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NBA Free Agency Guide: Part 1, Salary Cap Rules

NBA Free Agent Season has officially begun…kind of. July 1 marks the first day that teams can open negotiations with free agents, but no deal can be made official until July 9. Luckily, this gives us fans a little more than a week to salivate over rumors and endless possibilities…or, to try and figure out the salary cap situation surrounding free agency. Today, I aim to give you a primer for the NBA Free Agent period, beginning now with a look at the salary cap rules surrounding the signing of free agents.

In general, the NBA’s salary cap is a soft cap, meaning that there are ways for teams to cross the threshold. This can be done via exceptions, minimums, trades, and owning player rights, all of which will be explained shortly. Keep in mind that any actual cap figures I use are rough estimates, since the league won’t announce the official cap for 2008-09 until the number crunching has ceased on July 9. The cap is usually set at 51% of the league’s Basketball Related Income, and it has increased at a fairly steady rate for the past few seasons, so I’m anticipating a salary cap of $59M with a luxury tax level of $71M, though these may be slightly higher than the announced levels. So, without further ado…

The Salary Cap
Congratulations, you’re one of the 13 teams that are presently below the salary cap threshold! What has your clever financial maneuvering won you this offseason? Sadly, because of so many rules and exceptions, not a whole lot. There is very little to keep teams above the cap from nabbing the marquee free agents, so these 13 teams don’t have a huge bargaining advantage. This goes doubly when you consider that of the 13 teams with cap space, only 9 have more than the expected mid-level exception (about $6M). I’ll get into those details more momentarily, but the basic premise you face being under the cap is this: you have a little extra bargaining power with free agents, but there aren’t many cases where you can offer significantly more money than another team (though you possess the ability to bring in multiple players).

I didn’t know where else to put this, but it made some sense here: A team that is slightly below the cap, such as the Heat this offseason, does not have the benefit of cap space and exceptions – the exceptions are added to their cap total, as if assumed they will be used, and then the team must use them. The team also has the option to renounce their exceptions, though this case would be a rare one. It is a little confusing, but basically you can assume that any team within the Mid-Level Exception ($6M) of the cap is essentially at the cap threshold and will be forced to use exceptions.

Bird Rights and Resigning Your Own Players
There’s actually an incentive written into the Collective Bargaining Agreement to attempt to keep players with their teams for a longer period of time. Foremost, you can go above the cap if re-signing your own players. The first way is via the Larry Bird Exception, where a team may re-sign a player who has been with that team for at least three years to any deal up to the maximum contract. There are also incentives such as the allowable annual raise to be 10.5% instead of 8.5% and that the deal can be a full year longer (6 instead of 5 years), meaning you can offer your own player more money than another team can. This is a great way to keep players with franchises for a long time, with the one problem being that a player’s Bird Rights are traded when he is (and that’s why you see things like sign-and-trades or players traded in the final year of their contracts). There is also the Early Bird Exception, where a player with at least two years of service time with that team can be signed for up to 175% of his previous contract amount or the Mid-Level Exception, whichever is greater. Finally, there is the Non-Bird Exception, where a player can re-sign with his previous team for up to 120% of his last contract amount. All three of these exceptions allow teams to exceed the salary cap and allow them to retain players for six years versus the standard five.

Mid-Level Exception
The Mid-Level Exception is a CBA loophole meant to assist teams from being handcuffed by bad fiscal management in the past. At least, I think that’s what it’s for, since it gives teams the right to spend up to the average league salary (roughly $6M this year) on players in the free agent market. This amount can be given to a single player or split among several free agents. Unfortunately, this exception is only offered to teams above the salary cap, meaning you can’t combine the mid-level exception with cap space to offer a player a monster deal. An added benefit of the MLE is that even if it is used for a multi-year contract (note: the annual raise can be a maximum of 8%), the exception is only officially used in the year the signing is made (for example, the Raptors signed Jason Kapono last offseason with the MLE, but the exception is available to them this year again).

Bi-Annual Minimum Exception
Like the Minimum Exception below, the Bi-Annual may be used once every two years by teams looking to sign players for double the minimum salary. The Bi-Annual is set at $1.91M for this coming season, meaning those teams that didn’t use it last year may use it this year, split between several players or just on one, for contracts up to two years in length. Basically, it’s an added bonus for teams looking to sign players close to but not at the veteran minimum.

