Introduction to the Arenas Provision
There are several misconceptions about the NBA Collective Bargaining Agreement and its terminology, none more misused than the “Gilbert Arenas” provision. Often incorrectly associated with the “Poison Pill” provision (which in itself is misunderstood), the actual Arenas provision is far more limited in both scope and occurrence than its popular use indicates. Located in Article 11, Section 5 of the CBA, the provision applies only to restricted free agents with one or two years experience, predominately second round picks or undrafted free agents. By design, the provision is pro-prior team, enabling a team to match offers for its second round picks or undrafted free agents by capping the amount qualifying players can receive as restricted free agents from teams that sign qualifying players to offer sheets. The provision is not a blanket enabler to either front or back-load contracts beyond the 4.5% or 7.5% raise parameters dictated in the CBA, nor does it have the application of the sentence “Team X should ‘poison pill’ Player Y’s contract by offering $20 million in the third year as opposed to $5 million in the first 2 years to provide disincentives to Team Z for matching an offer!” (Ironically the “Poison Pill” provision applies to the enhanced difficulty in trading a player who signs a rookie extension between the period signed and the actual extended term beginning, not general contract raise structure).
Application of the Arenas Provision
The provision is seldom invoked, at least to its fullest extent, because it either seldom warrants using or seldom applies. First, only two players in the current CBA have signed contracts utilizing near the entire provision: Jeremy Lin and Omer Asik. Both players had two years of experience when signing their respective contracts with the Houston Rockets, where Lin was an undrafted free agent and Asik a second round pick. More importantly, both actually warranted enhanced contract amounts. Lin was a marketable pick and roll savant coming off a highly publicized “Linsanity” campaign in New York, whereas Asik was a top 5 defensive center in the league who afforded rim protection, pick and roll lateral agility, and elite rebounding, qualities seldom found in second round picks, let alone second round big men. Both players warranted team salary cap hits of $8,374,646 a year, whereas most second round picks are worth only the minimum.
Furthermore, the provision seldom applies because teams can easily circumvent it by signing either second round picks or undrafted free agents to contracts for more than two seasons. The provision only applies to restricted free agents of one or two years of experience, or contracts typically signed using either the minimum salary exception (since a minimum salary contract under the minimum salary exception can be at maximum 2 years), or a de-facto minimum salary exception using cap space for one or two years, which automatically qualifies a player for the provision. However, teams can easily circumvent this (and most do now) by signing their second round picks or undrafted free agents to three year contracts utilizing either a portion of an exception (non-taxpayer midlevel exception, taxpayer midlevel exception, or bi-annual exception) if over the cap or a three year contract (even for the minimum) if under the cap. Both avenues make the Arenas Provision inapplicable, as a player would have three years experience once becoming a restricted free agent (or unrestricted if given a four year contract), affording the team veteran qualifying free agent rights, or “bird” rights to the player. Therefore, as stipulated previously, the Arenas Provision is seldom invoked.
K.J. McDaniels: Arenas Provision Candidate
Looking ahead to the 2015 offseason, there are would-be obvious Arenas provision candidates such as Draymond Green. However, Green does not fall under the parameters of the provision as he was signed to a three-year contract using part of the non-taxpayer midlevel exception as a second round pick. Surveying the potential landscape, there is one eligible player who actually projects to warrant a high enough salary increase to really invoke the subtleties of the provision, rookie K.J. McDaniels.
McDaniels is the likeliest candidate to invoke the Arenas Provision this offseason. He signed a one-year non-guaranteed contract for the minimum ($507,336 )this past offseason as a second round pick, automatically qualifying him for the provision. Furthermore, his rookie numbers thus far look relatively similar to fellow Arenas Provision trigger-man Wesley Matthews’ rookie numbers in 2009/10. Per Basketball-Reference.com:
PER TS% PTS/36 REB/36 AST/36 STL/36 3PT%
KJM 13.5 .56 15 7.1 2.1 1.8 .385
WM 12.3 .592 13.7 3.4 2.2 1.1 .382
McDaniels is a better athlete than Matthews was, and has shown incredibly rare Dwyane Wade-esque weak-side shot-blocking instincts for a wing, averaging 1.9 blocks/36. However, both players do possess similar set shots and three-point prowess. McDaniels is being groomed as a “3 & D” player in accordance with Philadelphia’s analytics-based approach, as demonstrated by the fact only 3.5% of McDaniels’ points thus far are comprised of mid-range jump shots, and 38% of his shots are from three-point range, per NBA.com. McDaniels is still raw as a ball-handler, but instead of forcing plays off the dribble he plays within himself and instead confines himself mostly to catch and shoot situations offensively, while demonstrating the ability to make the extra pass if shooting opportunities aren’t there. Defensively, McDaniels has excellent lateral agility and when focused is a plus defender, both on ball and on weak side team defense. Overall, while known mostly for his highlight reel plays in the dunking and shot-blocking departments, McDaniels has shown legitimate NBA skills in the form of three-point shooting, rebounding and defensively for a wing, and at just 22 this offseason provides a package rarely available at that age.
