K.J. McDaniels: Arenas Provision and Availability in 2015 Free Agency

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 or taxpayer midlevel 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 qualifying veteran 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, even after being traded at the deadline to Houston where he found himself out of the rotation, only to later fracture his left wrist, ending his season. 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.

McDaniels has shown incredibly rare Dwyane Wade-esque weak-side shot-blocking instincts for a wing, and in his time at Philadelphia was being groomed as a “3 & D” player. Defensively, McDaniels has excellent lateral agility and when focused is a plus defender, both on ball and on weak side team defense. Offensively, McDaniels is still raw as a ball-handler, but instead of forcing plays off the dribble he mostly plays within himself and instead confines himself largely to catch and shoot situations, while demonstrating the ability to make the extra pass if shooting opportunities aren’t there. He doesn’t possess an advanced feel for the game and his limited playmaking ability hurts, but in a pseudo-Danny Green role offensively he could thrive, with the following enormous caveat. The biggest issue in projecting McDaniels is his perimeter shooting consistency. When I wrote about McDaniels in December he was coming off a month where he shot 39.5% from three, a mark that since then has nose-dived, culminating in a 28.7% mark for the season, an unacceptable number. For a player with his limited offensive skill-set, he needs to be the plus floor-spacer he exhibited in November. Shooting is undoubtedly the most difficult skill to project, so McDaniels could certainly get back up to a respectable percentage from three, especially with superior spacing than he operated under while in Philly. But his precipitous decline as the season progressed raises some red flags.

Overall, while known mostly for his highlight reel plays in the dunking and shot-blocking departments, the hyper-athletic McDaniels has shown legitimate NBA skills in the form of finishing, rebounding and on/off ball defense for a wing, with limited but promising floor-spacing stints sprinkled in, and at just 22 this offseason he provides a package rarely available at that age.

Application of the Arenas Provision 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, assuming Houston extends him a qualifying offer, which they undoubtedly will.

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.

Houston 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, Houston’s matching privileges hypothetically being over the cap would be limited to the non-taxpayer midlevel exception. The Rockets can also match any offer with cap space if operating under the cap (more on this below).

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 if the full parameters of the provision are utilized. 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 based on 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 service tier, or slightly less than 25% of the expected $67,100,000 cap (an estimated $15.7M), and thus would be entitled to two 4.5% raises built into that maximum figure in year 3.  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 with 4.5% raises built in based on slightly less than 25% of the projected cap of $67,100,000 in ’15, or an estimated $17,113,000, the team must have $11,525,378 in cap room available to sign him in the first year of the contract.  For the latter prior team, the contract as counted towards team salary would be the actual contract structure. Meaning for Houston in the case of McDaniels, $5,464,000 in year 1, $5,709,880 in year 2, $17,113,000 in year 3 and $17,814,633 in year 4 on team salary, not the average. This would place a significant onus on Houston’s team salary in the third year, which could serve as an impediment to match, especially if Houston is near or over the luxury tax threshold in the 2017/18 season (admittedly unlikely with the salary cap increase).  Conversely, it would also permit a lesser cap hold for ’15 and ’16 free agency, maximizing cap space.

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: $17,113,000 (maximum amount if there was no provision, 1-6 years of service tier)

Year 4: $17,814,633 (4.1% increase of year three salary)

If Houston 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: $11,525,378 (Total salary in the contract/ 4 years)

Year 2: $11,525,378

Year 3: $11,525,378

Year 4: $11,525,378

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 Houston 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 market dynamics and projecting McDaniels as a player moving forward, 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 Houston to match by diminishing trade flexibility in every year of the contract via player control and discretion. 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. The question remains whether Houston is willing to match any offer McDaniels receives, or if they will even be in position to. That circumstance will now be explored.

Houston Rockets Offseason Cap Sheet

Aggregate Guaranteed Salary (8):

Dwight Howard: $22,359,364

James Harden: $15,756,438

Trevor Ariza: $8,193,030

Terrence Jones: $2,489,530

Donatas Motiejunas: $2,288,205

Clint Capela: $1,189,200

Joey Dorsey: $1,104,421

Nick Johnson: $845,059

$54,225,247

Team Option:

Kostas Papanikolaou: $4,797,664 (Salary 100% Non-guaranteed until 10/4/15)

Free Agent Amount Cap Hold (Unrestricted):

Jason Terry: (150% x $5,850,313) $8,775,469

Corey Brewer: (130% x $4,702,500) $6,113,250

Josh Smith: (120% x $2,077,000) $2,492,400

Free Agent Amount Cap Hold/QO (Restricted):

Patrick Beverley:              (QO: Starter Critera; QO 21st Pick in 2011 Draft )                 $2,725,003.5

*Qualifying Veteran

K.J. McDaniels: (QO: Min Sal 1 yr vet + $200,000) $1,045,059

Aggregate Non-Guaranteed Salary:

