2012 NBA Free Agency: A Beginner's Guide to the NBA Salary Cap

Joshua J Vannuccini@@jjvannucciniSenior Analyst IIIJuly 1, 2012

2012 NBA Free Agency: A Beginner's Guide to the NBA Salary Cap

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    As NBA free agency approaches, there are a number of stories floating around about potential destinations for the best players available. Big-name players such as Deron Williams, Steve Nash, Ray Allen, Kevin Garnett and Jason Terry are but a few of those who could suit up in a new uniform next season.

    However, there seems to be a mass confusion in terms of which teams are potential candidates for certain players. The prospect of All-Stars joining perennially-contending teams is viable in certain situations, yet many ignore the limitations and regulations of the salary cap.

    The amnesty clause provision is also one that is mostly misunderstood. The following presents clarity for those who need further insight into the finer aspects of the NBA business.


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    Unlike the NFL, the NBA does not have a hard cap to build teams. The cap limit will be approximately $58 million for this season.

    Rather than limiting contracting at a certain amount, the league allows teams to exceed this constraint in specific situations. They are as follows.

Exceptions: Mid-Level Exception

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    This is a clause every NBA fan is familiar with. It permits teams, either below or above the cap limit before the signing, to obtain a player for a specified amount. This can be utilized just once per year, but differs team to team.

    After the collective bargaining agreement (CBA) of 2011 (the reason for the lockout), the MLE was set at $5 million per season for four years for teams either below or above the cap limit.

    However, teams that paid a luxury tax (which we will get to later) in the previous season can only use a "mini mid-level exception" worth $3 million over three years. One example of this was Miami’s addition of Shane Battier. 

Exceptions: Rookie Exception

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    This clause allows teams, either below or above the cap, to sign their rookie picks regardless of their cap situation.

    This allows teams like the LA Lakers, Miami Heat and, now, the Detroit Pistons to add prospects, in spite of their cap situations.

Exceptions: Larry Bird Exception

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    This rule is notably renowned. It permits a team to exceed the salary cap to re-sign its own players. Those who qualify for this must play a minimum of three consecutive years with the respective team without being traded, waived or amnestied.

    This can be a three-year deal, three consecutive one-year contracts, or a combination of the two. The maximum amount of years on this contract is five years.

    An example of this was Miami’s construction of its current team. Dwyane Wade and Udonis Haslem’s contracts were permitted to exceed the cap, as both have spent their entire careers with the franchise.

Exceptions: Early-Bird Exception

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    This exception is a lesser model of the Bird exception. While it constitutes the same process of exceeding the cap, it can be put into effect after two years of playing with the team rather than three. The contract must be a minimum of two years in length and a maximum of four.

    A notable instance of this exception will be New York’s re-signing of Jeremy Lin. As Lin was claimed off waivers after his first year with Golden State, a judge ruling has confirmed his year with the Knicks permits early-Bird rights.

    The Bird Exception denies players who have been waived, yet the court hearing permitted Lin, as well as teammate Steve Novak, early-Bird rights. This means the Knicks are able to re-sign both to 104 percent of the average salary of the 2011-12 season, which is approximately $5.3 million, if they wish. 

Exceptions: Traded Player Exception

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    This exception is more commonly known as a trade exception. Fundamentally, when a team trades away a player and receives less salary back than it sends out, it obtains a trade exception of that amount.

    As seen with the Lamar Odom trade, the Lakers received a first-round draft pick in return. Odom’s $8.9 million contract then became a trade exception of the same amount, as draft picks are of no monetary value.

    These can then be used to accommodate a surplus of incoming salary in another trade, regardless of the cap situation, but only if the received player’s contract does not exceed the amount of the exception. It can also be used as a "bid" when players are amnestied or waived (which we will get to later).

    It is most commonly seen when trading draft picks for players and/or vice versa. However, it can also appear in sign-and-trade scenarios (which we will get to later), such as LeBron James’ decision to join Miami. Rather than Cleveland receiving zero, the two teams completed a sign-and-trade for James through which the Cavs received two first-round picks, two second-round picks and a trade exception for James' contract.

