Rookie Extensions: Terrence Jones and Donatas Motiejunas

As most readers likely know by now, teams have until November 2[1. This date is normally October 31, but since the date falls on a Saturday the CBA mandates that the date extend to the first business day thereafter.] to reach extensions with first-rounders entering their fourth seasons.  If not, the players become restricted free agents next summer.  This year’s negotiations have bandied about some eye-popping numbers, with the salary cap set to explode to an estimated $89 million in the summer of 2016 when the extensions would kick in.

Nevertheless, it would seem both teams and players have less reason to extend than ever before.  On the players’ side, they know that over half the league will be able to create cap space up to the applicable $21 million maximum salary for players with zero to six years of experience.  Thus, the fear of reaching restricted free agency only to find a dearth of offers is muted.  What’s more, if the player suffers an injury or performance downturn there will still be so much money out there that he might obtain a solid contract with life-changing money even so.

On the team side, most plan to use cap space to sign free agents.  The best way to maximize space is by keeping a free agent’s cap hold—in nearly all of these cases a lower amount than their projected salary the following year—on the books before re-signing the player instead of extending them now, which would eat into summer 2016 space.  This is the mechanism the Spurs used with Kawhi Leonard a year ago, giving them about $9 million in extra cap space to sign LaMarcus Aldridge before extending Leonard for his max.  It was recently reported that the Pistons had tabled extension talks with Andre Drummond with a similar plan in mind. Keeping his $8.2 million cap hold on the books opens up another $12.8 million in space compared to signing him to a max extension of $21 million now.  The Wizards with Bradley Beal are likely to pursue the same strategy as they chase Kevin Durant.

With such a high opportunity cost for both player and team, the middle ground for a rookie extension is in many cases fleeting or even nonexistent.  For a team with 2016 free agency ambitions, the player must take a steep discount over his projected market value next summer for the long-term savings of the length of his contract to be worth foregoing the 2016 flexibility.  And with all the free agent dollars out there this summer, players have little incentive to take a discount at all.

Here we examine a rather unique situation in Houston, where power forwards Donatas Motiejunas and Terrence Jones are both up for extensions at the same time. What is the opportunity cost for Houston in the coming 2016 and 2017 free agent bonanzas?  If all goes well this year, the Rockets are unlikely to have any cap room next summer even if they don’t extend Motiejunas and Jones and retain their respective $5.7 and 6.2 million cap holds.

Dwight Howard has a $23.3 million player option for 2016-17, and if he either opts in or (more likely) opts out and re-signs for that amount or more, the Rockets would not have much cap space even if they were to extend neither Motiejunas or Jones.  Ty Lawson also has a nonguaranteed salary of $13.2 million next season, but unless he melts down he represents solid value at that price—especially with no ready replacements likely to be available on the free agent market.  Waiving Lawson, renouncing Jones and Motiejunas, and pulling the qualifying offers for the latter two could get the Rockets to near $20 million in space (assuming Howard re-signs a longer-term deal starting at about the $23.2 million he is to make in his player option), but that would leave them with no starting power forward and Patrick Beverley as the starting point guard.

Using cap space in the summer of 2016 if Howard were to leave.  In that case, the Rockets could use up to $17.7 million in space including the Jones and Motiejunas cap holds (more if they chose to move on from the $7.6 million owed Corey Brewer, the $6 million owed Beverley, or the $3.3 million for KJ McDaniels, all of whom should easily be tradeable) and then re-sign either or both their extension candidates.

With Motiejunas and Jones presumably reaching deals to re-sign and Clint Capela also in the fold, the Rockets would have the luxury of adding a wing or another big, or making a trade for a star on another team.  Houston could target a wing who can shoot and also play forward with Ariza in small lineups (Nicolas Batum?), a traditional big (Hassan Whiteside? Al Horford?), or a pure stretch four (Ryan Anderson?).

If Motiejunas and Jones are extended now for, say, starting salaries of a combined $25 million, it essentially eats up any potential cap space even if Howard leaves.

2017 Free Agency

Howard’s situation next summer is very tricky. He will almost assuredly opt out, but unlike some of the less-experienced players on the market his maximum contract will start at $29.3 million as a player with 10-plus years of experience.  If he makes it through the year without another major injury or performance decline, he is probably worth that amount in the first year of a new deal with all the cap space around the league.  But he will turn 31 during the 2016-17 season.  If he signs the maximum possible five-year, $168.7 million contract next summer, Howard will be making a whopping $38.1 million in 2020-21 as a 35-year-old.  Even if he signs for the max with another team (limiting him to four years and 4.5 percent annual raises), that’s still $33.3 million in his age-34 season.  He is unlikely to perform at anywhere near that level, especially with the cap increase set to level off in the latter part of this decade.[2. An aside: The NBA’s compensation system which allows only 10+ year veterans to get the 35 percent max and 7-9 year veterans to get the 30 percent max (unless they qualify for the Derrick Rose rule) is broken. The fact that Howard will be able to make so much as a 35 year-old while far superior younger players cannot makes no sense. Perhaps the system is an artifact of the CBA negotiations in 1999, when older stars like Michael Jordan and Patrick Ewing ruled the union.  It was a unique time in NBA history, when the best players like Jordan and Karl Malone were in their mid-30s.  Generally though, players from four to nine years of experience provide the most production.  The parties (mostly the owners) have already installed a mechanism to more frequently distribute the wealth to the players who deserve it with progressively shorter contracts in the CBA negotiations since 1999.  Allowing stars in their prime to make the most money is a fair next step, even if it might make rookie extension negotiations a lot more difficult.]

