The Gilbert Arenas Provision and Why It's (Sometimes) Better To Be a Second Round Pick
One of the benefits of the “soft salary cap” in the NBA is that it purportedly enables a team to retain its own players easier than a “hard salary cap.” Teams can offer their own free agents more money and more years than any other team, thus rewarding hometown fans and promoting player loyalty. Of course, it is not a flawless system, and there will always be players who have their minds firmly set on taking their talents to a different market to play with different teammates. But for the most part, a player’s current team will virtually always be able to offer a more lucrative and longer contract.
Back in 2003, the Washington Wizards were able to take advantage of one of the few loopholes in this soft cap system when they outbid the Golden State Warriors for Gilbert Arenas, a restricted free agent (RFA) after being a second round pick in 2001. The Warriors were over the cap and thus could only use an exception to re-sign Arenas. Gilbert was classified as an “Early Bird” free agent, meaning he had played with the Warriors over the previous two seasons without changing teams. A team can use the Early Bird exception to re-sign its own free agent for up to 175-percent of his salary in the previous season or 104.5-percent of the league’s average salary, whichever is higher. Therefore, Golden State could only match an offer sheet, or extend Gilbert’s contract, for up to the amount of the Early Bird exception ($4.9 million in 2003, the league average at the time). The Wizards smartly (two words you don’t hear next to each other very often) signed Arenas to an offer sheet nearly doubling Golden State’s exception, $8.5 million in starting salary, and left the Warriors without an option to legally match within salary cap rules.
This loophole was seemingly closed in the 2005 CBA with the “Gilbert Arenas Provision,” where it was ruled that an offer sheet made to a restricted free agent in his first or second year in the NBA could not contain a first-year salary greater than the non-taxpayer mid-level exception ($5 million for 2012-13) and a second-year salary no greater than the standard 4.5-percent raise from the first year. The third year of the offer sheet has no such restrictions and could be as high as the player’s maximum, given the offering team’s cap room. However, if a raise from year two to year three is greater than 4.5-percent, the team proposing the offer sheet must be able to fit the average of the entire contract under the cap, rather than the first-year salary, and that is how it is applied to their ledger. But if the original team decides to match the offer sheet, the annual salary is applied to the original team exactly as it is laid out in the standing offer sheet. To put this in context of 2003, the Wizards would only have been able to offer the full mid-level exception in the first two seasons, which at the time was $4.917 million. Golden State therefore would have at least had the option to match this offer sheet for Arenas, if they chose to do so.
The So-Called “Gilbert Arenas” Provision
The difference in the application of the salaries for each team is where the loophole lies. This structure allows a team with a plethora of cap room to back-load an offer sheet significantly in the third and fourth year, only needing to fit the average of all four years (or three years, depending on length of the offer sheet) under the cap in the first season of the deal.
The Houston Rockets took full advantage of this recently with their offer sheet to Chicago Bulls center Omer Asik. They submitted a three-year, $24.3 million offer, paying around $5 million in the first two years before ballooning to almost $15 million in year three. Houston, with boatloads of cap room, only needs to fit the average of the total deal, or around $8.1 million, under the cap each year. But if Chicago matched the offer, they would have to pay Asik $5 million this year and next, and then almost $15 million in 2014-15 when they are already paying big men Carlos Boozer and Joakim Noah almost $30 million combined. Tack on Derrick Rose’s max deal, and those four players would take up Chicago’s entire salary cap. And given the Bulls’ typical aversion to the luxury tax, especially when the penalty will be more severe in 2014-15, it is a virtual certainty they will not match the offer for Asik. This was a strategic move by Houston to ensure they get the player they want through a loophole in Gilbert Arenas Provision designed to help teams keep their successful second-round picks.
The Toronto Raptors used the exact same concept with their offer sheet on Tuesday to Landry Fields, back-loading the contract to make the third year higher than the first two and likely preventing the Knicks from being able to match. The Houston Rockets and Jeremy Lin agreed to a four-year, $30 million offer sheet, which includes a team option in year four. Lin will make $5.2 million over the first two years, before getting a bump to $9.3 million for the remaining two years of this contract. Expect to see more of the same going forward this summer. My bet for who’s next: Devin Ebanks.
[Note: Offer sheets and other free agent contracts cannot technically be signed until July 11, and at the point, the Bulls and Knicks will get three days to decide if they want to match the offers for their respective players.]
