As the NBA moves toward the All-Star break, the next major milestone on the horizon is the trade deadline. During the deadline, NBA teams take leaps of faith and test their salary cap knowledge for a chance to create a legitimate contender.
The NBA trade deadline has become one of the most exciting times of the year. As the player empowerment movement continues to grow and teams begin to recognize the value of assets over the value of a home grown player, the time period around the trade deadline has become as hotly contested as free agency. So how does the trade deadline work? Below, is a crash course on what to expect over the next few weeks.
The Trade Deadline: March 25th 2021
The trade deadline was put in to place to restrict teams from sending players to contending teams in the twilight of the regular season. By forcing teams to make deals with a time constraint it evens the playing field come playoff time and encourages competition. Without a trade deadline teams with high draft capital at the end of the year could flip their picks for a superstar or an unexpected playoff team could become exponentially better right before a playoff series. The trade deadline creates balance in the league while still allowing teams to sign and waive players at any point during the season. After the trade deadline passes a team must wait until the offseason to trade any players that may be disgruntled, underperforming to their contract, or aging. Since these rules are in place speculation begins to run rampant every year around three weeks before the actual deadline day. Generally, with the deadline comes contending teams hoping to improve between the margins to help their chances at a championship. More recently due to the growing empowerment of players, the league has seen substantial names moved before the deadline. So what are the essential aspects of a trade? First it is important to know why many contenders work within the salary constraints they do.
In recent years the NBA has experienced a massive salary cap boom because of their record TV deals and the interest surrounding the league internationally and in the United States. As their revenue grew, player salaries continued to rise and the salary cap was blown out of the water by almost every team in the league. Really, in this NBA, the salary cap is a suggestion and the luxury tax is the true “cap” for all thirty teams in the league because of the penalty it carries. Since 27 teams are currently working over the salary cap and 7 teams are over the luxury tax, it is important to understand how these restrictions shape NBA trades.
Salary Cap: The current NBA salary cap is 109.1 million and is considered a soft salary cap. Since it is a soft cap teams have the ability to use exceptions and NBA rules like “Bird Rights” to exceed the salary cap. Prior to reaching the luxury tax, any cap between 109.2 million and 132.6 million is considered over the cap. To acquire other players when you are over the cap organizations have to make sure the salaries relatively match.
Luxury Tax: This year the tax like the cap stayed flat and sits at 132.6 million. The luxury tax is still not a hard cap but a deterrent to big market teams in an attempt to keep the league balanced, the luxury tax acts as a penalty many teams elect to stay away from.
The above charts breaks down the luxury tax for both non-repeaters and repeaters, while it may look confusing the example below should help explain the situation:
Focusing on non-repeaters, a non-repeater is classified as a team that crosses the luxury tax threshold less than 3 out of 4 years in a row. The bracketed rates above increase the penalty for teams as they drive deeper into the tax. So, if the New York Knicks were to cross the luxury tax threshold next year by increasing their team salary to 149.6 million they would have to pay a non-repeater tax on 17 million dollars (149.6 total salary – 132.6 million the luxury tax threshold = 17 million above the tax level). The money is then taxed in a bracket format so, the Knicks would meet the threshold in the first three brackets which would mean adding each incremental maximum (7.5+8.75+12.5) for a total of 28.5 million in tax. For the remaining two million, the team would take 2 million multiplied by the 3.25 tax rate, this is because the 17 million total falls within that bracket, for an overall total of 35.25 million dollars. The same method is applied to repeaters a team in the luxury tax 3 out of the last 4 years, the opposite of what classifies as a non-repeater.
MLE: A bare bones explanation of the mid-level exception is that it allows teams with different levels of cap space to always have a bit of flexibility come free agency. Specifically, the mid level exception is used by teams over the cap but not paying the luxury tax, they use the exception in an attempt to bolster their lineups prior to or during the season. This year, the MLE for non tax payers was set at 9.2 million dollars and can be used to sign players for up to four years with a 5% annual increase. The most important part of the MLE is that it is a pool of money and not a single contract. Therefore, you could use the exception to sign one mid-tier player or three to four rotation contributors. Once you use the MLE you can’t use it again until the player signed with it is either traded or their contract expires. For example, if you signed Wayne Ellington to a four year exception you would not be able to use the MLE again until you either traded Ellington or his contract expired. However, if you signed him for 1yr/9.2 mil his contract would expire after the year and the MLE would again become available.
In a trade, the exception is important because MLE contracts are often featured as salary filler in deals around the trade deadline. For example, Mike Scott of the Philadelphia 76ers was signed on the room exception and with a salary of five million he will be a valuable piece if the team looks to upgrade positions. For a more detailed explanation on the various types of exceptions click here.
Veteran Minimum: The veteran minimum is a way to fill out an NBA roster with experienced veterans, incentivizing teams to reward players with league experience. Recently, as the NBA continues to get younger, veteran minimum contracts have been used to make the money work around the trade deadline. The easiest way to explain the minimum is that it allows teams with no cap flexibility and an undermanned roster to reward veteran free agents. A veteran minimum contract can be used at any time but is most commonly associated with contenders because middling teams tend to overpay for marginal talent. The benefit of the minimum is that the NBA actually pays a portion of the salary instead of it being a full cap hit.