Ultimately, a fair deal for Howard is probably somewhere in the five-year, $125 million range.  That is probably still an overpay on the back end, but also reflects the realities that a) the Rockets are a contender now and need Howard and b) another team would very likely offer him a four-year max deal.[3. For Howard, getting  a player option in 2016 when he signed with Houston in the summer of 2013 was incredibly important.  With so much money around the league and Howard only 30, he can still command the max or close to it on a five-year deal.  The idea as an agent is to make your player a free agent in a year when he is still worth a max contract in the first couple years of the deal, but then the team has to overpay on the back end.  30 or 31 years old is usually that point for superstars, whereas lesser players should probably shoot for free agency at age 28 or 29, assuming everything else is equal.]

We’ll assume that Howard re-ups for a flat $25 million per season over five years.  In that case, Houston could have a maximum of $34.9 million in the summer of 2017 under a projected $108 million cap.  (With a potential new CBA in place, it is quite possible the cap ends up in the $95-$100 million range that year.)  Houston could again open up more space by moving or stretching Corey Brewer, Patrick Beverley, or KJ McDaniels, who has a team option that year.

That $34.9 million does not account for Jones or Motiejunas, or any players signed to longer than one year contracts with Houston’s exceptions in the summer of 2016.  Ty Lawson also comes off the books in 2017, meaning the Rockets will have a need at point guard if he does not return. Fortunately, Chris Paul, Russell Westbrook, Derrick Rose, Stephen Curry, Jeff Teague, and Kyle Lowry can be free agents that summer.  Paul would be eligible for a contract starting at $35.6 million per season, while the rest could sign for up to $30.5 million to start.  Plenty of other quality free agents will be available as well, such as Gordon Hayward, Danilo Gallinari, Kevin Durant[4. With an additional year’s experience, Durant will qualify for the 10-plus years of experience max of around $35 million in 2017-18.] (if he takes a one-year deal to stay in Oklahoma City this summer), Serge Ibaka, Blake Griffin, Paul Millsap, and Nikola Mirotic (RFA).

Cap space in 2017 is the opportunity cost.  With Houston’s excellent history with free agents, one would have to imagine it could get one of those players had it the space.  And all of those players project as superior to either Jones or Motiejunas even by 2017.  On the other hand, the Rockets need at least one of them until then.

My guess is that Houston will only agree to an extension with one of the two if it looks like a solid discount—and thus a potentially tradeable contract up to the summer of 2017 if necessary.  Contracts in the $15 million per year range for Jones have been bandied about, but what kind of year will he need to have to get more than that on the open market?  To become more than just a decent starter (who should command in the $13-15 million per year range), Jones is going to have to show he is a good defender, a decent three-point shooter, or a one-on-one playmaker this season.  The last is probably out the window on a Rockets team where he will be at best the fourth option, and he has not shown a great shooting touch so far.  Defensively he has excellent tools, but will need to make some huge strides to garner an offer sheet of more than $15 million a year.  Therefore, around $13 million per year seems like a number the sides could agree on.

Motiejunas is much harder to peg due to his back injury.  Some consider him the superior player to Jones, with a better outside shooting touch and high skill level in the post.  Unfortunately, he has now been out more than six months, so we are getting to the point where there is a concern it may be career-altering, at least in the short-term.  That limits the amount Houston may want to invest in him, but could also be an impetus for him to sign up for less than his market value if healthy.  If Motiejunas is willing to settle for something in the four years, $40-$44 million range, there may be a deal to be struck.

The negotiations will be fascinating.  Right now, neither of the two young power forwards is indispensable to Houston’s future.  But if they let both of them reach restricted free agency and Howard leaves, they could both become essential.  Ultimately, my tentative prediction is that neither deal gets done and the Rockets just let it play out in restricted free agency, confident that neither player is absolutely necessary and the competition for minutes between the two will prevent either from emerging to the extent they break the bank in restricted free agency next summer.

My backup prediction is that the Rockets extend whomever they can extract the biggest discount from.  I do think it rather unlikely that both are extended though, since it would likely require an investment of at least $25 million per season in the power forward position with no assurance that either will be a championship level starter.