NBA off-season FAQ: Explaining ‘Bird rights,’ luxury tax, more

Los Angeles Clippers guard Chris Paul will not play in the 2016 Olympics. (Rick Bowmer/AP)

The NBA off-season is already off to a blockbuster start, but it still has the promise to get even wilder with free agency set to open July 1 at 12:01 a.m. ET.

Between now and then there will be many terms flying around, some you may be familiar with and some you won’t. To help you sort through the confusion, we’ve hopefully got you covered here with our NBA off-season FAQ.

What exactly is the signing moratorium period?
Perhaps the largest source of confusion for casual NBA fans is the difference between the signing moratorium period and when free-agent contracts can actually be signed.

As mentioned off the top, free agency opens on July 1, but that doesn’t mean that contracts can begin to be signed just after midnight. Instead, the NBA has something called the ‘moratorium period’ and it lasts until July 6 at 12 p.m. ET. During this time, teams and players are allowed to reach verbal agreements on new deals, but they can’t formally put pen to paper until it’s over.

This is why you see so many report stories of signings right as free agency opens, but nothing becomes official until a few days later.

Because only verbal agreements can be made, it can lead to bizarre situations like what we saw in the summer of 2015 with DeAndre Jordan and the Dallas Mavericks. When word leaked that Jordan was leaving the Los Angeles Clippers for Dallas, he was essentially held hostage by his Clippers teammates until being peer pressured into staying in Los Angeles.

What is this year’s salary cap?
According to Turner Sports’ David Aldridge the salary cap for the 2017-18 NBA season will be set at approximately $99 million, rising from the $94.1-million it was at this past season.

In case you’re wondering why and how a sport that only has 15 roster spots per team can have such an astronomically high salary cap, it’s largely due to the rights deal the NBA struck with Turner and Disney in October 2014. It sees reportedly the average annual payments for NBA TV rights nearly triple from what they were receiving in 2015-16.

How does the NBA luxury tax work?
Simply put, the luxury tax is a tool to help control team spending and try to even the playing field between the richer teams from the poorer. Every season the league determines a new luxury tax threshold the league. This coming season’s will reportedly be set at $119 million, an increase of last season’s supposed $113-million figure.

If a team’s payroll exceeds the threshold, it must pay an additional tax on top of its player salary commitments.

For example, according to the chart below, a team that is anywhere from $0 to $4,999,999 over the salary cap will have to pay an additional $1.50 per every dollar they’re over.

Also of note, there’s something called the “incremental maximum.” Using the example of the two tiers above, if a team is $7 million over the threshold, that team would have to pay $11 million in luxury tax because $7.5 million is the incremental maximum of the first tier, plus an added on $3.5 million because of the $1.75 rate for the extra $2 million.

Here’s a look at the luxury tax tiers.

Salary above threshold Tax rate Incremental maximum
$0-$4,999,999 $1.50 $7.5 million
$5,000,000-$9,999,999 $1.75 $8.75 million
$10,000,000-$14,999,999 $2.50 $12.5 million
$15,000,000-$19,999,999 $3.25 $16.25 million
$20,000,000+ $3.75, increasing 50 cents for each addition $5 million N/A

(Luxury tax numbers from CBA FAQ)

Of note, the Toronto Raptors have never had to pay the luxury tax in their 22-season existence.

What is the repeater tax?
The repeater tax is almost identical to the luxury tax but is much more punitive in that the tax rates increase, essemtially, by a dollar per tier if you’re a team that has been paying the luxury tax for three of the last four seasons.

Here’s another table explaining the rates repeater tax teams must pay.

Salary above threshold Tax rate Incremental maximum
$0-$4,999,999 $2.50 $12.5 million
$5,000,000-$9,999,999 $2.75 $13.75 million
$10,000,000-$14,999,999 $3.50 $17.5 million
$15,000,000-$19,999,999 $4.25 $21.25 million
$20,000,000+ $4.75, increasing 50 cents for each addition $5 million N/A

(Repeater tax numbers from CBA FAQ)

The best example of a recent repeater tax offender is the Brooklyn Nets, who made the dramatic move of trading for Kevin Garnett and Paul Pierce back in 2013-14 season.

What are Bird rights?
The Larry Bird exception, better known as “Bird rights” is a way a team can exceed the salary cap in order to sign its own free agents, provided that player meets certain criteria. It’s named after Bird because the Celtics were the first team to receive permission to exceed the cap to re-sign one of their own players… guess who?

In order to qualify for “Bird rights” a player must play for one team for at least three seasons without clearing waivers or changing teams via free agency.

In addition to being able to exceed the cap, Bird rights are also a given team to sign that player for one more year than another team can offer.

On top of the regular Bird exception, there’s also the ‘Early Bird’ exception. The difference is it can be used after a player has been with a team without clearing waivers or changing teams in free agency for two years instead of three. The catch here, however, is that Early Bird contracts are restricted to two-year terms.

What is a “max contract?”
This term is bandied about a lot. A “max contract” is the maximum dollar amount a player can sign for as a percentage of that team’s salary cap, based on that player’s experience.

Tier level Experience Percentage of cap
1 0-6 seasons 25%
2 7-9 seasons 30%
3 10+ seasons 35%

Putting this into context, Raptors free agent Kyle Lowry has played 12 NBA seasons. If Toronto or any other team were to sign him to a “max deal” he’d be eating up 35 per cent of the team’s total cap space for the 2017-18 season.

Additionally, there is something called, the “fifth year, 30 per cent max.” This is a special exception to essentially allow a player to get bumped up into a Tier 2 a season early. A player can qualify for this by meeting one of the following criteria:

• If a player makes any All-NBA Team in his fourth season or in two of the three seasons between his second and fourth seasons.

• If a player wins Defensive Player of the Year in his fourth season or in two of the three seasons between his second and fourth seasons.

• If a player wins MVP in any season from his second one going forward.

What makes completing NBA trades so tricky?

To put it simply, for any team at or over the salary cap to make a trade, the salaries of the players changing teams in the transaction must come within 125 per cent of each other.

This is why we saw the Houston Rockets acquire fringe players such as Darrun Hilliard and DeAndre Liggins for cash. They needed these players’ contracts on their books to line up the money properly to help make the Chris Paul trade happen.

Rockets acquire Clippers acquire
Chris Paul ($24.27 million) Patrick Beverley ($5.51 million)
  Sam Dekker ($1.79 million)
  Montrezl Harrell ($1.47 million)
  Darrun Hilliard ($1.47 million)
  DeAndre Liggins ($1.57 million)
  Lou Williams ($7 million)
  Kyle Wiltjer ($1.31 million)
  First-round pick
  Cash considerations (likely approx. $3 million)
Total salary acquired: $24.27 million Total salary acquired: $23.12 million

Teams below the salary cap are able to make trades without any regards to salaries.

How do sign-and-trades work?
Sign-and-trades are made out to be more complex than they actually are. But they’re exactly what you think they are.

A sign-and-trade is just the act of signing a player to a contract and then trading him to another team. The agreement with the other team you’re trading the player to is usually agreed upon before the signing takes place, but other than that, it’s precisely what the name suggests it is.

Sign-and-trade deals are popular with teams who know they’re losing a player in free agency but still want to extract some value out of him. In the case of the Raptors, a sign-and-trade with a player like Lowry is a viable option for the club if they feel they’re going to lose him. It would also work out for Lowry because the Raptors own his Bird rights and therefore can offer him that fifth year he can’t get elsewhere.

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