“I never thought they would let him go,” Jared Jeffries said in July 2012 after the New York Knicks’ chose to not match Houston’s $25 million offer sheet for Jeremy’s services through 2015. The Knicks did not re-sign Jeremy Lin after the 2011-12 season and, instead, asked him, to find offers for the Knicks to match as a restricted free agent. Houston’s general manager Daryl Morey who once waived Jeremy Lin on Christmas Eve, provided James Dolan with an offer he could only refuse. And, this is after Knicks’ coach Woodson said Lin is “my starter” and after it was reported that the Knicks will match any offer up to a billion dollars.
Houston’s offer for the Knicks to match is for contracting Jeremy Lin to three years for $25 million. Had the Knicks matched that offer, the Knicks would of had to pay Jeremy Lin a salary of $5 million during the first two years and the remainder of the total for the final third year. And, the impact on Knicks’ luxury level, the amount over of which is taxable by the league then redistributed to other teams who did not go over salary cap, we’re estimated to be between $30 to 40 million during the 2014-15 season. This estimate is based on the the team having to pay between an estimated tax of $2 to $3 for every dollar the team is over the luxury level. The amount of salary already committed to Knicks’ top four players already adds up to close to the team’s luxury level, so it is safely assumed that the entire amount of Lin’s three year salary will be subjected to luxury taxation.
The Knicks are projected to be over the salary cap of $59 million because of the amount salaries committed to players for each season through 2015 is already over the salary cap. So, the Knicks could not re-sign Jeremy Lin without using exceptions allowable by the CBA:
1) Larry Bird Rights: Bird rights is an exception that allows teams that are over the salary cap to resign their star players. However, players have to qualify to have these rights and generally they have to be three year veterans on the same time. However, players can appeal and be granted early Bird rights if they played with three individual teams with individual contracts for three years aggregated.
Jeremy Lin was granted early Bird rights, and this meant the Knicks could go over their cap and pay Lin at the higher rate of either 175% of his previous annual salary or up to the league’s mid-level exception rate of $5 million dollars. So, the Knicks had the opportunity to sign Jeremy Lin to a contract that pays Lin $5 million per year using Lin’s Bird rights but instead asked him to test his market value using the Gilbert Arenas rule.
2) Stretch Provision: Hypothetically, had the Knicks used the Bird rule to sign Lin to a 4-year $20 million contract paying Lin $5 million per year, and Lin turned out to be a scrub, the Knicks does have a hedge against keeping Lin’s full salary against the team’s salary cap. If the Knicks were to use their single stretch provision, it will allow them to waive Lin and stretch Lin’s remaining salary’s cap hit over a longer duration.
The stretch provision allows the waived player’s remaining salary amount to be divided by the doubled remaining number of years on the player’s contract plus one more year. So, Lin’s remaining salary would be divided by two remaining years times two then plus one to equal five. For example, suppose the Knicks waived Lin after two years of singing him to a four year contract, Lin’s remaining two year salary of $5 million per year goes down to $2 million ($10m / (2 x 2 + 1) per year in terms of cap hit but extended from two to five years. And, per year luxury tax would then only be $5 million ($2m x 2.5 repeat offender luxury tax rate).
3) Gilbert Arenas Rule: Teams with no salary cap space were often unable to re-sign their star players because the market price has driven the players’ asking price beyond what the team is capable of providing due to limited cap space. The Arenas rule dictated that a restricted free agent can field offers from other teams. The home team has not only the rights to match the offer and keep the player from signing with the competing team, but they only have to up to the mid-level exception amount of $5 million per year with a 4.5% bump for the second year for the first two years of the contract thus alleviating the home team’s salary and tax burden for the first two years. And, the remainder of the salary is paid during the third year and thereafter.
The Arenas rights is designed to give teams an advantage over competing teams re-sign their own players , but a loophole in this rule allows for competing teams to plant poison pills in their offer sheets which makes it more prohibitive for the home team to match the competing offers because of possible impact to the home team’s total taxable amount in luxury tax. In this case, the Knicks is already projected to be over the luxury level cap from 2012 through 2015 due to committed salaries.
So, for a player signed using the Arenas rule, the Knicks will have a lower tax hit during the first two years of the contract but hit very hard in the third year and thereafter for contracts’ total value is over $5 million per year. This is because CBA’s luxury tax rate is progressively punitive. Tax rate starts at $1.50 for each dollar over the team’s luxury cap and starts at $2.50 for ever dollar over cap if the team is a repeat offender which the Knicks will qualify during the 2014-15 season. So, on top of Jeremy’s $15 million salary in the 2014-15 season, the Knicks would have to pay at least $43.75 million in luxury taxes ($5m x 2.5 + $5m x 2.75 + $5m x 3.5).
