK, but this team has major flaws – at the power forward spot, with interior defense behind Bam Adebayo, etc.

Now consider the possibilities, and how those flaws could’ve been better addressed, if the Heat had not signed Iggy to his extension.

If they had not signed Iguodala to his $15M extension, the Heat would’ve been able to create $36M of cap room this offseason (which is less than the $42M projected in my post below, from before the pandemic, when the cap was projected at $115M, but still a big number). That’s enough for the $18M that Dragic ultimately got, plus another $19M to spare… It’s no secret that my main free agent target for the Heat this summer was Christian Wood. I, personally, think he’s going to be a future All-Star, and a would-be perfect complement to Bam as an inside-outside offensive threat at the power forward position (he’s still a little raw defensively, but he’s long, lean, mobile and has potential). Well, as things worked out, the Heat didn’t even consider him. And why would they? They had no means to sign him AND Dragic. But without Iggy, things would’ve changed drastically. Wood wound up taking a bargain 3-year, $41M contract from the Houston Rockets, which started at just $13M. So, from the initial $36M, the Heat could’ve given Dragic exactly what he got, given Wood up to $2M more than he took in his sign-and-trade to the Rockets, and still had enough left over to sign Avery Bradley to the exact contract Miami ultimately gave him. And when the Heat’s cap room was all burned up, they would’ve still had the $5M R-MLE: That’s Nerlens Noel money.

So, to understand why I was so against the Iggy extension, imagine what this Heat team could’ve been this season without it: How much improved would this Heat team be if they were able to replace Andre Iguodala, Meyers Leonard and Maurice Harkless with Christian Wood, Nerlens Noel and an open roster spot for whomever you choose (on a minimum salary, or slightly above minimum salary, contract). Would it have solidified Heat dominance for years to come?   

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The Miami Heat attempted an ambitious move in advance of Thursday’s NBA trade deadline, seeking to package forward Justise Winslow with the unwanted contracts of James Johnson and Dion Waiters and turn them into championship forward Andre Iguodala and prized forward Danilo Gallinari.

Things didn’t quite work out as planned.

Discussions with Oklahoma City for Gallinari advanced to the point where the Thunder approved Heat representatives to negotiate with Gallinari on a possible extension, indicating that both parties clearly felt there was a path toward a deal.

Gallinari, an upcoming free agent who is earning $22.6M this season, was eligible to receive an extension from the Heat of up to $48.7M over up to two years – $23.7M for next season, and $24.9M for 2020-21. The extension was a critical component to a potential deal. Miami did not want Gallinari merely as a four-month rental, given the draft compensation that OKC was demanding (which likely included removing the protections on the 2023 first-round pick Miami already owes OKC, and sending a second one in 2025).

Despite the discussions, the sides were not able to come to agreement. Gallinari presumably wanted to fully guarantee both extension seasons at or near the maximum possible payout, while the Heat wanted to attach a team option onto the 2021-22 season. Miami wants to preserve max cap space in 2021, for a pursuit of Milwaukee Bucks forward Giannis Antetokounmpo (among other prized potential then free agents).

With the Gallinari pursuit stalled, the Heat completed the deal without him – sending Winslow, Waiters and Johnson to the Memphis Grizzlies (who then redirected Johnson to the Minnesota Timberwolves in exchange for Gorgui Dieng) in exchange for Iguodala, Jae Crowder and Solomon Hill.(1)

As part of the trade, the Heat signed Iguodala, who was on an expiring contract, to a highly questionable two-year, $30M extension, the second season of which is subject to a team option (the contract also has a 15% trade kicker). He’ll bring the Heat championship-caliber leadership for at least the next season and a half. What on-court production the 36-year-old will provide is impossible to know, given that he’s spent the first three months of the season at home in California awaiting a potential trade. If history is any indication, the 2015 NBA Finals MVP tends to shine in the biggest of moments. He’ll receive his biggest minutes in the playoffs. His stat line won’t blow you away at this point in his career, but he’ll be asked to play strong perimeter defense and provide just enough perimeter shooting to be respected.