Application of the Arenas Provison to McDaniels
Under the Arenas provision, any team that wishes to sign McDaniels will be limited in the following capacities:
1.McDaniels as a free agent with one year of experience, will be a restricted free agent.
2.Under the Arenas provision, McDaniels’ first year salary in ’15 will be limited to the non-taxpayer midlevel exception, or $5,464,000.
3.Because any team that wishes to sign McDaniels will have to do so via submitting an offer sheet, the contract must be for more than one season (or at least two seasons). Under the Arenas provision, the second year salary is limited to a 4.5% raise over the first year, thus $5,709,880 will be McDaniels’ second year contract number.
The Sixers, if over the cap, would be able to match any offer McDaniels receives via the non-taxpayer midlevel exception. Teams can also match “Arenas” offers via the early qualifying free agent exception, but those matching privileges are afforded only for early qualifying free agents with two years experience on a teams roster without changing teams as a free agent. Since McDaniels will only have one year of experience, Philadelphia’s matching privileges hypothetically being over the cap would be limited to the non-taxpayer midlevel exception.
However, this point is moot because the Sixers are projected to have a plethora of cap space, as they are currently $17,908,784 under the 90% cap floor this season without any contract extensions kicking in next year. Thus, Philly can match any offer McDaniels receives with cap room.
The issue for Philadelphia in the McDaniels Arenas Provision scenario is not finances, but tradability. Wesley Matthews for example, was given a hefty front-loaded signing bonus in conjunction with his Arenas contract under the previous CBA, a factor that contributed to Utah’s decision not to match. Any contract structuring in terms of total dollar amount is unlikely to deter the cap room aplenty Sixers. However, how the contract is structured to permit (or in this case limit) trade flexibility might be crucial.
As touched on above, any McDaniels offer sheet under the Arenas Provision must be at least two years in length, with the first and second years being $5,464,000 and $5,709,880 respectively. From that starting point, the contract can venture multiple directions, the most likely being the Chandler Parsons third year option route.
Chandler Parsons Contract Structure Element
Parsons was given a near max offer this last season starting at $14,700,000, with a third year player option of $16,023,000. While the Parsons contract isn’t an analogous comparison to McDaniels’ projected contract because the former was not governed by the Arenas Provision (Parsons had three years experience in the league when becoming a free agent, and was thus outside the parameters of two years or less experience needed to fall under the Arenas Provision), the contract structuring and methodology behind the third year player option will likely be similar.
Two trade-inhibiting features are built into the Parsons three-year offer sheet with a player option the third year. First, any team that matches an offer sheet via submitting its right of first refusal cannot trade that player for one year without the players consent (It should also be noted that the matching team cannot trade the player to the team that signed the player to an offer sheet entirely for one year). Second, the player option at the end of the second season gives the player discretion to control his potential trade destination by the leverage of opting out of his contract and leaving as an unrestricted free agent if traded to an undesirable location. In effect, the 2 year + player option offer sheet structure diminishes a player’s trade value every year of the contract, as in the first year the player has discretion to consent to any trade and in the second year the player has the leverage to uproot a trade by opting out of his contract. In both cases, the contract structure limits a team’s trade flexibility, ergo a predominant reason the Rockets did not match Parson’s offer (though the Parson’s contract had a much greater impact numerically on team salary).
Full Arenas Provision Utilization: Third Year Salary Leap
Another route permitted by the Arenas Provision that discourages matching an offer sheet is the third year “leap” in salary. Per the provision, while the first two years of any offer sheet are set, the second being a maximum 4.5% raise over the first, the third year is allowed to escalate to the maximum amount the player could have signed for in the first year of his contract if the provision did not exist. Thus, for McDaniels, a player who will tally one year of experience by the end of this season, he would entitled in the third year of his contract to the maximum salary amount under the 1-6 year experience tier, or slightly less than 25% of the expected $66,500,000 cap. In order for a team to offer this leap in salary, the first two years of the contract must be for the maximum amount allowable (meaning the full non-taxpayer midlevel exception in year one and a 4.5% raise in year two), the contract must be fully guaranteed and the contract cannot possess any bonuses.
