Renegotiation and Extension Value (’15)

There have been numerous usually scarce and intricate uses of the CBA this summer, ranging from the combination of a signing bonus and maximum qualifying offer utilized on Jimmy Butler to Roy Hibbert waiving a portion of his trade kicker to fit into LA’s cap room (+$100,000) to technically make the trade legal. However, perhaps the most unusual combination of CBA gymnastics has come from Denver by way of the simultaneous renegotiations and extensions of 26-year-old Gallinari and 28-year-old Chandler. Such an event has yet to occur in the current CBA, and was utilized in seldom fashion under greater leeway mostly by the Thunder in the previous CBA. With the cap spike looming, the question posed is can this largely unused and seldom applicable recourse carve out potential value in the upcoming offseasons in keeping certain players off what will assuredly be an inefficient free agent market. The following will look first at the provisions that pertain to renegotiations and extensions, using Gallinari and Chandler as application of the rule and finally turn to what players could be candidates for such usage next summer and beyond.

I.CBA: Renegotiations, Veteran Extensions, and Simultaneous Usage

Veteran Extensions:

Before diving into renegotiations, which as a standalone don’t have any utility from a team perspective, it is first prudent to briefly touch on the rules governing rarely desired veteran extensions.

Veteran extensions are largely governed by three general rules:

1)Article VII Section 7 (1), which stipulates that only contracts of at least 4 years in length can be extended after the 3rd anniversary of the signing.

2)Article VII Section 7 (1) (a)(3(i), which stipulates a maximum 107.5% increase in the first year of the extended term in respective base/regular salary, unlikely incentives and likely incentives over the final salary cap year of the original contract.

3)Article IX, which limits the duration of a veteran extension to 4 years maximum including remaining years on existing contract.

The first rule definitely limits the applicability of extensions as contracts continue to grow shorter and shorter, but the second two rules are especially damning.

Take Mike Conley for example. If he were to sign an extension this summer the maximum contract he could earn under these confinements is as follows:

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The imposed restrictions for the soon to be 28 year old point guard make the concept of an extension asinine, even with a recent checkered injury history. The maximum projected salary for a free agent of 9 years service under the estimated 2016 cap is $25,098,000. That’s roughly $7.5M less than the amount Conley would definitely receive in guaranteed money (if no incentives were earned) from ’16-’18 via an extension, and that doesn’t even take into the account Conley being able to secure two extra years in his 30’s by re-signing instead of extending. Who knows if Conley will command the absolute full max, but it will definitely be within a few million as he is the best lead guard on a desolate market by a country mile. But we know about veteran extensions and their general uselessness in most situations (this component really needs to be addressed in the next CBA negotiations). Let’s turn now to renegotiations.

Renegotiations:

Renegotiations are largely governed by Article VII Section 7 (c), which states the following general rules:

1) There must be at least a 4 year contract and renegotiated/extended on or after 3 years from the signing.

2) A player’s salary can only be renegotiated up, not down, thus no pay cuts are allowed (this is actually found in d (1)).

3) A player’s salary can only be renegotiated up to the extent of a team’s cap space (and not above the player’s maximum salary).

4) No renegotiations can take place from March 1 to June 30 of any salary cap year.

The second outlined rule is all you have to know in order to comprehend the undesirability of this practice in a vacuum from a team perspective. If you can only renegotiate contracts up, why the hell would a team do that? They wouldn’t, which is why this provision isn’t utilized in a vacuum. When seldom invoked, renegotiations come simultaneously with extensions, which will now be explored.

Simultaneous Renegotiation and Extension:

Simultaneous renegotiations and extensions allow for a wider utilization of the CBA (for example, signing bonuses are permitted here) and largely follow the above two provisions, but the main power of the provision lies in Article VII Section 7 (d) (2), which states the following:

A player’s base compensation, unlikely and likely bonuses in the first year of the extended term can drop by no more than 40% from the player’s renegotiated respective regular/base salary, unlikely and likely incentives in the last salary cap year of the original contract.

This is where you can start to see the logic behind simultaneous renegotiation and extension setting in from both a team and player perspective as either a contract inflator or front-loading mechanism. The former has fairly obvious allure: allowing a player an immediate raise and raises off that enhanced number has value. The latter is much more interesting. In the previous CBA that 40% drop figure was actually 75%, so a team with requisite cap room could significantly front-load a contract via renegotiation and simultaneously extend the contract at a far lower figure with the 7.5% raise or decline scale governing each successive year after year 1 of the extended term (assuming the team had cap space). This is exactly what happened with Oklahoma City and Nick Collison.

This concept still has value even at the reduced 40% drop figure and is applicable now more than ever for the following two reasons:

1)With the impending cap spike more teams will have cap space than ever before, and you need cap space to utilize the provision.

