CBA Corner – Renegotiate and Extend Scenarios

Last week, we introduced the concept of renegotiating and extending as a way to circumvent the usual limitations on extensions and use the league’s burgeoning cap space to retain teams’ stars before they hit free agency.  By this method, current salary cap space is used to give players a raise on already existing contracts, then do an extension based on the increased salary.  Not every player may renegotiate, but they may occur on existing contracts of four or more years after the third anniversary of the signing of that contract or extension.  However, those parameters apply to nearly every non-rookie contract star in the league as he nears free agency.  The bigger caveat, of course, is that the team must have the cap room to increase a player’s salary.  And any extension may not be longer than four years, including the remaining seasons on the player’s existing contract.

For which teams and players might it make sense to renegotiate and extend?  Here’s a look at some of the more logical candidates, starting with one of the league’s nascent stars.  And thanks as always to Basketball Insiders and Eric Pincus for providing the salary data.

DeMarcus Cousins—Sacramento Kings

For the last decade, the Kings have lacked a clear direction.  Yet in that time period, they managed to acquire one of the most coveted assets in the league.  DeMarcus Cousins is a young superstar with the potential to someday be the best player on a championship team.  Unfortunately, the turmoil in the organization and the lack of a potential second star on the roster raise legitimate concerns as to whether they can retain him as a free agent in 2018.  Fortunately for Sacramento, they should have plenty of room to offer a renegotiation and extension to Cousins in the summer of 2017, when the cap is projected to hit $108 million.[1. We discussed last time why this number may never actually come to fruition due to the potential for a new CBA, but even if the cap were more like $100 million the Kings would have sufficient space.] Sacramento’s current salary structure has only Kosta Koufos, Marco Belinelli, and Willie Cauley-Stein under contract for the 2017-18 season.

Even with cap holds for Rudy Gay[2. Gay has a player option for 2016-17 which for these purposes we’ll assume he picks up.] and Ben McLemore, they are looking at over $35 million in space for the summer of 2017.  And were the Kings to spend up to the projected $89 million cap in 2016-17 with multi-year contracts that extend into the following season with their up to $20 million in space that year, they should still have the $12.4 million required to give Cousins a bump from his scheduled $18.1 million up to his projected maximum of $30.5 million in the summer of 2017.  In addition to the $12.4 million in new money, the Kings could extend him for up to three more years and $105.8 million, totaling $118.2 million in new money.

Would it be worth it for Sacramento?  They would be punting on about $12 million in cap room for 2017-18, but with the $108 million cap that space probably would not even glean a starter in free agency.  The Kings could also be sacrificing about $5.7 million in space for the summer of 2018 if they were to re-sign Cousins at that point, with Cousins due to make $32.8 million that year when his cap hold would only be $27.1 million.

Nevertheless, it seems keeping Cousins out of free agency is well worth that opportunity cost for a team that has traditionally struggled to get impact free agents and would be back at square one without Cousins.[3. It is also worth noting that once Cousins signed an extension of more than two seasons or greater than 4.5 percent raises, he could not be traded for six months due to the 2011 CBA’s restrictions on extend-and-trades.  But assuming he extended in the summer of 2017, he could still be moved as early as the trade deadline of 2018 were he to become disgruntled.]

Perhaps the greater question is whether it would be worth it for Cousins to stay.  Clearly he has had his issues with management and coaches during his time in Sacramento, but the climate two years from now is difficult to predict. If he is so unhappy that he definitively wants out by that point, an extension may be a nonstarter.

Nevertheless, from a financial standpoint an extension and renegotiation make particular sense for him due to the timing.  First off, 2017 is the first year he would be eligible for the higher “30 percent”[4. This is not truly 30 percent of the salary cap, but about 28.3 percent.  That is because max salaries are calculated as a percentage of the salary cap from previous CBAs, which were set at 42.14 percent of BRI rather than 44.74 percent.  The 25 and 35 percent maxes are calculated similarly.] max allowed players with seven to nine years’ experience.  Second, the cap is actually projected (again, with caveats regarding a potential new CBA) to fall from $108 million to $100 million in 2018-19.  This would be of particular import because his succeeding years’ salaries would be based off what he made in the year he signed the extension.

Under that falling cap scenario, Cousins’ maximum salary as a 2018 free agent would be only $28.3 million, less than his $30.5 million max the year before and quite a bit less than the $32.8 million he’d be scheduled to make that season had he renegotiated and extended.  The table below lays it out in detail, but Cousins would be sacrificing an average of about $5 million per season from 2018 to 2023 were he to wait rather than renegotiate and extend.[5.  The second column assumes that Cousins were to sign a new contract in 2021 as a free agent at the maximum allowed 105% of his previous year’s salary.  If the cap were to rise so that his maximum salary (at the 35 percent 10+ years’ experience level) were higher than 105% of his 2020-21 salary, he would of course be eligible to start his new contract at that number.]  Include the extra $12.4 million in new money for 2017-18, and Cousins clearly has the most earning potential by renegotiating and extending based on the current cap projections.