Minimum Exception
Teams may sign any number of players at the league’s minimum contract value, for up to two years (the second year also has to be the league minimum contract value). This is so teams are not forced to enter the season short on players (or, if you’re a contending team, so you have a nice cheap way to fill out your roster after spending $60M+ on The Big Three).

Rookie Exception
Teams are always allowed to sign their draft picks (the NBA mandates rookie contracts based on a scale) even if it puts them over the cap.

Traded Player Exception
Salaries don’t have to match exactly in trades; they have to be within 125% +/- $100,000 of each other, meaning teams can take on added salary via trades. Ever hear the term ‘sign-and-trade?’ Well, this is why it gets done, as it allows teams to essentially offer players large contracts while the team losing the player gets some value in return, usually in the form of a trade exception or draft picks (note: the trade exception is a dollar amount that is a bit confusing, but it basically means if you trade a $2M player for a $1M player, you have $1M extra you can receive in a trade later, with that $1M exception moving to the other team. These exceptions do expire, though).

While this doesn’t appear to be a major player in the market this year, except for possibly Stephon Marbury and Jamal Tinsley, if a player agrees to a buy-out, the agreed upon buy-out amount counts against the cap, not their original salary. The buy-outs are not league mandated, so a bought out player could reasonably help his old team out in a big way, though I don’t think this is very likely, especially for Tinsley. You gotta make it rain, right?

Luxury Tax
The luxury tax is a level set above the salary cap to further negate teams from overspending. Most teams will try to avoid the luxury tax, since once you cross that line you must pay the league one dollar for every dollar spent, but there are several teams (not just the Knicks) who don’t mind throwing around the extra cash. In fact, 8 teams are already above next year’s anticipated luxury tax line before using any exceptions. This threshold acts as a deterrent for roughly half of the league, but you’ll see some teams come dangerously close and essentially treat this as a ‘hard’ salary cap.

Incentives may be built into contracts but they are somewhat rare and their hit against the cap is left to the league’s discretion based on the likelihood of the incentives being achieved.

Maximum Contract
Just thought I’d point out that a maximum contract is the most a team can offer a player on the free agent market. If he’s coming from another team, the deal can be up to 5 years, starting at a league-set maximum based on years of service (roughly $13M or $15M) or 25% of the cap (roughly $14M), whichever is higher, with an 8.5% raise each year. If he’s being re-signed by his previous team, that increases to 6 years with a 10.5% raise each year.

Restricted Free Agents
Like any sport, a player is a restricted free agent if his contract mandates so and he is tendered a qualifying offer from his team. RFA’s are free to negotiate as if they were free agents, but the player’s original team has the right to match any offer and the player is forced to stay there. Players can accept one-year contracts from their teams in hopes of becoming unrestricted free agents the following season.

Hope this helped clear some things up…add any more rules or questions in the comments below!

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23 Responses to “NBA Free Agency Guide: Part 1, Salary Cap Rules”

  1. HoopsIsWhatiLive4 Says:

    With everything that’s going on right now with Brand and Baron opting out of their current contracts, can I ask you a question? Do the Clippers still hold Brand’s Bird Rights? And if so, what is to stop them from signing Baron Davis on July 9th to a max contract where he makes 18 mil a year(due to the fact that since Brand and Maggette opted out, the Clips have almost $30 mil in cap space), and then using Brand’s Bird Rights to go over the cap to sign him to a max deal paying him $17 mil a year. I know that after Baron’s deal the Clips couldn’t afford to pay Brand that much, but, if they own his Bird Rights they can go over the cap to sign him. So, can this actually happen?

  2. Blake Murphy Says:

    I’ve been trying to figure this out all day, actually, so great question. I think, and I haven’t been able to confirm this yet, that Brand still technically has his Bird Rights with the Clippers. I know that if he had just become a UFA, this would be the case, but I haven’t been able to find any exception for if a player opts out to become a UFA. The way I understand the CBA, Brand still has Bird Rights with the Clippers, so you’re half correct so far.