    One feature of a trade exception that limits its use is the fact that it must be used within a year of the initial trade. 

    There are a number of other exceptions, such as the non-Bird exception, but they are not as common as the aforementioned.


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    This particular aspect of the salary cap can be confusing at times. However, once you break down the regulations, it is quite simple.

    Teams that are below the salary cap threshold are able to make trades, regardless of the salary of those involved, yet only as long as the trade doesn’t leave them more than $100,000 above the threshold.

    Teams above the salary cap threshold cannot receive more than 125 percent plus $100,000 of the departing salary.

    What this means is this: Say for instance a player has a $5 million contract, and his team is over the cap. If he is traded to a team who is also over the cap, neither team can receive more than 125 percent of $5 million plus $100,000 ($6.3 million in total). If he is traded for a player who has a matching salary, there is no issue. If his salary equates to more than the aforementioned calculated amount of $6.3 million, the trade would be void.

    The following is not directly relative to the salary cap, but it is noteworthy nonetheless. A free agent signed to a team cannot be traded until December 15 of the year he is signed, or three months after the official signing. The different scenarios determining the ability to trade the player are dependent on which date comes later. For example, if the player is signed on December 14, the mandatory three-month wait period comes into effect, rather than waiting one day.

    This is to inhibit the idea of signing players to include in trades. Furthermore, players who have been traded cannot re-join their previous team for a period of time. The player cannot negotiate a buyout of his contract and simply re-sign with his former team. He must wait a period of one year or until July 1 of the year his contract expires.

    Additionally, a player received in a trade can be immediately sent elsewhere for another piece. This is most evident in "three-team trades," where teams will trade among themselves so all parties receive their desired pieces. This can only be done in a synchronized deal.

    For example, if the Dallas Mavericks were to trade Shawn Marion for a player and they wished to combine said player with another in a separate deal, there is an obligatory 60-day wait period before doing so.

Trades: Sign-and-Trade

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    This rule allows teams whose free agents are departing to other teams to receive something in return. In the aforementioned scenario with LeBron James, he decided to join the Heat. Losing a player of his magnitude was extremely damaging to the Cavaliers franchise.

    However, organizing a sign-and-trade agreement with Miami allowed Cleveland to receive two first-round draft picks, two second-round draft picks and a trade exception equal to James’ contract. It is a simultaneous arrangement and cannot span over days.

    The team dealing away the player central to the settlement can receive either draft picks or players. Cleveland received the trade exception, as they did not take back any other players in the trade. The exception is not fundamental to the sign-and-trade agreement but appeared in this particular scenario.

Trades: Cap Holds

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    Despite the previously mentioned exceptions, there are also countermeasures to prevent an unbalance in player movement. This discards the idea of signing free agents then using players' Bird Rights to exceed the cap, which would be somewhat unfair. This can be done in certain situations. 

    Free agents have what is called a "cap hold" on their team's salary. A cap hold is basically a reservation of salary on a team's payroll, but it does not equate to actual salary. It acts the same as a qualifying offer but applies to every player. This changes depending on the player's recent contract and his experience in the league. 

    For example, in the scenario of Miami signing Dwyane Wade: In 2009, Wade earned $15.7 million for the season. As the Heat possessed his Bird Rights, his cap hold is equal to 150 percent of that salary, or $23.6 million. Factor in Udonis Haslem's $10.6 million, and the Heat had $34.2 million reserved for the two players. 

    However, because Wade was re-signed first, it eliminated the cap hold. Signing a new contract with either the same team or a new team removes the cap hold from the payroll, allowing future moves to go ahead. 

    As you can see, having such a tool implemented restricted the concept of Miami signing James, Bosh and Mike Miller, perhaps a few more players, and simply re-signing Haslem and Wade with their Bird Rights, where the cap could be exceeded to accommodate their contracts. 

    The cap hold is also relinquished if the team renounces its rights to the player. Some of you may have heard this before. It essentially means the team is releasing its ability to exercise the player's Bird rights (and all other variations of Bird rights).

