Enormous Contracts Are the NBA’s New Reality

It has been a relatively quiet first day of free agency as the market waits for big fish like Carmelo Anthony and LeBron James to bite.  But the few deals that have been signed have shocked many observers in both salary and length.  Notably, 30-year-old Marcin Gortat agreed to return to the Washington Wizards for a reported five-year, $60 million pact, Jodie Meeks agreed to three years and nearly $19 million with the Detroit Pistons, and the Golden State Warriors reportedly agreed with Shaun Livingston on a three-year deal for their full mid-level exception, although the last year is only partially guaranteed.  This morning it was reported that restricted free agent Avery Bradley agreed to a four-year, $32 million deal to return to the Boston Celtics, and C.J. Miles agreed to four years, $18 million with the Indiana Pacers.

While these contracts are far above the market rate for last year, the rising cap this year, the number of teams hording cap space and the increased number of teams looking to compete this year has significantly inflated the market compared to the last few post-lockout years when the cap remained relatively flat.

Bear with me if you will for a short gaming of what this offseason will look like.  Please note that this is not a prediction of where these players will land necessarily, but more of an exercise to get an idea of how much money will be left once the main players have found their destinations.  To do so, I went through the salary situations of all 30 teams starting with the updated salary situations from our Eric Pincus.*  The goal was to determine how much room they would have, either via exceptions or outright cap space.  Obviously such an exercise involved myriad assumptions such as which players’ cap holds will be renounced, which non-guaranteed players will be retained, ad infinitum.  Clearly, not all of these can be correct.  They will not be delineated here, as that is not really the purpose of the exercise.  The point is more to get an idea of the total amount of free agent money available.

*Eric’s numbers include cap holds that have yet to be renounced as well as a lot of non-guaranteed money that will likely be cut.

As we will see, not only are the Meeks, Livingston and Bradley deals in line with this year’s market, but the teams signing them might have even been smart to move on them so quickly.

The Big Fish

The first part in modeling the summer is accounting for where the major free agents will land.  Aside from where we have reporting to the contrary, the assumption will be that most if not all of the major free agents will return to their prior teams.  Because the market is so inflated, the incumbent team will often have to use the advantage of offering a fifth year, as only the prior team may do. Since many of those teams are over the cap with no way to replace those players, that seems the most likely scenario in these cases. This is especially so since most of the teams in this situation are trying to get better this year.

If so many players end up returning to their prior teams, that will cause more overall money to be spent due to many of those teams using Bird rights to re-sign those players by going over the cap.  If those players leave, then those teams likely will not have the spending power to replace those assets, while teams with cap room still must spend to at least 90 percent of the projected $63.2 million cap this year.*

*If a team does not spend that much, it must distribute the difference between its actual payments to players and the salary floor to the players on its roster via whatever formula the NBPA finds appropriate. This would most likely be pro rata based on how much the players on the team are already making.

On to the main players.

The Heatles

Reports have generally indicated that LeBron James will demand a maximum deal. Chris Bosh and Dwyane Wade may sign for the max as well, but it’s possible that they’ll re-sign for less. Udonis Haslem will also re-sign for less than his original salary, but probably for more years to make up the lost income.  Most estimates have floated the idea that the Miami HEAT could have around $10 million in space to sign free agents, plus the $2.7 million Room Exception for teams under the cap.

Carmelo Anthony

Anthony seems the most likely star to leave his prior team. This analysis will assume he goes to the Chicago Bulls, but the overall league market would be much the same if he goes to another new team. If he remains with New York, that leaves another team with cap space that must be filled and inflates the market even further.

Dirk Nowitzki

All reports have indicated he is going back to the Dallas Mavericks, likely for about $10 million per year.

Lance Stephenson

Because the Pacers have no way to replace him, the assumption will be he ultimately returns there despite reports of an impasse after Indiana offered him a five-year, $44 million deal.

Kyle Lowry

Reports have Toronto mulling whether to offer him a fifth year on a contract starting at $12 million per year. If that is indeed the offer, it is hard to imagine him leaving because there is no way he would get that kind of money as a 32-year-old free agent coming off a four-year deal.