    That said, you’re wrong about being able to sign both. The way the exceptions (e.g. Bird Rights) work is that they are essentially added to the team’s cap total, as if the league is assuming they will be used. Thus, Brand’s Bird exception technically counts against the cap until it’s clear that they won’t resign him, meaning that they won’t have the cash to sign both, unless both take a pay cut. It works this way to prevent teams from doing such things, as it would make it very easy to go way over the cap (imagine a situation in which the Cavaliers have a tonne of cap space in the 2010 offseason and sign a bunch of great players up to the cap level and THEN sign LeBron…disaster!).

    I’m pretty sure I’m understanding this correctly, but if someone knows otherwise please feel free to help out.

  3. HoopsIsWhatiLive4 Says:

    I see. Thank you for this clarification. The Lebron example is a good one in that I know in the season that he can use his ETO (summer of 2010, I believe), the Cavs don’t have anyone under contract. So, theoretically, they could sign Wade and Bosh to max deals and then re-sign Lebron with his Bird Rights and fill out the team with the various exceptions available to them.

    However, I’m still wondering, it’s not like Brand is an RFA, like say Iggy and Josh Smith this year, or Darko last year. In these instances, I know a cap hold exists and limits those teams ability to sign FA’s as the hold affects their cap number. They would have to renounce the rights to those players if they were to sign a player to a contract that exceeded the cap space that exists with the cap hold in place (the Magic did this with Darko, renouncing his rights to sign Lewis). But, since Brand is not a RFA, but an UFA how does a hold exist? He’s free to go wherever he wants (with considerations for cap space and hence his contract demands) and Clippers would have no say in any of it and don’t have the right to match. So, in this regard, I’m still confused. To sum it up, Why is there a cap hold when right now the Clippers have no official “rights” to Brand other than his Bird Rights (which only give them an advantage in contract offers, but not in right of first refusal)?

  4. HoopsIsWhatiLive4 Says:

    I guess what I’m also asking is: A team can renounce a players Bird Rights? I would think that is the only way to make it clear that you don’t plan to re-sign him.

  5. Blake Murphy Says:

    Like I said, I’m not 100% clear on the legalese of it and haven’t found much help elsewhere on the internet. To the best of my knowledge, they would have to renounce his Bird Rights, though that may even create an issue with the Player’s Association because it eliminates the chance of a sign-and-trade and therefore limits his earning potential (think Devean George, but this time it matters). It doesn’t make sense for him to have a cap hold, you’re right, but I guess it also doesn’t make sense for the LeBron example to play out, so that’s why it’s in there (if it is…like I said, I’m still only about 70% on this).

  6. Blake Murphy Says:

    Sorry I can’t give you a more certain answer, by the way.

  7. HoopsIsWhatiLive4 Says:

    It’s all good. It’s not like I’m a Clips fan or anything and getting my hopes up.

    I guess I’m questioning the whoe thing because it just doesn’t make sense that Brand would opt out and use the reasoning that he watched the Celtics win by stockpiling stars, so he wanted to opt out to help the Clips get some salary cap leverage, if that leverage really can’t be used for anything. I mean, the Clips were going to be under the cap anyway because they renounced their rights to Livingston and then Maggette opted out. So, brand could have easily just said, “I won’t opt out, now go spend that money on a FA player to get us going.” Instead, he opts out, says it’s for flexibility purposes and that he fully expects to return to the Clips, but it’s not going to help them sign another big money player? I don’t get that…

  8. JT Says:

    It’s all in here, in the Cap FAQ:

    Hoops - cap holds are designed to keep a team from signing other teams players, and then signing their own. Until you renounce a player (and his Bird Rights) and release that hold against the cap, you don’t really have cap room to sign another team’s player. The reason teams hold onto rights, even though they don’t intend to resign their player is to keep other notions from kicking in - if you have less than 12 roster players and cap holds combined, the league assigns minimum cap holds to you and that can prevent a team from clearing enough room to sign a player they want. So, they renounce right before they execute the new contract to get around this. Yeah, it’s complicated. The Cap FAQ is the best, anywhere. In fact, the NBA Player’s Association website links to it…

  9. Sports Socialite Says:

    all these numbers hurt my head

  10. Joe Says:

    Someone mentioned 30 million as the projected cap space. This is incorrect. You need to have 12 players counting “against the cap” and Gordon has to be included. Their salaries against the cap come out to about 33.45 million. The cap will be set at 57-60 million almost certainly. We will assume 58.5. That means 25-25.5 million in cap space.