2)Teams especially have more incentive to keep their respective players out of what projects to be an insane free agent market if they can carve out monetary and cap value via this mechanism.

These motivations were clearly factors in Denver securing Gallinari and Chandler utilizing the provision as will be discussed below

II.Denver Nuggets Renegotiation and Extensions Application

The following chart outlines Denver’s two simultaneous renegotiations and extensions as compared to hypothetical traditional extension for both:

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Note that both players received roughly 7% raises, not the fully allowable 7.5%. This was no doubt part of the give and take for Gallo especially having a player option just one year into his extended contract to reenter the market before he turns 29 (Chandler also secured a player option).

Denver was able to do this first of all by trading McGee’s $12,000,000 2015/16 salary at the deadline (was this part of the plan?) and by clearing additional cap room in the Lawson trade to utilize enhanced cap room to renegotiate Gallinari (they had initial room for Chandler).

There were obviously incentives for both players health wise to secure guaranteed money. Gallo especially has been injury plagued of late and ended the season on a total terror, thus securing some guaranteed money with corresponding flexibility made sense. Similarly, although Chandler played 78 games last year, he has also struggled with injuries and also chose to reside in the guaranteed money corner. From a team perspective, Denver kept two coveted wings off the market for the cap explosion, and thus likely carved out contractual value barring injuries of course (which was priced in).

Overall, this was an atypical occurrence all around, but the emerging question is will the simultaneous renegotiation and extension now become more prevalent with the cap spike implications. Denver utilized the provision to enhance the value of the contract, but the more interesting question (to me at least) is whether teams will utilize the provision’s 40% drop rule. The following is a list of players who could fall under the renegotiation and extension process next summer and beyond, starting with 40% drop rule candidates.

III. 40% Drop Rule Renegotiation and Extension Candidates

1.George Hill (2016)

Eligibility: Already Eligible (But Pacers Don’t have Cap Room)

Hill will be 30 next summer on an $8M expiring contract and 31 when he enters free agency in 2017. He’s an Indiana native and right now he’s on one of the better contracts in the league when you factor in the cap spike.

The Pacers have in the neighborhood of $30 million in cap space next summer, and they’ve never been a destination location. They could likely afford to renegotiate Hill’s salary up by $10M or so to $18M in 2016 and extend him, with the first year of his extension in 2017 dropping by 40% to $10.8M. From there, the contract could depreciate by 7.5% on a declining scale of that first year of the extension in years two and three, bringing the grand total to the following:

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Essentially, Hill would be getting $39,970,000 in new money over 4 years (including the renegotiated last year of his current deal). Would that initial $10M increase in ’16 be enough to get Hill to bite? It’s hard to tell, but it’s worth offering. Hill is one of the most underrated players in the league and his skill-set projects to age well. I believe Hill could garner more on the open market, but the security card is stronger than most give credit for.

2.Kyle Korver

Eligibility: July 12, 2016

Korver will be 35 next year and 36 when his contract expires in 2017, which begs the question, do you want to commit significant money to a player that age? Korver is an anomaly however, as last year was his best season. He’s the most feared catch and shoot player/perimeter decoy in the league, and that doesn’t figure to go away. As long as he’s paired next to a defensive oriented wing where the decline in movement defensively will show, he should provide high utility.

The Hawks have approximately $16.3M in cap space next summer if they pick up options on Schroeder and Hardaway Jr. prior to November 1st (expected) and Muscala’s eventually, even with Horfords $18M free agent amount hold. The Hawks have been unsuccessful luring premiere free agent targets, relegating them more to bargain hunting. If they can nab a player like Batum for a figure starting around $16M that would help fill a void left by Carroll’s departure. However, Batum could easily command a starting salary greater than that if he returns to form in Charlotte.

Korver is integral to Atlanta’s motion offense, and it would behoove the Hawks not to let the league’s best catch and shoot player hit the market in an age where shooting reigns supreme. A typical extension wont get it done either at a feeble 107.5% starting point on Korver’s $5,239,437 ’16 salary. Enter renegotiation and extension.

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The Hawks could really utilize the 40% drop in ’17 to try to capitalize on an increased $108M cap. A shorter 3 year renegotiation and extension is likely as it is conducive to both Korver’s age and avoiding the complex deferred compensation restrictions of the over 36 rule.

3.Tony Allen

Eligibility: July 17, 2016

Allen will be 34 next summer and yet still is likely to be one of the top 3 premiere defensive stoppers in the league. Iconic in Memphis’ grit and grind scheme, Allen is a prime candidate for the renegotiation and extension involving a 40% drop, especially considering Memphis’ acumen with the CBA.