    By doing so, his cap hold is removed from the salary cap. Teams are able to re-sign these players, but must have the necessary cap room to do so, or by means of another exception, such as the mid-level exception. Teams can do this to create more cap space.


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    Many of you would be familiar with this aspect, as it happens very often. Waiving a player essentially releases him from the team. He is then placed on something called "waivers."

    This is a period of time in which another team can claim him and add him to its roster. By doing so, it also claims his contract, so teams over the cap or that cannot afford to pay his contract cannot claim him. A team that has a "trade exception," much like the LA Lakers have from the Lamar Odom trade, can claim a player so long as his contract does not exceed the amount of the exception.

    During the regular season, the waiver period is 48 hours. Between July 1 and August 14, it is a seven-day period. If multiple teams attempt to claim the player for the same amount, the team with the worst win-loss record receive him. However, much like any bidding war, whichever team bids highest obtains the player. 

Amnesty Clause

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    This section of the current CBA and salary cap is also difficult to grasp but simple once you know all the rules. It is essentially the same as waiving a player, yet his contract does not count against the team’s salary cap or luxury tax.

    Essentially, if you have a $70 million salary cap and amnesty a player whose contract equates to $15 million for that season, your payroll would then total $55 million. This clause is generally used to shed a bad contract and bring the team under the cap limit. The amount of salary amnestied does not become money to spend on other players.

    The same as waiving, teams that can afford to bid on the player can offer as much as the player’s contract balances to. This means that a team could place a $15 million bid and receive that player. Yet unlike waiving, it can be a full or partial bid of the player’s contract.

    A full bid is not normally completed, as it requires the recipient team to take on the player’s entire contract. The amnesty clause is generally exercised to clear an overburdening player’s contract from a team’s payroll, as seen with Gilbert Arenas, so it is ill-advised to make a full bid.

    As seen with the Los Angeles Clippers, they placed a $2 million bid on the amnestied Chauncey Billups and were able to secure his place on the roster. The team that initializes the amnesty clause is required to pay the remaining salary to the player. In Billups' case, he was due to receive $10.7 million his past season. Since the Knicks amnestied "Mr. Big Shot," the team was forced to pay the aforementioned amount. 

    Teams over the cap can only obtain an amnestied player if he clears waivers (no teams bid on him) and becomes a regular free agent, unless they possess the aforementioned trade exception. The amnesty clause can only be exercised on players signed before the 2011-12 season. 

Luxury Tax

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    The salary cap limit for this season is predicted to be about $58 million. Teams that surpass this amount are required to pay luxury tax, which is basically a penalty for exceeding a certain amount past the cap limit.

    For this season, the luxury tax limit will be $70.3 million. Therefore, barring roster movement, the Heat and the Lakers are the only two teams that must pay luxury tax, as their payrolls are $78.8 million and $77.3 million, respectively. Since the luxury cap is $70.3 million, the majority owner must pay dollar-for-dollar how much the team exceeds the limit, in addition to the normal team’s salary.

    Starting next season, an incremental system will be put in place. This means teams must pay an increased amount depending how far over the cap the payroll is. The table is as follows:

    Amount over tax threshold Standard Tax Repeat Offender Tax
    $5 million or less $1.50 $2.50
    $5 million to $10 million $1.75 $2.75
    $10 million to $15 million $2.50 $3.50
    $15 million to $25 million $3.25 $4.25

    If this were the 2013-14 season, Miami would need to pay $1.50 per dollar for the first $5 million and $1.75 for the next $3.2 million ($8.2 million) it is over the luxury tax limit. The "repeat offender tax" signifies the amount due for teams that have exceeded the luxury tax threshold in four of the past five seasons, and their penalties increase for doing so. 

In Conclusion

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    The aforementioned clauses, exceptions and regulations make up a basic outline of the NBA salary cap. The central concepts can be difficult to grasp at times, but this has hopefully provided a concise explanation to start you off.

    If you have any questions, do not hesitate to comment below, email me at vannuccini@hotmai.com.au or write on my bulletin board here on Bleacher Report.