How does this affect the Wizards?
There are two ways that the Wizards can be affected by the loophole in the Gilbert Arenas Provision:
1) They can submit an offer sheet to a player they want to add, or …
2) Another team can submit an offer sheet to one of their RFA’s that they will need to match
[Note: For the purposes of this article, we will just focus on first- or second-year players who will be restricted, and not players like Eric Gordon or Roy Hibbert, both of whom just signed max deal offer sheets with the Suns and Trail Blazers, respectively.]
This offseason, the Wizards have no RFA’s that they need to worry about losing. Their second round pick from 2010, Hamady N’Diaye, is no longer on the roster. Their second round pick in 2011, Shelvin Mack, signed a two-year deal and thus will not be a RFA until next offseason, should the Wizards opt to bring him back and give him a qualifying offer of $1,084,293. It is highly unlikely that another team will propose an offer sheet for Mack, let alone one that the Wizards could not match financially. Therefore, Ernie Grunfeld will have to make a decision between A) paying that salary to Mack next year, or B) renouncing his rights, allowing Mack to become an unrestricted free agent. If he chooses the latter and drafts a point guard in the 2013 second round to back up John Wall and signs the pick for the rookie minimum ($490,180), Washington could save almost $600,000 in cap space. And unless we see a drastic improvement from Shelvin Mack in his second season, you could easily argue that a rookie could come in and fill that same role seamlessly. Looking even further down the road, the Wizards second-round pick this year, Tomas Satoransky, won’t even play in the NBA until 2013-14 at the earliest, meaning the soonest he could become a RFA is after the 2015-16 season.
With the Wizards’ cap space all but gone right now, they have no option to even submit an Arenas Provision offer sheet that would force a team to relinquish their player (however if they amnesty Andray Blatche as expected, there is much more wiggle room). There is not much relief coming next year, either, unless the Wizards decide to decline their team options on any of John Wall, Jan Vesely, Kevin Seraphin, Chris Singleton, Trevor Booker, or Jordan Crawford. The RFA crop next summer for an Arenas Provision offer sheet is not exactly overwhelming, with players like Justin Harper (Orlando), Jon Leuer (Houston), E’Twaun Moore (Boston) and Josh Harrellson (New York) among the names that might available. The most productive second-round rookies from 2011-12, Isaiah Thomas (Sacramento) and Chandler Parsons (Houston), are both locked into longer rookie deals, while Lavoy Allen (Philadelphia) recently signed a two-year extension on his one-year rookie contract.
Looking at the crop of 2012 second-round picks, it will be interesting to see if any of them experience enough success to earn a big offer sheet like the ones being handed out this summer. In fact, for players like Perry Jones III or Marquis Teague, both taken at the end of the first round, it could have been more lucrative for them in the long run if they slipped a few spots to the second round. Look no further than Landry Fields, the 39th pick in the 2010 draft. In his first two seasons, he earned a total of just over $1.2 million. But after signing the offer sheet with Toronto (three-years, almost $20 million), Landry will have earned around $13 million in his first four seasons, before the final and highest-paid year of the offer sheet even kicks in. Compare that to Lazar Hayward, the final pick in the first round in 2010, which also means the final guaranteed contract. If Lazar plays out the duration of his four-year deal, he will earn just over $5 million total. No comparison. In fact, Landry’s earnings in his first four years will be virtually equal to Greg Monroe’s, who was the seventh overall selection in 2010.
Second-round picks in 2012 who might see playing time right away are the ones likely to get an Arenas Provision offer sheet at some point. Someone like Darius Miller (New Orleans), Mike Scott (Atlanta), or Kim English (Detroit) could get immediate minutes, and thus will have a chance to increase their value once they become a RFA. Wizards’ fans should keep their eyes on second-round picks playing well, because in a few years, they could be had using a loophole in the provision that Ernie Grunfeld & Co. were responsible for creating in the first place.
[Editor’s Note: This is Andrew Abramson’s second post for Truth About It.net. Andrew has been around basketball his entire life — he’s a Wizards fan, having grown up in Alexandria, Va. — and has experience working in the basketball industry. Andrew will provide insights on the business side of the NBA as well as salary cap analysis. You can follow him on Twitter at @AndrewA91.]
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