Pablo Prigioni: ($440,000 Guaranteed if he makes 2nd round of playoffs after playing in at least 2 games in the first round of ’14-’15 season) $1,734,572

100% Rookie Scale Draft Pick Cap Hold

Debits

2015 First Round Pick(Owed to Lakers: 1-14 protected) Conveyed

Credits

2015 First Round Pick (From NO: 1-3, 20-30 protected): $1,372,000 (18th pick)

Houston Spending Mechanisms: Impact on McDaniels

GM Daryl Morey could pursue several different avenues from a cap perspective this offseason. Should Aldridge become a viable option Houston has already shown a willingness to shed salary to pursue top-shelf talent (see the Lin trade clearing room for Bosh). Houston could also look to the trade market for another shot-creator on the perimeter such as Ty Lawson, and remain over the cap to sign their own free agents. Lastly, they could simply remain over the cap with their current roster and re-sign their own players. Regardless, what transpires with the following three players, with the final player the key, will impact Houston’s willingness and ability to retain McDaniels, with the availability of the midlevel exception spending mechanism as the focal point.

1.Patrick Beverley

The Rockets have full qualifying veteran free agent rights here, thus Beverley can be signed for up to his maximum allowable amount (slightly less than 25% of the cap). That obviously wont be necessary however, as Beverley projects to garner a contract in the non-taxpayer midlevel exception range.  The relevant fact here is that the non-taxpayer midlevel exception wont need to be used on Beverley.

2.Corey Brewer

Brewer, possessing early qualifying veteran free agent rights, can be re-signed either utilizing those rights for an amount up to $8,229,375 (175% of his prior salary), or those rights could be renounced to render Brewer a non-qualifying veteran free agent, permitting him to sign for up to $5,643,000 (120% of prior salary). The latter has an advantage in that Brewer could be offered a one-year deal and Brewer’s price range projects to be in the non-taxpayer midlevel range as it is. In contrast, re-signing Brewer using the former rights would necessitate a two-year deal under the CBA, reducing flexibility. Either way, utilizing the non-taxpayer midlevel exception would not be necessary here to retain this transition dynamo pivotal to the Rockets attack.

3.Josh Smith

Smith is the key to McDaniels’ availability. Because Smith cleared waivers and was signed to a one-year contract, Houston possesses only his non-qualifying veteran free agent rights, thus Smith can only be obtained via the non-qualifying exception for 120% of his prior $2,077,000 salary, or $2,492,400. While Smith still acquire extra money in virtually any signing circumstance even with set-off (as he was entitled to $27,000,000 over the remaining two years of his deal prior to being waived and stretched by the Pistons), he could likely garner more than $2,492,400 on the open market. With how set-off operates, Smith could still receive an extra $3 million by signing for $5,464,000 (the Pistons would be inclined to set off the difference between $5.464M – $845,059, the latter being the minimum salary for a veteran of 1 years service, divided by 2, or $2,309,471), and approximately $1.5 million under a $2,492,400 contract with a set-off of $823,671 under the same calculation. $1.5M in earnings isn’t necessarily a deal-breaker, but it’s also nothing to scoff at.

With the increasing cap in 2016, Smith could potentially be enticed into taking a 1 year contract at $5,464,000, with perhaps a team option in the second year of $5,709,880 (maximum 4.5% raise) to showcase himself for another year in preparation for the increased cap.   The takeaway here is that retaining Smith, who has been a key cog for Houston in their playoff run, will likely require the utilization of the non-taxpayer midlevel exception, which affects Houston’s status to retain McDaniels.  The Rockets will undoubtedly try to convince Smith to take that $2,492,000 figure to preserve the non-taxpayer midlevel exception (they don’t have access to the bi-annual exception next offseason having utilized it to sign Smith), and they could succeed.  But the prospect remains unlikely.

Conclusion

There remains a possibility of McDaniels accepting his qualifying offer (which I’m sure Houston factored in upon trading for him) and playing out next season at $1,045,059. However, McDaniels would still be a free agent of 3 or less years of service in 2016, and would thus still be encumbered by restricted free agency (as well as the Arenas Provision), disincentivizing that move.  He could earn more money next year than his QO amount, and if he accepts his QO to remain on a currently deep Houston team that mitigates his playing time and could depress his value, as opposed to seeking a team where playing time is more readily available. It’s an interesting predicament for McDaniels, and one teams will undoubtedly be keeping a close eye on as free agency begins.  Whether the Rockets duck below the cap to pursue a star or stay above the cap to retain critical pieces, they remain vulnerable to an early attack that either ties up their cap space or non-taxpayer midlevel exception spending ability for 72 hours by a team who covets McDaniels.  Considering Houston’s predicament and the rarity of a 22 year old potential 3&D player, McDaniels could be worth the risk.

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