Qualifying Offer/Cap Spike (’15 Thompson)

For the second year in a row agent Rich Paul is prolonging negotiations far into summer and using the leverage of the qualifying offer to procure the best offer for his restricted free agent client. Last year of course it was Eric Bledsoe, who finally accepted a 5 year, $70M contract in late September, conveniently right before the league released information on the new media deal and cap projections moving forward. That wasn’t an accident. This summer everyone knows about the spiking cap and the ramifications that will have on free agency next summer, where nearly every team will have the capability to create maximum cap room. It projects to be an insanely inefficient seller’s market, and that bodes tremendously well for both players and agents. Enter Tristan Thompson, who at 25 could be one of the most coveted unrestricted free agent big men on the market should he take the once untenable route of accepting his qualifying offer. Agents have used the qualifying offer route as leverage before but have seldom followed through, largely because it didn’t make much financial sense to do so. But with the spiking cap this avenue holds significantly more weight now. The question posed numerous times is whether Paul and Thompson are bluffing with this qualifying offer sword, and as the following will illustrate, from a financial and market standpoint their position is well founded.

I.Thompson Contract Comparison/2016 Market Analysis

As the following table evidences, Thompson could recoup the $9,629,911 difference between his large qualifying offer (he met the minutes played starters criteria last season playing 2,000 or more minutes so his QO isn’t reduced) and the $16,407,500 max for his 4 years service by signing a 4 year max deal with another team in 2016 where his max starting figure jumps to a projected $20,915,000. This calculation assumes a hypothetical scenario for comparison’s sake of Cleveland offering Thompson a max contract this year, which they reportedly aren’t close to doing (otherwise there would have already been an agreement). Thus, depending on the offer Thompson could recoup the difference in salary even quicker with a lesser offer from the Cavs.

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Thompson has every reason to gamble on himself if the contract figures aren’t to his liking. He’s played all 82 games over the past three seasons and would have a distinct age competitive advantage in 2016 free agency among most of the following unrestricted big men:

Al Horford (30)

Hassan Whiteside (27)

Joakim Noah (31)

Timofey Mozgov (29)

Roy Hibbert (29)

Al Jefferson (31)

Pau Gasol (PO) (35)

Nene Hilario (33)

The CBA is designed to keep young players on the teams who drafted them for 8 or 9 years. Rarely are 25 year-old big men of Thompson’s skill-set available without the right of first refusal in play. Factor that in with an already inefficient market and it’s easy to deduce Thompson could command max money on the market next summer. However, market analysis is only one of the interests at play here, as the Cavs tax scenario must also be weighed.

II.Cavs 2015-16 Tax Position

While it would behoove the Cavs to lock of Thompson long-term under a reduced cap if they deem him part of their long-term future, there are sizable immediate luxury tax ramifications as the following chart indicates:

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The Cavs currently have 11 guaranteed contracts, with 13 being the minimum roster count and 14 the league-wide mandate. Should Thompson re-sign hypothetically for the max the difference between his qualifying offer salary and the max is $9,629,911, which would actually equate to a $28,198,160 tax payment difference. That doesn’t even take into account the re-signing of J.R. Smith, who will likely command more than the minimum, and if Thompson is re-signed the Cavs would be paying $3.75 (or more if they jump tiers) on the dollar for Smith’s contract being a tier 5 taxpayer. That’s a tough pill to swallow, even if it’s likely just for one year and basically revolves solely around Dan Gilbert’s wallet.

It can be argued that having three power forwards in terms of ideal utilization (LeBron, Love, Thompson) on the roster all making max money is unsustainable from a team building perspective (though I’d argue Thompson is optimally used as a center), and the Cavs have to weigh that sentiment along with luxury tax concerns against securing Thompson long-term. Thompson is a cut and dry player: he’s the league’s best offensive rebounder and is one of the few bigs with the foot speed to step out on the perimeter on switches and wall off penetration of quicker and smaller players not named Stephen Curry. He has also demonstrated the ability to protect the rim adequately in a pinch playing center in smaller lineups. However, he’s a fairly limited offensive player with no touch around the rim, which limits his offensive impact. On the Cavs who already have enough shot-creators, he adds tremendous value as an off-ball possession creator/extender on the glass and a defensive option when Love falters. But that impact has a cost.

III.Resolution

The notion of players accepting 1+ 1 year player option contracts this summer was oversold, as players still for the most part prefer long-term security. However, that is when the dollar figures are agreeable. Thompson (and Paul) clearly feel that the market is in their corner and will dictate a higher salary for Thompson than Cleveland is offering. It’s hard to disagree, even with projecting next summer’s spending craziness being an imprecise science. The smart money is still likely on Cleveland and Thompson reaching an agreement. The only team with the current cap room to offer Thompson a max contract with realistic/conceivable interest in Thompson is Portland, which I’m sure the Cavs have noted as a point of relativity in negotiation. However, Paul is likely countering with free agency next summer as a point of relativity instead. The fact remains that even with Mozgov’s free agency on the horizon the tax line will climb to $108M next year (or more), rendering the hefty tax bill likely a one year enterprise while the Cavs navigate through the end of Varajeo’s contract (the damning one). There are multiple competing interests at play here ranging from Thompson’s market value to the political dynamics of Paul representing LeBron as well, but one of the certainties is that from a financial perspective Thompson accepting the qualifying offer is not unfounded bluffing.

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