Crowder and Hill, both on expiring contracts, would have been redirected to the Thunder had a three-way deal including Gallinari been possible. Crowder, however, as a rugged perimeter defender and high-volume (though not particularly efficient) three-point shooter, could become a key figure in the Heat rotation – giving the team the opportunity to take a small-ball approach with Bam Adebayo at the five position and a host of highly versatile wings, a philosophy which, consistent with the thinking behind the Iguodala acquisition, tends to be increasingly valuable during the playoffs.

So that’s three guys with different attitude- issues who weren’t playing a whole lot – Waiters, Winslow and Johnson — out, and two who could play key playoff minutes — Iguodala and Crowder — in.

Whether the Heat actually got better remains unclear. Defensively, the Heat sacrificed two of their best, but also got back two good ones. Iguodala may have been the headliner, but Crowder will be the key. He’ll take lots of 3s. If he’s making them, the trade will look awesome. If he’s not, it won’t.

Strategically speaking, it’s a trade that has the potential to look great if it works out, or average if it doesn’t. It won’t go down as a bad one unless Winslow breaks out. Which is unlikely.

Financially speaking, the trade has interesting salary cap implications, both for the current and each of the following two seasons:

Implications for 2019-20

Difference in salaries sent and received: A bit over $2M.

Which saves some $3M in luxury taxes, leaving Miami anywhere between $1.4M and $2.9M above the tax line (with the range based on $1.0M and $0.5M bonuses for Olynyk and Hill reaching 1,700 and 1,000 minutes, respectively)(2).

It also leaves Miami $2.8M below the hard cap, which creates the ammunition for the Heat to attack the buyout market. With the roster now standing at the 15-player limit, they’d need to waive a player to do so. That player would certainly be Hill(3), which would have the added benefit of increasing the Heat’s room below the hard cap to $3.9M, all of which could be deployed if the Heat were to be willing to pay the corresponding tax dollars; that’s more than any contender has available. And if the buyout market pursuit fails, the Heat also maintains the flexibility to either convert Gabe Vincent’s two-way contract into a (potential multi-year) standard NBA contract or to sign someone else.

Implications for 2020-21

Difference in salaries sent and received: $27M.

With that savings, the Heat can now produce up to $28M of cap room this summer. But that’s somewhat misleading, since any attempt to bring back Goran Dragic, will eat the vast majority of it up.

Which brings us back to the Iguodala extension. Iggy could be good. He could be not good. Either way, he’s not worth anywhere near the two-year, $30M extension he just got, even with the team option on the second season. The Heat know that. They gave it to him simply to provide flexibility for (next summer and) the summer of 2021. If the need a big salary for trade-match purposes, they can exercise the $15M option and they’ve got it; if they’d rather have the cap room, they can decline the option and recover the cap room instead.

But by having the flexibility of that $15M option in 2021, Miami locks themselves into a $15M guaranteed salary for next season. Which sheds $15M off of what would’ve been $42M in cap room. You can do a ton with $42M that you can’t do with $28M.

By giving Iguodala that $15M, the Heat is effectively acknowledging that they don’t plan to do much in free agency but re-sign their own guys (or replace them with the MLE). And looking at the relatively weak free agent class, that may seem like a reasonable position. But we’re still five months out. You never know what will develop. Which makes the Iggy extension a highly questionable decision. It’s pretty awful really.

I like the trade. I HATE the extension.

Nonetheless, the Heat does still have $27M of cap room next summer. And a couple different approaches they can take with it.

