Maximum Qualifying Offer (’16 Drummond & Beal)

The 2016 NBA offseason is perhaps most recognized for unrestricted free agent veterans such as Kevin Durant and Al Horford, and justifiably so. However, what transpires with two dynamic restricted free agents, Andre Drummond and Bradley Beal, also warrants some look-ahead attention. The circumstance of these two projected RFAs could also spawn a seldom used clause of the CBA: the maximum qualifying offer. Recently utilized on Jimmy Butler for the first time this past summer, it is conceivable that we see clause invoked again by either Detroit or Washington (or both). The following will explore the intricacies of the provision and the applicability to the aforementioned two players.

What is the Maximum Qualifying Offer?

A maximum qualifying offer, described in Article 11 Section 4 of the CBA, is an enhanced version of a regular qualifying offer, and is offered simultaneously with a regular qualifying offer through June 30th prior to the new league year to designate a player a restricted free agent. It is not an extension or contract, but rather, an offer that remains outstanding until a player either accepts it or pursues another course, such as signing a new contract with the prior team, an offer sheet with a new team or accepts the regular QO. A maximum QO must be for the maximum salary applicable to the player in the first year, stem 5 years with the subsequent 4 years possessing the max allowable 7.5% raise over year one salary, be fully guaranteed (fully protected for lack of skill, injury, illness) and cannot contain any options of any kind. It also only applies to players coming off first round rookie scale contracts of 4 years experience.

Why Don’t We See Maximum Qualifying Offers More Often?

Typically, players who would garner max contracts in restricted free agency reach contract extensions on or by October 31st of a player’s 4th year of his rookie contract, which removes them from the maximum qualifying offer domain. Players of this nature such as Russell Westbrook are locked in ahead of time to virtually the same contract he would receive under the maximum QO via a max “designated player” (one per team) extension, which of course mitigates the risk of potentially injury. Furthermore, the max-level extension route also can earn a max level player increased money by way of the 5th year max criteria, where a qualifying player can earn a salary up to the 7-9 years of service slightly less than 30% of the cap max increased salary tier instead of the typical 0-6 year max level slightly less than 25% of the cap max salary tier. This was the case with Paul George, Damian Lillard and Anthony Davis.

Furthermore, players coming off their 4th year rookie contracts who are not extended usually are either not maximum salary players or the team wants to save some money (via decreased raises) by matching another team’s maximum offer sheet. The first circumstance is straight-forward. The second scenario was undergone by Utah two summers ago in matching Charlotte’s maximum offer sheet for Gordon Hayward, awarding them Hayward at a reduced cost. Overall, rarely does a scenario arise where a maximum qualifying offer is either applicable or sensible to utilize.

What is the Value of a Maximum Qualifying Offer?

The real value of a maximum qualifying offer (if it is applicable and sensible) is to increase the minimum required guaranteed years a prospective team can sign a prior team’s restricted free agent in an offer sheet from 2 to 3 years, not including option years. That doesn’t sound significant, and up to this point it hasn’t really been, but factoring in the cap spike in 2016, where current projections have the cap at an estimated $89,000,000 (and $108,000,000 in 2017, albeit a likely strike could impact this), this could prove very valuable.

Locking in a max level player for additional year (minimum) under a decreased salary cap creates monetary value. It avoids the now dreaded Chandler Parsons 2 guaranteed years + 1 option year offer sheet (where the trade value of the player is reduced in each year: year 1 because any trade requires the player’s consent and year 2 a de-facto expiring contract if the player exercises his option at the end of the year). It should be noted that Chandler was not eligible to receive a max qualifying offer, as he was not a first round pick coming off the 4th season of his rookie scale contract (he was a 2nd round pick coming off his third season), nor would Houston have offered it and significantly cut into its cap flexibility. But the point remains, as will be explored in the following sections, for very specific cases, a maximum qualifying offer could be tremendously valuable.

Maximum Qualifying Offer Application: Andre Drummond and Bradley Beal

Does the Maximum Qualifying Offer Count as a Cap Hold?:

A maximum qualifying offer oddly also does not substitute in as a cap hold, at least from a straight read of the CBA. The cap hold for a restricted free agent is the greater of his free agent amount hold (determined by years of service without signing a new contract or clearing waivers) and a regular qualifying offer (determined by a plethora of tables and benchmarks outlined in the CBA).   The CBA in Article VII Section 4 establishes this cap hold with the defined term “Qualifying Offer” which is defined in the definitions section with a cross-reference to Article XI Section 1(c)i. This section only encompasses a regular qualifying offer, as the definition and components of a maximum qualifying offer are set forth in distinguishing fashion in Section 4 (a)2 of the same article. To make a long story short, the CBA omits a maximum qualifying offer from a restricted free agent cap hold, thus a team can offer it without impinging on potential cap space (if the CBA is interpreted literally).

That being said, the CBA has an anti-circumvention clause, and the league could easily interpret that since a free agent amount cap hold encompasses a qualifying offer in its definition, a maximum qualifying offer should also be incorporated. The Bulls utilized the max QO on Butler, but they were over the salary cap, rendering it unnecessary to make a ruling on this issue. The Spurs needed cap space to sign Aldridge and did not utilize the max QO on Kawhi, but that could easily be attributed to the Spurs’ respected standing with Leonard and his agent at Impact Sports, rendering the necessity for the max QO low.