This third year leap imposes additional constraints on both the new team signing the player to an offer sheet and the prior team. For the former, the team must have cap room in the first year to sign the player being as though the third year leap would exceed the non-taxpayer midlevel exception parameters. More specifically, the team must have cap room in the first year to fit the average amount of total salary over the duration of the contract. For example, if McDaniels signed for the full amount allowable under the Arenas provision, meaning a third year salary of slightly less than 25% of the projected cap of $66,500,000, or an estimated $15,700,000, the team must have $8,957,960 in cap room available to sign him in the first year of the contract (the average of $5,464,000 in year 1 + $5,709,880 in year 2 + the $15,700,000 max in year 3/3 year contract duration). For the latter prior team, the contract as counted towards team salary would be the actual contract structure. Meaning for Philadelphia in the case of McDaniels, $5,464,000 in year 1, $5,709,880 in year 2, and $15,700,000 in year 3 on team salary, not the average. This would place a significant onus on Philadelphia’s team salary in the third year, which could serve as an impediment to match, especially if Philadelphia is near or over the luxury tax threshold in the 2017/18 season (admittedly unlikely with the current roster and salary cap increase).
In overall application of the provision, McDaniels’ maximum hypothetical contract under the Arenas Provision could be:
Year 1: $5,464,000 (non-taxpayer midlevel exception)
Year 2: $5,709,880 (4.5% increase in year one salary)
Year 3: $15,700,000 (maximum amount if there was no provision, 1-6 year tier)
Year 4: $16,342,700 (4.1% increase of year three salary)
If Philadelphia matched the contract, these figures would also count for respective team salary in each year. For the team signing McDaniels to an offer sheet, the salary amounts attributable to team salary would be as follows:
Year 1: $10,804,395 (Total salary in the contract/ 4 years)
Year 2: $10,804,395
Year 3: $10,804,395
Year 4: $10,804,395
Of course, a team signing McDaniels to an offer sheet does not have to offer the maximum salary amount permitted by the Arenas provision, which a team surely will not considering market dynamics. McDaniels is not a $10,000,000 a year player (at least not yet), and teams will not overpay him as such just to exercise the full utility of the provision. However, even a slight increase over 4.5% of year one salary from year 2 to year 3 would trigger the additional restrictions set forth above for both the new team signing McDaniels to an offer sheet (must have cap room in year one for average yearly amount of salary) and the prior team (subject to principle terms of the offer sheet and team salary would reflect the actual structure of the contract). It is conceivable that a team could offer McDaniels $6,826,120 in year three, more than a 4.5% increase of first year salary from year 2 to year 3, for an average salary of $6,000,000. This would not only eliminate teams who are over the cap from competing for McDaniels services in the market since that contract figure would exceed the parameters of the non-taxpayer midlevel exception, but would also impose slightly more excessive team salary obligations for Philadelphia in year three of the contract. The increasing cap and scarcity at shooting guard (if teams are still compelled to differentiate by specific position) could compel a team to spend more to acquire McDaniels.
Projecting McDaniels’ Contract: A Hybrid Approach
Overall, given McDaniels’ current production, it is fair to assume a hybrid contractual construct between the Arenas Provision and the Parsons structure in the following structure:
Year 1: $5,464,000 (non-taxpayer midlevel exception)
Year 2: $5,709,880 (4.5% increase in year one salary)
Year 3: $5,955,760 (4.5% increase in year one salary) PLAYER OPTION
This contract structure complies with the Arenas Provision but does not fully utilize it by not invoking the third year leap in salary, while also discouraging Philadelphia to match by diminishing trade flexibility in every year of the contract via player control and discretion. Given the fact Philadelphia signed McDaniels to be a trade asset (fully non-guaranteed minimum salary player who can fit into any teams minimum salary exception), it is conceivable to assume the Sixers might not invest in an asset where the contract structure by design reduces tradability. Teams with a younger nucleus with a need for a floor-spacing “3 & D” wing player such as Charlotte, Milwaukee, and New Orleans could all be potential suitors for McDaniels this offseason.