However, for the team competing for Lin’s services such as in Houston’s case, Houston is not bound by the Arenas rule and cap hit by Jeremy’s salary as it is prorated to $8.3 million per year over three years. And, because this fits under Houston’s salary cap, Houston will not be penalized by luxury tax. Hence, this is how Houston’s offer sheet for Lin’s services serves as a poison pill for the Knicks but only serves as a normal contract for Houston.
Now, let’s have some fun. (might be easier for you to follow along with this Cap Hit 3)
Scenario 1: The Knicks did not match Houston’s offer
The Knicks were under luxury level in 2012 but will eventually be $23m over it in 2015 based on projected salary commitments. Based on these projections, the combined luxury tax that the Knicks will pay between 2013 and 2015 is about $156 million.
Scenario 1.1: The Knicks trade for Lin in 2013
Hypothetically, suppose the Knicks trade for Lin this year, the salary impacting the Knicks’ luxury tax level for the remainder of Lin’s contract will be $8.4 million per year and not $5 million and $15 million for the two remaining years because the Arenas rule no longer applies to the Knicks.
Under this scenario, Kidd retires and Udrih replaces Kidd, Lin is acquired thus Felton is traded, so the net effect to luxury cap each year is about $3 million, and this increases luxury tax by $13.5 million each year:
Scenario 1.2: The Knicks trade for Lin and Exercises their Stretch Provision
Following up on scenario 1.1, The Knicks decided that they want to part ways with Amare Stoudemire and waives him with the stretch provision hence reducing his salary’s tax hit from $22m and $23m in in the 2013-14 and the 2014-15 season to $9m per year. The luxury tax effect with this move is reducing luxury tax by amount of $50m in the first season and $62 million in the next season.
You will still have to pay Stoudemire’s salary of about $46m for the next two years plus 3 more years of luxury taxes of $9m per year. However, the net savings will be about $45m ($50m + $62m – ( $22 + $24 + 3 x $9)), two years of luxury tax savings minus two years of Stoudemire’s salary minus three more years of prorated luxury tax). And, compared to scenario one, Knicks will save a total of $85m in luxury tax if they were to acquire Jeremy Lin this year and keep him through the end of his current contract as well as waiving Stoudemire:
Scenario 2: The Knicks offer Lin MLE Max Contract in accordance with Early Bird Rights
Hypothetically, suppose the Knicks didn’t allow Lin to test the free agency market, the Knicks could have offered him the max contract allowable for a player who is granted Bird rights which is the Mid-Level Exception amount of $5 million in the first year with 4.5% bump for each year thereafter. This means Jason Kidd will still be signed in 2012-13 to replace Baron Davis, but Raymond Felton would never have been signed. Further, Bobby Udrih will be signed to replace Kidd after Kidd retires after the 2013 season.
Under this scenario, the total amount of increase in luxury tax over the three years of Lin’s contract will be a grand total of $1.1 million over the original scenario that Jeremy Lin was never re-signed.
Scenario 2.1: The Knicks offer Lin MLE Max Contract in accordance with Early Bird Rights and they waive Stoudemire with the Stretch Provision
Following upon scenario 2, suppose the Knicks had re-signed Jeremy Lin in accordance to his early Bird rights instead of letting him test the free agency market and suppose the Knicks were to waive Stoudemire this year just like in scenario 1.2, then the Knicks will yield a total of $100 million in luxury tax savings compared to the original scenario that the Knicks never reacquired Jeremy nor waived Stoudemire:
Why waive Stoudemire? As explained in scenerio 1.2, the Knicks will increase their total cashflow by about $45 million dollars net of paying Stoudemire’s salary and his lingering Stretch Provision related luxury taxes. This means, Stoudemire has to be worth more than $22.5 million per year to make it worthwhile for the Knicks to keep him instead of waiving him. And, in my opinion, the Knicks are best to part ways with Stoudemire because, at this stage of his career, I can’t imagine his market value to be more than $8 million per year.
Moral of the story? Had the Knicks simply offered Lin a contract extension as allowable by the early Bird rights granted to Lin, the Knicks could have signed Lin to $5 million a year for up to four years. The total marginal luxury tax they would have paid based on this scenario is only $1.1 million based on scenario 2. So, it is a fallacy that re-signing Jeremy would have cost the Knicks over $40 million in luxury tax. This punitive amount only resulted because they failed to act before making Lin field competitive offers.
And, if they owned up to admitting that they are over paying Stoudemire and simply waive him, the Knicks could be sitting pretty with one of the top point guards in the league and with $100 million removed off their luxury tax load. However, the Knicks own short sightedness now projected to cost them $100 million.
It’s not too late! Knicks can still trade for Lin and acquire him without the Arenas rule restrictions on salary cap plus waiving Stoudemire, and the Knicks can STILL sit pretty with $85 million more in their pocket and have Manhattan’s darling back in Madison Square Garden.
Credit goes to fellow conspirator alcsd