An example of the veteran minimum is Nicolas Batum. After being waived by the Hornets, Batum elected to sign a 1yr/$2,564,753 deal with the Clippers. Since he is a 10+ year veteran the cap hit for Batum was only 1.6 million because the league picks up the rest. While it looks like a small number in comparison to some of the massive NBA contracts, the 1.6 million that Batum makes could be used to “make the money work” in a bigger deal.
Bird Rights: Bird Rights were initially developed so the Boston Celtics could sign Larry Bird to the contract he deserved even if they had to go over the salary cap. Since the implementation of bird rights, it has become one of the main contributors to why teams are over the salary cap and even in the luxury tax. Indirectly, it is one of the main reasons teams are using their exceptions to drive trades at the deadlines and also incentivizes teams to trade for stars at the deadline.
If a player plays three or more seasons in the same organization they are considered to be part of the “Bird exception”. Since Bird rights allow an organization to go over the salary cap threshold to resign their own players the MLE and player minimums became extremely important to the success of a team because if teams are going over the cap to resign their own players they have to be able to fill out the rest of their roster. Bird rights are important around the deadline because they carry over in trades. Andre Drummond was traded to the Cavaliers after starting in Detroit and since he played more than three years in the Motor City, the Cavaliers now retain his bird rights. This does not necessarily impact trades from a value standpoint but could be an influence in trading for a disgruntled superstar you believe would resign.
Trade Structure: Trades vary across the league but usually the core of each trade is similar. Even though the names may be different and the draft compensation may change the salaries involved in each deal are predicated on what each team does during the offseason. In a soft cap league organizations manipulate their player signings in
Trade Exception: When an over the cap team trades more salary to an under a team under the cap, instead of receiving the salary back they receive a place holder for the difference. This difference is a “trade exception” and allows the team over the cap to take on more salary in a later trade. Trade exceptions last one year and if a team is unable to use the exception to absorb a new salary it expires. If you want to learn more about the various ways to create a trade exception hoopsrumors.com goes into further detail on simultaneous and non-simultaneous trades as a way to create an exception.
Making the Salaries Work: The most important part of any trade is making the salaries work. However, the NBA rules vary depending on where you fall in comparison to the salary cap and luxury tax.
Under the Salary Cap: Two under the cap teams have the financial freedom to swap salaries as they please, as long as one team does not end up over the salary cap. For example, if the Knicks (4 million under the cap) and Hornets (15 million under the cap) were to make a deal tomorrow that sent Cody Zeller to New York for Derrick Rose the trade would be able to go through without any restrictions. This is because both teams have the ability to make the deal and still remain under the cap.
Over the Cap but Under the Tax: So what happens when a team is over the cap but under the tax? The NBA allows teams to make trades even when they are over the cap by placing additional requirements on each move. For a team over the cap but under the tax to complete a trade, the total salaries they are receiving in the deal must be within 175% +100k of the salaries they are sending out. For example, if the Pistons and Hawks tried to trade Tony Snell for Dennis Smith Jr. the trade would fail because Detroit would be taking on more than 175% +100k of Dennis Smith Jr.’s current salary.
The Math: Smith Jr.’s 5,686,677 multiplied by 175% is only 9,951,685 plus 100,000 is 10,051,685 which does not meet the threshold to accept Snell’s contract. The Pistons would have to add 2,126,886.25 to the deal to make the trade work or reduce the incoming player’s salary. In a scenario where a deal between these teams would work is if the Pistons acquired Rajon Rondo instead of Tony Snell.
This trade, substituting Snell for Rondo as mentioned above, would pass because Smith Jr.’s contract would fall within the 175% +100k rule. The Pistons would only be taking on 131.89% of Smith Jr.’s salary which allows the trade to pass. The Math: 7,500,00/5,686,677= 131.89% or 5,686,677*175%+100,000= 10,051,685 which gives the team the room to make the deal.
Over the Luxury Tax: The same idea as over the salary cap but under the tax applies to teams over the tax. The rule to make a deal work is more strict as the league only allows over the tax teams to except 125% +100k of the outgoing salary.
Since the basic concept is the same at the over the cap and over the tax level, this should be a bit more straightforward. The trade above fails because Danny Green’s salary multiplied by 125% +100k does not meet the 30.5 million Lowry makes. More specifically, 15,365,853*125%+100,000 is only 19,307,316 much less than the 30,500,00 needed to complete the trade. Now, if you were to trade Joel Embiid for Kyle Lowry, this is an example we are not suggesting the Sixers would trade Embiid, the salaries work because 29,542,010*125%+100,000 is much more than you would need to make this deal and would fall within the 125% +100k threshold.
Hopefully, this guide has provided you with an understanding of the different types of exceptions and trade rules associated with teams at the deadline. In the upcoming weeks trade talk will only continue to rise and ESPN’s trade machine is sure to get a workout. This should help you gain a high level understanding of what it takes to really make these deals go through and how teams plan ahead through the use of team exceptions. If you have questions or comments we would love to hear from you at joecaseyscouting@gmail.com