One note before we begin: Timing will play a giant role in how the Heat approaches its future. Giannis becomes eligible for a massive 5-year supermax extension with the Bucks next July, which is projected to pay out $254M. If he remains healthy, the Bucks will certainly offer it. And if he accepts, the Heat’s entire roster-building strategy will instantly change. The entire summer of 2021 class will looks far less attractive than it once did — Giannis would no longer be a possibility; other potential free agents such as LeBron James, Kawhi Leonard and Paul George would only be possibilities if the Heat were able to rip them away from Los Angeles (the latter two at a highly advanced age), and, beyond Victor Oladipo, that’s about it for truly transformative talents. Which, in theory, could cause the Heat to about-face and shift focus to the summer of 2020. But Giannis doesn’t need to make a decision until long after the free agent rush is over. Which could force the Heat to act as if he is still a possibility for 2021, even if we learn a few weeks later that he isn’t. So… watch for a Giannis decision, and how the Heat reacts to it.

With that, let’s analyze how the Heat could utilize the $27M:

Approach 1: Operate as an Above the Salary Cap Team

This is, far and away, the most likely approach. The Iguodala extension was a dead giveaway.

Under this approach, the Heat could retain all of its key free agents – Goran Dragic, Meyers Leonard, Jae Crowder and Derrick Jones Jr. – and potentially supplement them with access to the non-taxpayer mid-level exception ($9.8M), bi-annual exception ($3.8M), and/or the trade exception they created in the Iguodala deal ($7.5M).

The Heat will have full Bird rights to all six of its impending free agents this summer (including Solomon Hill and Udonis Haslem), so they’ll have the means to re-sign whoever they want. This scenario likely entails signing whoever returns to one-year deals with team options for a second season, preserving max cap room for the summer of 2021.

The primarily limitation in this approach would be avoiding the luxury tax, which they wouldn’t be willing to cross (for a second time in as many seasons). But, by virtue of having cleared that $27M off the books, they’ll start $50M+ below the tax line. So they shouldn’t have a problem bringing back whoever they want, at whatever salary they negotiate.

Approach 2: Operate as a Cap Room Team

This approach carries the more exciting possibilities. It’s also the one for which giving up $15M to Iguodala is particularly painful.

By virtue of having dumped that $27M of salary in the trade, the Heat now go from projecting to have no cap room next summer to being able to create up to $28M of cap room, which would increase to $40M if Kelly Olynyk were to decline his player option.

They can utilize their $28M+ cap room to: (i) re-sign Goran Dragic, Meyers Leonard, Jae Crowder and/or Derrick Jones Jr., (ii) pursue outside free agents, and/or (iii) engage in potential trade scenarios.

At a net cost of less than $1M of that projected cap room, the Heat can use Jones Jr.’s Bird rights to re-sign him to any contract they negotiate. However, his full second year in any potential multi-year deal would count against Miami’s cap sheet, which would subtract from its summer 2021 cap room. So the Heat needs to be creative there. Or let him go.

Beyond that, here’s a look at some of the opportunities with the remaining $27M or $39M of cap room:

Miami could try to leverage the rest of its cap room to sign prized Lakers free agent forward Anthony Davis. The Heat would surely, without hesitation, bypass the Giannis plan if a Davis long-term contract were a possibility (and who knows; maybe the Heat could make both work). As a consequence of the Iguodala extension, the Heat will only have $27M of cap room if Olynyk were to exercise his option. Therefore, to get all the way to the $35M required for a Davis max would require some maneuvering, involving perhaps an Olynyk trade ($12M net savings) or waive-and-stretch ($8M net savings). That’s the first potential cost of the Iguodala extension. But it’s highly unlikely Davis leaves Los Angeles.

Miami could also leverage the rest of its cap room to re-sign their own players and/or less than superstar outside free agents. In this scenario, the team would have the $27M to $39M of cap room remaining after accounting for Jones, plus the room mid-level exception ($5.0M), to allocate to everyone: Dragic, Leonard, Crowder and new additions. One possibility could certainly be Gallinari himself, perhaps after he’s reconsidered his position on a short-term deal after experiencing the throws of a relatively muted free agency market. Another could be a defensive presence. As a consequence of the Iguodala extension, the Heat probably won’t be be able to re-sign Dragic AND sign an impact free agent to a contract with a starting salary higher than the $10M NT-MLE. That’s the second potential cost of the Iguodala extension.