The Grizzlies will likely have cap space next summer regardless of what transpires with Conley’s free agent status (he will get the max from someone). If Conley decides to remain in Memphis, which is the likely scenario, he has an agreeable $14,082,639 free agent amount hold that will permit Memphis to add a shooter or two along with retaining Lee and still have some space left over.

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Allen’s pay increase could be a modest $3.5M or so bringing his 2016 salary to $9M. Memphis could then exercise that 40% drop for ’17 in making his salary $5.4M, which is less than his cap hold as a free agent would be, and have the successive year on a declining 7.5% raise scale.   Similar to Korver, Allen’s renegotiation and extension would be a 3 year contract (2 additional years) for both age purposes and to once again avoid the over 36 rule.

IV.The Injury-Related Gamble Contract Inflator

4.Jrue Holiday

Eligibility: November 1, 2015

Plagued by serious leg and ankle injuries over the past few seasons, there is legitimate risk here. However, there is also legitimate reward in terms of value creation. When healthy, Holiday is an elite defensive point guard and a plus offensive floor general who can play both on and off the ball. He doesn’t turn 26 until next June despite already accruing 7 years service at that time.

Much will depend on whether Holiday can stay healthy this season. If he does, it would behoove New Orleans to try to lock him up long-term and prevent him from entering free agency. Holiday has more incentive than most to choose the security route, making the renegotiation and extension here a viable option.

New Orleans’ ’16 cap situation is somewhat precarious. If they bring back both Anderson and Gordon for expected high dollar contracts it will take to retain both then they wont have the cap room to renegotiate Holiday. However, it is likely that at least one of those players doesn’t return, and perhaps even both, affording the Pelicans some cap flexibility. It remains to be seen if New Orleans is a destination city with Anthony Davis being the draw because the Pelicans decided to re-sign Asik (likely because they surrendered a first rounder for him) instead of pursuing superior options/fits like Amir Johnson in free agency. But if the Pelicans have some cap room (it probably wont take much) they should offer Holiday a contract in the Reggie Jackson, Brandon Knight yearly value range of $15 million over 4 years (3 additional with perhaps a team option in the final year). Doing so would lock up Holiday for the majority of his prime and allow him to reenter free agency at 29. Should Holiday continue to suffer injuries there could be an amnesty provision afforded when CBA talks ensue in ’17, giving New Orleans a recourse (though I suspect that might be where we’re going with Asik down the line).

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*Pending Precise Incentives

V.The Star Contract Inflator

5.DeMarcus Cousins

Cousins signed a four-year extension on September 30, 2013, making him eligible to for a renegotiation and extension on September 30th of 2016. Sacramento could conceivably renegotiate Cousins’ contract at that point (it can be done up to March 1, 2017), but the timing isn’t ideal as it occurs significantly after the heart of free agency.

That being said, the difference between Cousins’ $16,957,900 2016 salary and the estimated max of his years of service tier of $20,915,000 is negligible, rendering it smart for the Kings to carve out and maintain that additional space for a Cousins renegotiation then. Doing so would only tack on 2 additional years to Cousins’ deal and keep him on the Kings through 2019-20 and the age of 29, but that’s two additional years of securing a top 10 player in the league to build around.

Cousins has definite financial motivation not to accept a renegotiation and extension in ’16 however (amongst other non-financial reasons as well). After the ’16-17 seasons Cousins will accrue 7 years service, allowing him to jump max salary tiers from slightly less than 25% of the cap to slightly less than 30%. Considering the cap is also projected to jump from $89M to $108M in ‘17/’18 Cousins’ max would skyrocket to an estimated $30,456,000 starting point, making it a more appealing avenue.

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Still, the Kings have a high incentive to at least propose the scenario to Cousins in ’16 and certainly again in ’17 to keep their franchise player off the market. It’s not impossible that Cousins accepts that pay increase and the security of short-term max money while maintaining flexibility to land one more albatross contract when he’s 29.

VI.Other Players Considered

6.Woefully underpaid stars in destination cities: James Harden and Stephen Curry

Both of these superstars are due for significant raises, but both organizations will likely be confident to roll the dice on retaining each respective player by using their lesser cap holds to bring in surrounding talent with added cap room. Situations can change however, and Harden especially bears monitoring.

7.Other Eligible but Unlikely Candidates: Splitter, Gibson, Ilyasova, Iguodala and Redick

VII.Conclusion

Overall, I expect renegotiations and extensions will become a more viable option considering multiple factors such as enhanced cap room with the spiking cap and the corresponding value it could create by keeping players off of the inefficient free agent market.  While most of the of the renegotiations and extensions are likely to take the form of Denver’s in being contract escalators, it is at least worth exploring the potential value the 40% drop can provide.  Every little piece of cap room counts, and these kinds of contracts could provide immense value moving forward.

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