Isaiah Thomas

We will assume he returns to the Sacramento Kings on something like an $8 million per year contract as a restricted free agent.  They too have talked about trying to get better this year, and if they lose him they would still be capped out with no other decent point guard on the roster and only the MLE to offer.  Given the amount of money available around the league, I am surprised Thomas isn’t being talked about for offers over $10 million per year.  Apparently teams are scared off by his size.

Trevor Ariza

It has long been predicted that Ariza will return to the Washington Wizards.  With Martell Webster going under the knife for back surgery, Otto Porter nowhere near ready to start (if he ever will be), and Marcin Gortat already paid, the Wizards will likely retain the 29-year-old Ariza as well using Bird rights. This too may be tougher than expected for Washington, given the other potential suitors for Ariza.

Restricted Free Agents

As reports of the Cleveland Cavaliers making a max offer to Gordon Hayward swirl, it appears very likely that Hayward, Eric Bledsoe and Greg Monroe will get maximum offers given the amount of space available around the league.  A maximum offer sheet for these restricted free agents will start at approximately $14.7 million. We will also assume that their incumbent teams will match such an offer sheet.  If, however, they do not, the Utah Jazz, Phoenix Suns and Detroit Pistons will all have an extra $14.7 million in cap room to use on other free agents since they are all below the cap.  Therefore, the ultimate destination of these players does not really affect the total amount of money available in the system.

Meanwhile, it seems very likely that Chandler Parsons has some sort of arrangement to return to the Houston Rockets, or they would not have let him out of his contract a year early when his signing an offer sheet as a restricted free agent could potentially scuttle their free agent plans.  Because he still has a low cap hold of $2.9 million, the Rockets will still be able to sign free agents up to the cap before exceeding the cap to re-sign him with Bird rights.  The assumption will be that he returns on something approaching a $10 million deal, presumably with a bit of a discount priced in since the Rockets did him a favor by not exercising their team option for under $1 million for 2014-15.

Edit: To be clear, under this scenaio Parsons would not actually sign his new deal until after the Rockets sign additional players.  Signing it before the Rockets sign anyone else would use up their Room prematurely.

Teams With Cap Room

Now that those assumptions are in place and most of the major free agents are accounted for, here is my projection of the remaining available cap room around the league.

Philadelphia 76ers–$30.9 million

Orlando Magic–$22 million*

Los Angeles Lakers–$21 million

Phoenix Suns–$20.9 million

Charlotte Hornets–$18 million

Atlanta Hawks–$16.1 million

Dallas Mavericks–$16 million

Cleveland Cavaliers–$15 million

Utah Jazz–$13.8 million

Milwaukee Bucks–$13.1 million

Miami HEAT–$10 million

Houston Rockets–$7 million*

Detroit Pistons–$2.8 million

*The Orlando projection includes the two-year, $9 million contract given to Ben Gordon.  Houston’s includes Jeremy Lin on the roster for now. Although they will likely move him, it would be to another team with cap space so it would not affect the total amount of money in the system.

Look at those figures again.  Even with most of the major free agents gone, there could remain as much as $218 million in cap space around the league.  That number could of course change based on the potential destinations for the big boys, but it represents a reasonable proxy for what is out there.*

*While teams like Philadelphia, Orlando and Utah may not spend all the way up to the cap on their own free agents, the 90 percent salary floor means they are incentivized to take on bloated contracts from other teams in exchange for assets, which would open an equivalent amount of cap space elsewhere in the league.

Available Exceptions

Of course, that is nowhere near the maximum amount of money available around the league.  Based on the math and what we know of teams’ luxury tax tolerance, quite a few teams will have the full mid-level exception to spend.  By my projections, Boston, Denver, Indiana (partial use), Los Angeles Clippers, Memphis (likely Mike Miller), Minnesota, New York (if Carmelo leaves), Oklahoma City (possibly a partial use), Portland, San Antonio and Washington (depending on how high Ariza’s contract goes) could use the MLE.  That is 11 teams. If we conservatively assume that six of them will use the full MLE and another two use part of it, that is another $35 million or so in the system.