Now, one can argue that signing a five-year deal as a free agent in the summer of 2018 offers Cousins more security than the three-year extension beginning that year, but the counter is the renegotiation and three-year extension locks him in sooner, taking away a year’s injury and performance risk.

Unless Cousins desperately wants out by the summer of 2017, in this instance a renegotiation and extension makes a great deal of sense for both player and team.

James Harden—Houston Rockets

Houston’s star shooting guard is also slated for free agency in 2018.  Since he is to make only about $250,000 less than Cousins in 2017, the math on whether to renegotiate and extend would be almost identical.[6. As a 2009 draftee, Harden will have eight years of service in 2017, but he still would be two years away from the 35 percent max.  He is also about a year older than Cousins. That probably would not make much difference in how he chose to proceed.]

The more interesting question is whether it would behoove Houston to make the offer. Unlike the Kings, the Rockets figure to have a very good team the next few years.  In addition to the usual caveats about a new CBA, it is unclear whether they will have the 2017 space even with a $108 million cap. Three key players are free agents in 2016.  We will assume for the purposes of this exercise that those players continue a normal career trajectory, the team remains a contender, and thus those players return on market value contracts.

Dwight Howard is the biggest wild card if he opts out of his $23 million.  With 10-plus years of service, he will be eligible for a contract starting at the 35 percent max, a stratospheric $29.3 million.  At age 30, a full five year deal starting at that amount is probably an overpay.  But enough teams will have cap space next summer that Houston may need to fork it over.  Nevertheless, the fifth year Houston can offer might allow them to pay him a bit less than the max.  Call it a five-year, $125 million deal, paying Howard $25 million in 2017-18.  If Howard returns, the Rockets do not project to have significant cap space in the summer of 2016.

Power forwards Terrance Jones and Donatas Motiejunas are currently eligible for extensions, and if no agreement is reached they become restricted free agents next summer. For the sake of the exercise, we’ll assume Jones is retained on a contract paying him $15 million per year, and Motiejunas is traded for future assets or allowed to leave in free agency.  If both are retained, the Rockets can probably kiss any cap space in 2017 goodbye unless Howard leaves.

In 2017, Ty Lawson will also be a free agent.  His cap hold would be $19.8 million that year.  If he plays well the next two years, he could merit a deal starting around $15 million that season.  That is a wild guess though for a 29 year-old 5’11 point guard whose effectiveness depends almost completely upon his quickness.

With all those assumptions in place, the Rockets would project to only about $5 million in cap space for the summer of 2017, not enough to renegotiate and extend Harden.

Of course it is not impossible to have enough space.  They could find a taker for Corey Brewer’s $7.6 million, move on from Lawson rather than re-sign him, decline K.J. McDaniels’ team option, or a host of other permutations dating back to the summer of 2016.

But even if they had the space, would keeping Harden off the market be worth the foregone $12.8 million in 2017 salary cap space for a team that has traditionally had great success with its free agent dollars?  Probably not, especially since the Rockets could have a need on the wing with Trevor Ariza aging or at point guard if Lawson isn’t re-signed.  This has traditionally been a very aggressive and confident organization under Daryl Morey, so one would expect they would have high hopes for any cap space in 2017 and no qualms about their ability to re-sign Harden should he reach free agency the following year.  Perhaps if they have the space in the summer of 2017 and strike out on their primary targets, it would then make more sense to renegotiate and extend Harden by that point.  That, however, is a fairly unlikely scenario.

Russell Westbrook and Serge Ibaka—Oklahoma City Thunder

Both Thunder stars can be free agents in the summer of 2017, If Kevin Durant is retained for the presumed max[7. Durant’s cap hold would be the same as his $25.1 million max.], the Thunder project at about $18 million over the cap in the summer of 2016.  But if Durant were to leave, the Thunder fall to about $6.8 million under the cap including Dion Waiters’ $12.8 million cap hold.

Waiters’ number for the summer of 2016 could fall if he were extended for less than $12.8 million this fall in a rookie extension or re-signs for a smaller amount next summer. It could be extinguished entirely were he allowed to leave as a restricted free agent. Sam Presti and company could also release Anthony Morrow, whose $3.5 million salary for 2016-17 is non-guaranteed, or release and stretch Nick Collison’s $3.8 million for 2016-17 over three years.

Sans Durant, they could have as much as $24 million in space—enough to max out Westbrook and Ibaka in a renegotiation and extension should they choose.  With the loss of Durant potentially auguring the other two stars’ departure were they to reach 2017 free agency, and a low opportunity cost due to a weak free agent crop next summer, OKC management might find renegotiating and extending these stars the best use of their money.