Miami could also leverage the rest of its cap room to unlock an unlimited number of potential trade opportunities. It’s impossible to speculate about who, exactly, could become available in trade. I’ve heard fellow Heat fans already speculate about anyone from Damian Lillard to Bradley Beal to Joel Embiid, and I’ll wildly and without basis throw personal favorite Karl Anthony Towns’ name into the mix (despite his apparently tense relationship with Jimmy Butler, and the fact that it’s not going to happen). These are among the most thrilling potential trade opportunities with the space, but what fans should realize is that just about all of these possibilities would involve sending out some big assets (i.e., players) AND taking on big long-term money (unless Butler or Bam is traded as part of the transaction), and could therefore eviscerate the Heat’s post-trade team and/or its summer of 2021 plan. A more realistic trade target on which I might personally focus: the Bulls’ Lauri Markkanen. He seems to have grown increasingly disgruntled in Chicago, and his play has reflected it; I personally believe his game could be revitalized in Miami, and, as a combination playmaking-shooting 7-foot forward, it would fill a key need. Markkanen would be a restricted free agent in the summer of 2021, so acquiring him wouldn’t reduce the Heat’s potential cap room for 2021; and, with a $20M cap hold, it wouldn’t be impossible to think the Heat could squeeze in both Giannis and Markkanen, if the latter were to live up to expectations.

Finally, Miami could leverage the rest of its cap room to take on some undesirable expiring contracts in exchange for future assets. Perhaps grab a first round pick or two if other opportunities fail. With two future ones gone, replacements could be a welcome addition (though this scenario could potentially cost the Heat the ability to re-sign some of its current free agents).

Most of these scenarios would likely involve oversized one-year deals — which could turn into longer-term situations if the Heat were to be unsuccessful in luring a Giannis-type. But not all of them need to be.

Here’s why signing everyone to one-year deals doesn’t necessarily need to be the case, despite the Heat’s efforts to maximize its summer 2021 cap room:

For the summer of 2021, the Heat currently projects to have Jimmy Butler, Tyler Herro, KZ Okpala, and its 2020 first-round pick under contract, as well as the free agent rights to re-sign Bam Adebayo, Duncan Robinson and Kendrick Nunn. In addition to that, the Heat could potentially generate up to $50M+ of cap room, if they decline Iguodala’s $15M option.

Max salaries, at the currently projected $125M salary cap, would range from $31.3M for players with 0-6 years of service, $37.5M for players with 7-9 years of service (e.g., Giannis, Davis), and $43.8M for players with 10+ years of service (e.g., Kawhi Leonard, LeBron James).

Heat max cap room: $50M+. Giannis’ max: $37.5M.

Which means the Heat could potentially fit a Giannis max into cap room, and still have up to $15M of cap room left over(4) — whether it’s for an existing Heat player, the second year salary of a new Heat player signed next summer, or another second free agent beyond just Giannis in 2021. Which mean that, in the case of Bertans for example, the Heat could build an up to 4-year, $63M contract around a $15M salary in 2021-22, and still have enough cap room for Giannis at the max.

Furthermore, I’m a firm believer that the Heat can’t plan it’s entire future around the low-likelihood prospect of signing Giannis. It’s why I, personally, would’ve guaranteed the extra season in order to get Gallinari. And it’s why, I would offer a longer-term contract if it meant getting an impact player this summer. If it turns out that the Heat ends up needing the space for Giannis, they could always trade the player to get it. And if that proves costly, they can always stretch the salary away.

Implications for 2021-22

Difference in salaries sent and received: $0.

None of the players sent or received in the trade will be under contract in 2021-22, except, possibly, for Iguodala – his extension gives the Heat a $15M team option for the summer of 2021, which they can exercise if they need it in trade or decline if they prefer the cap room.

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How will the Heat utilize its newfound flexibility for this and each of the next two seasons?

Should the Heat have given Iguadala his lofty extension? Was the possible extra flexibility for 2021 worth sacrificing the definite extra $15M of cap room for 2020?