Many teams could also use the $2.1 million Bi-Annual Exception. These include Boston, Los Angeles Clippers, New York, Portland, and San Antonio.* If four of the six use it, that’s another $8.4 million.

*If Chicago can execute a sign-and-trade for Anthony or another target, they will likely use the MLE and BAE as well.  Edit: A previous version of this article stated that Washington could also use the BAE, but it was used on Eric Maynor last year.

Given Brooklyn’s recent spending habits, it will likely use the $3.3 million Tax-Payer MLE (MMLE).

Finally, many teams trying to improve with cap room could use their $2.7 million Room Exception.  These include Atlanta, Chicago, Cleveland, Dallas, Detroit, Houston, Los Angeles Lakers, Miami, Milwaukee, New Orleans (lost other exceptions due to going under the cap for the Omer Asik deal) and Phoenix.  That is another 11 teams. All but Atlanta and Milwaukee of this group seem certain to use theirs, so let’s conservatively say nine teams.  That is another $24.3 million.*

*I assumed that cap teams Orlando, Philadelphia and Utah would not use their Room Exceptions.

That now leaves us with approximately $289 million in available money—an absolutely enormous sum.

Who Gets the Money?

Now remember again that this $289 million is available to be spent with almost all of the best free agents off the market.

In the scenario I’ve modeled, here are some of the remaining notable free agents:

Pau Gasol

Spencer Hawes

Luol Deng

Channing Frye

Ed Davis

Boris Diaw

Josh McRoberts

Shawn Marion

Paul Pierce

Patty Mills*

Patrick Patterson (RFA)

P.J. Tucker (RFA)

Mo Williams

Vince Carter

Thabo Sefolosha

*Mills has a shoulder injury that will keep him out until at least midseason, and is widely assumed headed back to San Antonio.

Certainly other players could get paid this offseason, but that list is incredibly unexciting.  And yet in this scenario $289 million, plus minimum salaries, is going to be split up among these players and even lesser lights. The choice between massively overpaying older players like these and investing in maximum contracts for players like Hayward, Bledsoe and Monroe is an obvious one.  That is why those players will almost certainly get maxed out.

What is Market Value?

Given the realities of the market, the Livingston, Meeks and Bradley contracts do not look nearly so bad. Then consider that the salary cap is projected to increase a further $4 million next year, and may see even higher increases in the years after that as new national and local television deals kick in.* Even the Gortat contract seems to be right about what he would have gotten on the open market in terms of annual value.

*Especially with respect to the national deal, the NBA may elect to mute a possible huge one-year jump in the cap by structuring the national TV contract to increase in value over its lifetime rather than doubling the previous contract in year one.

Nevertheless, the mere fact a contract is market price based on what other teams are willing to pay does not necessarily make it a good deal.  This is especially so for players like Gortat, Lowry and Ariza who will likely re-sign with their old teams.  With the market so competitive, the fifth year becomes critical for both player and team, especially when a player is on his third long-term contract.  With the amount of competition on the market, length of contract rather than size will become more important than ever.  We may see smart teams move ever more in the direction of shorter offers for more money to free agents when they are signing players below the upper crust.

For the first three offseasons after it was enacted, many cited a depressed free agent market as the reality of the 2011 CBA.  It is now clear that was an artificial reality imposed by the flat cap required to reduce the players’ percentage of BRI into the agreed-upon 49-51 percent range from the previous CBA’s 57 percent, as well as bloated longer contracts left over from the previous CBA. The shorter contracts under this new CBA will put many more free agents on the market every year. The new breed of general managers are much smarter about maintaining flexibility. The cap is now rising, and should continue to do so beyond what many have imagined. Get used to three years, $19 million as a relative “bargain” for Jodie Meeks for the foreseeable future.  It is the NBA’s new reality.