Overall, it’s not entirely clear if max QO substitutes as a cap hold, and such a ruling will definitely impact its applicability to Detroit and Washington. Both teams sought to maximize cap space in 2016 free agency by not locking up either Drummond or Beal to increased amounts long-term. If a max QO cuts into that spending flexibility, it will likely not be invoked. Furthermore, the max QO might not be necessary if either Detroit or Washington has a “wink-wink” deal in place with each respective free agent on holding out signing a longer deal so the team can utilize each players’ lower cap hold to maximize spending with the potential carrot of a 5th year player option. For the remainder of the article it will be presumed the max QO does not substitute as a cap hold and thus will be hypothetically applicable.

Contract Structure:

Prior to analyzing each player, a maximum qualifying offer (akin to re-signing for the maximum amount w/ 7.5% raises with a player’s prior team) would take the following form with an estimated $89,000,000 in 2016.

Yr 1: $20,915,000

Yr 2: $22,483,625

Yr 3: $24,052,250

Yr 4: $25,620,875

Yr 5: $27,189,500

Total: $120,261,250 Fully Guaranteed

Andre Drummond:

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The Pistons’ delay on offering Drummond a new contract is certainly intentional, as the reasoning behind not extending Drummond by October 31st of this past year was to free up additional cap room to pursue free agents (such as Ryan Anderson). Drummond’s free agent amount cap hold is currently $8,180,228 (250% of his 4th year rookie scale salary). The Pistons have $47,377,414 tied up in 7 guaranteed contracts and 2 guaranteed salaries (stretched) to waived players. Including Drummond’s free agent amount hold, the partially/non-guaranteed contracts of Ilyasova, Dinwiddie and Hilliard, as well as the 100% scale cap hold of the currently projected 19th overall pick, a realistic cap projection for the Pistons is $67,168,809, leaving $21,931,192 in cap room (exceeding the cap by $100,000). Thus, by not extending Drummond for what was certain to be the max, the Pistons created $12,734,773 in cap room value.

Offering Drummond a max QO serves as a sword and a shield. It is an aggressive tactic to attempt to secure an extra guaranteed year for Drummond in any offer (unless he accepts his regular qualifying offer which is highly unlikely), and serves as a slight deterrent for other teams to offer a max offer sheet immediately knowing that the Parsons’ contract structure wont be an impediment for Detroit matching any contract (this probably wont matter because teams know Detroit will match regardless, which is why I say slight).

Overall, there is no downside to Detroit offering a max QO. Drummond might not accept it, and even if he does that’s a win for Detroit locking him up under a reduced cap and salary for 5 years. If he does not, it affords the Pistons with more negotiating leverage to seek an extra guaranteed year, as every other team would also be required to submit an offer sheet of three guaranteed years minimum (not including an option year).

There are unquestionably politics involved in the relationship between the team and player/agent at play here. Drummond is represented by Jeff Schwartz, who also represents Brandon Jennings. There have not been any notable disagreements between Drummond’s side and the organization in the past, and given the Pistons’ “goodwill” toward Reggie Jackson last summer in signing him to an above market value contract and the addition of Arn Tellem to the front office, the likely recourse is “wink-wink” agreement leaving the max QO route unnecessary. However, the Pistons would be wise to consider it as a precaution.

Bradley Beal:

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Beal receiving the maximum qualifying offer makes as much sense as Drummond, despite him not being in the same tier as a player. The Wizards, similar to the Pistons, will operate under the cap this offseason largely to pursue Kevin Durant.

With 4 guaranteed contracts, Webster’s guaranteed stretched amount, Beal’s free agent amount cap hold, the currently slotted 100% scale amount of the 11th pick in the draft and 6 minimum roster charges of $543,471, the maximum realistic cap room the Wizards will have (assuming the renouncement of all other contracts/holds) is $31,777,135 under a $89M cap. That’s enough to offer Durant the full max for his tier starting at $25,098,000 with space left over with an accompanying cap room midlevel exception (which doesn’t count as a cap hold).

Thus, not extending Beal creates an additional $6,678,315 in cap room flexibility for the Wizards to pursue marquee free agents. Again, similar to Drummond, offering Beal a max QO prior to July 1st creates value for Washington. If Beal accepts the max QO, locking him in through age 28 and part of his prime, that’s a win for Washington at a reduced salary (assuming Beal garners the max as a FA which is a fair assumption), but that remains unlikely. What seems far more likely is Beal does not accept it, but the impact is still twofold. First, the aforementioned additional requirements of a minimum of three guaranteed years in any offer sheet given by another team apply if another team indeed gives Beal an offer sheet, which creates value for Washington of an additional year when Beal is 25 under a reduced cap. Second, even if Beal does not sign an offer sheet with another team, the Wizards can use that reality in negotiations, offering the same allowable three year guaranteed contract plus a fourth year team option, but with enhanced 7.5% raises as a carrot. Doing so locks Beal in at a reduced salary in the 2018 season.

Conclusion

Overall, submitting a maximum qualifying offer has to be considered by both Detroit and Washington, especially if the max QO does not substitute as a cap hold. The max QO route is a surefire way to get an extra guaranteed year at a reduced salary for a max level player in his prime for both organizations without any real downside. There are of course alternative avenues for Drummond and Beal, including accepting the regular QO and becoming unrestricted free agents in 2017 to gain access to the $108M increased cap. Drummond talent wise is a shoe-in for a max deal, whereas Beal is in terms of market value, but carries sizably more injury risk. Regardless, the max QO issue, in terms of both official league ruling as a cap hold and the applicability to these two players, is something to monitor moving forward.

*Harrison Barnes (represented by Schwartz as well) was also considered here as a max QO candidate, but at this juncture it is unlikely the Warriors allocate that full maximum amount given the precedent of Green taking less and Barnes’ talent level.