How you evaluate the trade depends on these answers. But one thing is certain: the trade produced a bunch of flexibility for the Heat, and, with it, for Heat fans, even greater hope for the future.

Notes:

(1) As you undoubtedly know by now, I viewed Danilo Gallinari as a transformative talent for the Heat, and my preferred trade target all season long. In fact, my long-time readers know that I actually wanted the Heat to sign him three years ago. So it felt amazing to have nailed what would ultimately become the Heat’s primary trade deadline interest a full seven months in advance. But the Heat put itself in the odd (though understandable) predicament of not wanting to trade for him if it were to be just a four-month rental, and not wanting to commit to anything beyond one extra new season — that’s a very precise and specific extension demand. I, too, don’t think they should’ve traded for him without agreeing to a longer-term arrangement. But I, personally, don’t think the Heat can plan its entire future, bypassing transformative opportunities, around the remote possibility of signing Giannis. If Giannis were to become a possibility, and the Heat finds itself needing more cap room to sign him, it could always have pursued trade scenarios to get it. What says you can’t trade a then reasonable and expiring Gallinari salary (no greater than $24.9M)? Perhaps, as Zach Lowe points out in his eloquent article, these kinds of trades tend to cost a lot; when everyone knows you need space, you have no leverage. But relying upon a potential trade wasn’t the only option available to recover the necessary cap room for Giannis, if he indeed became a possibility. There were several other ways to do it too. As noted above in this post, the Heat could’ve paid out up to $15M in 2021-22 and still had enough room for a max. So, if the negotiations broke down over whether or not to attach a team option on Year 2 of a potential two-year, $48.7 million extension, the Heat could have, for example, instead made that $24.9M second-year salary partially guaranteed for up to $14M – enabling Gallinari to still get his full extension-max salary next season and a free $14M to walk away in the second if the Heat were to need to cut him to preserve max cap room for Giannis. And, lest we forget, if all else failed, the Heat could’ve always waived and stretched Gallinari’s $24.9M salary (or $14M partial guarantee) to create the max room. Technically speaking, there was no extension Miami could have given Gallinari that would’ve eliminated the possibility of having flexibility for a max slot for Giannis in 2021, because the most he could’ve gotten was $24.9M, which could’ve been stretched away to $8.3M. Of course, none of these ways are anywhere near as eloquent as simply not trading for him if he wasn’t willing to forgo a second-season full guarantee. And, as detailed above, the Heat has bigger plans in mind. But, still, I’m bummed.

(2) Part of me was surprised that the Heat didn’t try to re-trade one of its two new expiring contracts in an effort to save that $1.4M and drop below the tax line. Assuming Solomon Hill would’ve be the primary salary the Heat would be dumping, trade rules allowed the Heat to take back as little as $7.8M in exchange for his $12.8M salary. Which means that there could potentially have been a bunch of potential opportunities to save that small amount. As just one example, the New York Knicks have Maurice Harkless ($11.0M, but they may want to keep him), Taj Gibson ($9.0M, and a $1.0M partial guarantee for next season that the Heat could swallow), and Wayne Ellington ($8.0M, and a $1.0M partial guarantee for next season that the Heat could swallow). Any one of those scenarios could’ve worked. But Miami didn’t have much to entice (just up to $5.6M of cash really, unless they would’ve been willing to take on 2020-21 money or part with KZ Okpala). But, that all being said, if there were ever a time not to worry about the tax, it’s this season. The tax hit will be no greater than $2.9M and the forgone tax distribution to non-taxpaying teams would’ve been less than $300K, for a cumulative cost of no more than $3.2M. And the Heat almost certainly won’t be a taxpayer next season. So, at some point, it’d be less costly just to pay the tax than to give up whatever it takes to drop below.  

(3) The Heat’s room below the hard cap is currently $2.8M. It can increase to as much as $3.9M if Hill were to be waived. But the Heat could lose half of that added flexibility if Hill were to reach his 1,000-minute target on his $0.5M bonus. He’s at 901 now. 

()  This is where that $5.2M dead-money cap charge really hurts. It could’ve been $20M+.