    Brand has a cap hold. If you check here… you will see that Brand has a cap hold set for 150% his salary last year which would be enormous, but it cannot exceed the maximum salary. He has been in the league for 9 years, so his max would be 30% of the salary cap.(based of league BRI I believe and not technically the cap) Long story short, he will have a cap hold of at least 15.5, but less than 18.

    They could, from my research, split the 25 million between Brand(10.5% increases max) and Baron.(8% increases) Both would have to take paycuts for sure.

    Oh yeah, and you need a bench. By using their capspace, they would have no MLE and so would be forced to live off veteran minimum players to fill their bench and I just don’t think that is going to cut it to get anywhere near being a top 5 West team.

    I hope I helped in some way.

  11. Joe Says:

    They extended QOs to Fazekas, Josh Powell, and Marcus Williams, which I was unaware of, killing a million or so off what I said most likely, since they have cap holds that would cut into free agency more so than rookie minimum contracts would.

  12. HoopsIsWhatiLive4 Says:

    All of this info was very helpful. Thanks to Joe and JT, you guys and Blake cleared it all up for me.

    It still strange though that Brand would use the logic he did when opting out, unless he plans on taking a pay cut (doubtful).

    Who knows though, maybe Baron and Brand aree incahoots to try and bring back the Clips and don’t care what they make…

  13. Joe Says:


    As a Sixers fan hoping for Brand against the odds, I have looked at some of this stuff.

    I think that the Clips surely weren’t notified of this info, or else I think they would have renounced their rights to Fazekas, Marcus Williams, and Josh Powell to create that extra million in cap space or whatever. At least Marcus Williams who is surely a minimum player.

  14. Joe Says:

    sorry for double post, but by “info” I meant a Brand-Baron cahoots thing.

  15. Blake Murphy Says:

    Thanks for the help clearing that up guys. Essentially, I was right, just didn’t have the legalese details down pat.

  16. HoopsIsWhatiLive4 Says:

    Yeah, I really think the Clips are in a bind now. They better try to work something out to bring in another legit player or I think Brand bolts for another team.

    Philly sure could use him too. I know they’re looking at Josh Smith to go with the rest of their young athletes, but to me, you can’t go wrong with Brand beasting it on the block and the boards…

  17. HoopsIsWhatiLive4 Says:

    And thanks to Blake for the forum and for helping to clear this up.

  18. Kiel Says:

    Hoops, I believe Brand opted out precisely so he COULD take a pay-cut, his logic being that they could take the money they save when they resign him for less and spend it signing another star, e.g. Baron. At least that’s what I took from his statement.

  19. Kiel Says:

    Also, Wikipedia mentioned a “One Million Dollar Exception”. What’s the deal with this? Or did someone on Wiki just make it up?

  20. Blake Murphy Says:

    The One Million Dollar Exception is the old name for the Bi-Annual Exception, which has obviously increased over time.

  21. HoopsIsWhatiLive4 Says:

    Kiel, you could be right. I know that Brand likes LA and he never seemed like a greedy guy or anything. And like I said earlier, maybe Brand and Baron are working a little behind the scenes magic to make this work out for the Clips. But, I’ve never seen a guy say “no it’s okay. really. i’ll play for less.” But if that’s what Brand does, good for him. Few players would commit to winning in that way, and it would really prove what he’s all about.

  22. Blake Murphy Says:

    Looks like we’re all on to something. Davis is a Clipper:

  23. Blake Murphy Says:

    5 years, 65M is the report.

    To clarify our discussion:

    “Forward Elton Brand also opted out of his contract with the Clippers on Monday, and speculation quickly began that the team would try to keep Brand and sign Davis. This scenario is only possible if the Clippers renounce the rights of Corey Maggette and Brand takes a slight pay cut.”

    So collectively, we were mostly right - the Clippers have to renounce Maggette to make it happen, and Brand has to take a small pay cut, but there is enough cash for both.

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