The Knickerbockers have the right to match any offer a team extends his way. As long as it is not a heavy, back-loaded deal that could hurt the Knicks in the long term, as Alex Kennedy points out, they're likely to match it.
According to Marc Berman of the New York Post, bringing back Lin is all but a certainty if the Players Association wins their arbitration hearing:
And if the Players Association wins its arbitration hearing and restores Lin’s early Bird rights, it is a virtual certainty the Knicks will match any offer because the Bird exception means teams can exceed the salary cap to re-sign players.
A source said the arbitration hearing date will be set this week. If the union loses and the Knicks need their $5M mid-level exception to re-sign Lin, it could get trickier.
If the union loses, a team could offer a back-loaded deal to Lin and that will cost the Knicks the mid-level exception and then some to keep him. That road is a dangerous road—one the Knicks hope they do not have to go down.
This team has an interesting offseason in front of it, and these decisions will make or break the franchise for the next several years—on and off the court.
Financially, Lin could be a double-edged sword. He has worldwide appeal for fans. But if the Knicks are forced to pay too much money, it will push them off the salary cap, costing them more money down the line.
On the basketball court, he fills the biggest need the Knicks have, although it remains to be seen how he'll fare under Woodson and alongside Carmelo Anthony long-term.
New York is likely going to let another team set the market for Lin, but the Knicks still have the final say. Once we see the outcome of the arbitration hearing, we'll know what direction this team is going in.