Wednesday, February 27, 2013

How did the Arenas rule, meant to protect the current team’s ability to re-sign a player, become a weapon the Rockets used to pry away two good young players?

How did the Arenas rule, meant to protect the current team’s ability to re-sign a player, become a weapon the Rockets used to pry away two good young players?

From a strategic perspective, one of the more interesting developments in in 2012 offseason was the use of the Gilbert Arenas rule as a weapon by the Houston Rockets.  Both Jeremy Lin and Omer Asik were restricted free agents, meaning their teams had the right to match any contract offer another team would give them.  Houston offered both players 3 year deals with yearly salaries of 5 - 5.2 - 14.9 (mil). 

The Bulls and Knicks chose not to match these offers.  The balloon payment in the third year is too painful in the new luxury tax era.  The Knicks, for example, are likely to be over the tax line even without Lin in 2014-15 and adding $15 million in salary would cost them over $40 million in total salary and tax hits.  The Bulls, on the other hand, usually try and avoid paying the tax and having one non-star player getting that salary would make it hard.

There are 2 unique features of these contracts that are only possible because of the Arenas rule.  First the big jump from year 2 to year 3 is only possible in Arenas rule contracts.  All other NBA contracts are limited to at most a %7.5 increase or decrease in salary from year to year.  Other than the Arenas rule contracts, there is simply no way to put in a poison pill year, by either front-loading or back-loading.  Second, the team signing the player to the offer sheet under the Arenas rule (Houston in this case) has the cap hit averaged over the contract, rather than using the yearly salaries as the cap hit.  So for both players, Houston’s cap hit is $8.4 million in each year.  This saves them $13 million in cap space in 2014-15.  The cost is increasing the cap bit by around $6.5 million this year and next.  It’s a net win for Houston since they already were well under the tax this year and likely next year, and they get added flexibility in 2014-15 if they are looking at contending and adding a big salary player.

So the Arenas rule allowed Houston to offer contracts that are otherwise not allowed, and at the same time warped the cap hits to benefit them while hurting the current team.  The crazy part of this is that the Arenas Rule was originally created to help the current team retain its players!  To understand this, you need to know a little about Bird rights.  Usually a player has Bird rights after his third season, but can never have bird rights after his second season.  A player with Bird rights can be re-signed by his current team to any contract even if it takes the team over the salary cap (they still have to follow all other rules, like maximum salary limit).  Without Bird rights, there are limits to the amount he can be re-signed for without using cap room. 

In 2003 Gilbert Arenas was coming off his second year in the league with Golden State (thus no Bird rights), he was a restricted free agent and  was offered a contract by Washington with a year 1 salary of $8.5 mill.  Golden State did not have $8.5 million in cap space and thus they were powerless to match the contract, even if they wanted to.  This was seen as unfair.  Had Arenas been coming off his third year rather than his second when his contract ended, Golden State could have matched without using cap space.

It is worth pointing out here that this situation can only come up with players not drafted in the first round, who are coming off their first or second year.  First round picks operate under rules which prevent them from ever being eligible for an Arenas rule contract.  Non-first rounders coming off their third year will almost always have Bird rights and non-first rounders with 4 or more years in the league are not restricted free agents.

In 2005, the new CBA tried to correct this situation, which was seen as unfair.  Starting in 2005, restricted free agents with only 1 or 2 years of experience can only be given an offer sheet starting with a salary at about the mid-level exception.  This means that, at worst, their current team can match using the MLE and can’t be put in a situation where there is no way to match.  But, in order to make sure a player’s right to get paid starting in his fifth year in the league is not restricted, the league allowed a balloon increase in salary starting in the player’s fifth year all the way up to the maximum allowed for a fifth year player.  So, for example, a player coming off his second year can be offered an Arenas contract, at most, with the salaries 5 - 5.2 - 14.9 - 15.5. It was thought unfair that a team could offer a 4 year $40+ million deal only using $5 million of cap room in the first year, so they added a rule that the cap hit for the signing team would be the average yearly value of the deal rather than the actual salary.

At some point Daryl Morey noticed that the peculiar rules of Arenas contracts actually opened up an opportunity to steal good young players from other teams.  To my knowledge, he is the first GM to notice that this rule could actually be used as a weapon.  But now that everyone has seen the Lin and Asik moves, will other teams find ways to take advantage of the Arenas rule?  And how can teams avoid being stuck with facing a poison pill offer sheet on a valuable young player?  My coming posts will address that.

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