Would it make sense for the players?  The uncertainty over the 2017 cap might be an impetus in that direction.  There could be a work stoppage, increasing the desire for new money in 2016.  The $108 million cap may not materialize, or a new CBA could prove less favorable.   And both have had injury concerns in the past, further pushing them toward locking in an extension at an earlier date.

Ibaka in particular might be tempted to renegotiate and extend.  Although the 26 year-old is an extremely valuable and rare player, he will not assuredly merit a full max contract as a free agent in 2017.  Perhaps a $7.75 million raise to $20 million for 2016-17, with a three-year extension building off that number, would be enough to entice him.  The Thunder could probably get there while still re-signing Waiters if they so desired.  Without Waiters, more money could be provided if necessary, up to Ibaka’s $25.1 million max in 2016-17.  For only a three-year extension instead of a five-year new contract the following summer, the Thunder could feel much better about giving Ibaka big money knowing the risk was limited.

Westbrook would clearly merit the max in any new contract barring catastrophic injury.  If he were to renegotiate and extend, he could make about the same money through 2019-20 compared to waiting until 2017 to sign a new contract—and that assumes the $108 million cap happens.  If the 2017 cap comes in lower, renegotiating and extending becomes more favorable.

That money would be locked in a year earlier, mitigating risk.  The Thunder could also sweeten the deal by offering a player option on the third year of the extension, allowing their star a chance to hit the market again in 2019 as a 29 year-old.  That is prime timing, since he’ll likely still be good enough to lock in a full five-year max contract at that age.

Of course, all this ignores that Ibaka and Westbrook might want to jump ship from a team that will not be a contender if Durant leaves.[8. Perhaps this is a good reason for OKC to push hard for the R&E, re-upping Westbrook and Ibaka before they experience life without Durant.] But from a purely monetary standpoint, a renegotiation and extension could entice Oklahoma City’s remaining stars to eschew 2017 free agency.

Other Potential Renegotiation and Extension Candidates

• The Atlanta Hawks will probably have to make a decision between 27 year-old Jeff Teague and 22 year-old Dennis Schroder after this year, with both slated for free agency in 2017. Teague is on a bargain $8 million per year deal, and the Hawks project to around $15 million in space in the summer of 2016 including free agent Al Horford’s cap hold. If they strike out in free agency and decide they want to give Teague an extension starting in his age-29 season, he would be a decent candidate.  Although he may not age well, the Hawks might be able to entice him with, say, a $4 million renegotiation for 2016-17 followed by a two-year extension off his new $12.5 million salary.  That $4 million might be low enough that it does not prevent adding another impact player next summer.
• The Hawks could also consider the approach with Tiago Splitter, slated to make $8.6 million in 2016-17, were he healthy and productive this year.
• Avery Bradley and Isaiah Thomas will both be free agents in 2018, with salaries that could be below market for the 2017-18 season. The Celtics’ cap and trade situations are too fluid to really predict much on those players this far out though.
• For the Chicago Bulls, Taj Gibson is slated to make $9 million for the final year of his deal in 2016-17. They may have some space depending on what happens with Joakim Noah and Pau Gasol next summer.  If the now 30 year-old Gibson has a good year, a small raise and shorter extension past 2017 might work for him.
• Ersan Ilyasova makes a non-guaranteed $8.4 million in 2016-17. If he establishes himself as the starting power forward this year at age 28, he could be a good candidate for a renegotiation and extension into the low eight figure range for the Detroit Pistons.
• With the Indiana Pacers, George Hill’s $8 million expiring contract for 2016-17 might be a candidate, although he would be 31 years old by the time the extension kicked in.
• JJ Redick’s contract expires in 2017, but the Los Angeles Clippers do not project to have space to renegotiate and extend him next summer. Blake Griffin and Chris Paul have Early Termination Options (ETOs) for 2017 on the last year of their contracts which expire in 2018.  However, once an ETO is exercised a contract may not be extended.  They would have to agree not to exercise their ETO before doing a renegotiation and extension starting in 2018.  There would be no reason to do that rather than just becoming a free agent in 2017.
• For the Utah Jazz, Derrick Favors is signed for a below-market $11.1 million in 2016-17 and $12 million in 2017-18. Favors could actually renegotiate and extend as early as late October of 2016, the three-year anniversary of signing his rookie extension.  The Jazz project for over $30 million in cap space next summer, and many have lamented they may not have anyone to spend it on efficiently.  If they save some space until October, they could give Favors a bump closer to his $20 million per year market value, then offer at most a two-year extension on top of that through 2019-20, his age 28 season.  More realistically, the Jazz target him for a renegotiation in the summer of 2017-18 when he could sign a three-year extension, perhaps in conjunction with a re-signing of Gordon Hayward.  Hayward is not an R&E candidate since he can opt out of his three-plus-one deal before he would be eligible to renegotiate in the summer of 2017.

To see more of Nate’s work, follow him on Twitter @NateDuncanNBA or listen to the Dunc’d On Basketball Podcast, recording up to five times per week during the season.

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