FanPost

Capology: The Nene trade revisited

This offseason the NBA went through a bitter lockout where players and owners went at it behind closed doors and in the media, canceled training camp and almost a fourth of the season, and finally reached an agreement on a new CBA. With the new CBA came new rules and a lot of the old assumptions and best practices had to be rethought. Whenever there are fundamental changes such as government legislation, competition committee rule changes, or new innovations, there is an opportunity for the best and brightest to find a competitive advantage by understanding and adapting to the new rules faster than the competition.

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Most trades are evaluated at their most basic level: how do the pieces that were traded directly compare. A typical argument would look like this: their stats compare fairly similarly, Nene has been bad this year, and McGee has a lot of potential. A more complex approach involves being able to look beyond the exchange of human capital and evaluate the trade from both a human capital and cap perspective. A typical argument from this camp would look like this: while this trade hurts the Nuggets in the short-term the Nuggets were overpaying Nene, he was on the decline, and they were smart to get rid of his contract. Jeff asked what Masai's long-term vision for the franchise was. In this piece, we'll revisit the Nene trade from a theoretical program building perspective, which should be heavily influenced by the constraints under which teams operate, the CBA.

CBA

There are several CBA related concepts that must be understood in order to understand the Nene trade:

Traded Player Exception (TPE): The CBA is a little ambiguous with the ‘Traded Player Exception' term. The first definition is that it's an exception that allows a team to trade for players up to 125% + $100,000 in the old CBA or 150% + $100,000 of the salary that they trade away. This exception allows a team to take on more salary than it traded. The second way it is used is to refer to a one-year monetary credit a team gains in order to complete a non-simultaneous trade. In the case of the Nuggets, the TPE will always refer to the one-year monetary credit that the team received while a non-simultaneous trade was pending completion.

Base Year Compensation (BYC): Base year compensation is a category that a player's contract may fall into when traded. As mentioned above, the TPE specifies that a team can't take back more than 125% +$100,000 of the salary it trades away. At it's most basic level, if a player's new contract is worth 20% more than his old contract then he's considered a BYC player and his cap number, for trade purposes, is either 50% of his new salary or his old salary, whichever is greater. The important takeaway is that Nene's new contract did not designate him as a BYC player when acquired via trade.

Luxury Tax: The luxury tax is the mechanism the CBA uses to control spending and is often referred to as "tax". Luxury tax is paid by teams whose payrolls exceed a predetermined tax level and is related to total basketball related income. The important thing here is that the tax level may go down in 2013 because the predefined tax level is taken at 50% of BRI instead of the current 61% of BRI.

Simultaneous Trade: A simultaneous trade, for cap purposes, takes place all at once. The salaries of the players in question must be almost equal. The 2005 CBA says that teams must take in less than 125% + $100,000 of the salaries a team trades away. For example, if we trade away a player with a $10M contract we must receive less than $12.6M in salaries in return. The important thing here is that the Nuggets aren't performing simultaneous trades.

Non-Simultaneous Trade: A non-simultaneous trade is one in which a player of greater salary is traded for a player or players of lesser salary. The designation applies to the team that traded away the player with the greater salary and the team receives a monetary credit, or TPE, equal to the amount of that player's salary or BYC, if applicable minus the salaries of the players the team received in return. Here is an example from Larry Coon's salary cap FAQ:

"A team trades away a $2 million player for a $1 million player. Sometime in the next year, they trade a draft pick (with zero trade value itself) for a $1.1 million player to complete the earlier trade. They ended up acquiring $2.1 million in salary for their $2 million player -- they just didn't do it all at once, or even necessarily with the same trading partner."

For the Nuggets' purposes, the Nene trade was a non-simultaneous trade. It's important to note that the Nuggets are intimately familiar with this kind of deal as they structured the Carmelo trade as multiple trades involving 1 player in order to crate multiple TPEs.

Replacement Player: The CBA defines a replacement player as either a player acquired by a team pursuant to the traded player exception or a player who is signed or acquired by a team pursuant to the disabled player exception. The language is pretty murky, but the CBA implies that a signed player is one obtained through free agency whereas an acquired player is one obtained through trade. The important thing here is that the Nuggets must trade for a player with their exception.

Here is a list of recent events:

  • June 24th 2011 - Nuggets trade Raymond Felton for Andre Miller
  • December 13th 2011 - Nuggets acquire Rudy Fernandez and Corey Brewer for 2nd round pick
  • December 14th 2011 - Nene signs a 5-year $67M extension to stay with the Nuggets at $13M for the 2011-2012 season.
  • January 6 2012 - The Sacramento Kings fire Paul Westphal citing issues with DeMarcus Cousins
  • March 15th 2012 - Nene is traded to the Wizards in a 3-team trade for JaVale McGee and Ronnie Turiaf.

Let's connect the dots. Before the 2011 NBA draft, The Nuggets had a giant $17M traded player exception from the Carmelo Anthony trade. In CBA terms, the Carmelo Anthony trade was defined as a non-simultaneous trade where the Nuggets had a $17M one-year credit to trade for whatever players they wanted. They then traded for Andre Miller ($7.27M), Rudy ($2.18M) Rudy Fernandez and Corey Brewer ($3.08M) whose combined salaries of $12.53M fit completely into the Anthony exception with several million leftover. Normally, since Raymond Felton and Andre Miller have a similar salary, the trade would have been classified as a simultaneous trade. However, the Nuggets had money left over from the Carmelo Anthony traded player exception and therefore executed a non-simultaneous trade with Portland while Portland executed a simultaneous trade. Since Andre Miller's salary fit into the previous traded player exception, the Nuggets essentially gained another $7.5M traded player exception for the difference in Raymond Felton and Andre Miller's contracts.

Next, Nene signed his deal for $13M. By most accounts, the story was they overpaid but it was necessary to keep him in town. The questions to ask are:

1. Why $13M?

2. Why would they randomly overpay for Nene when Masai has always shown patience and intelligence when negotiating? He signed Gallo to a reasonable deal and then waited out Chandler.

As we mentioned above, a player becomes a BYC player when his base compensation is more than 20% of his old compensation. Nene's last salary was $11.36M. If the Nuggets had given him more than $13.63M, he would have been a BYC player and his exception value would have been $11.36M (his previous salary) instead of $13M. If you intend to trade Nene then your interests become negotiating the largest possible cap value for this year that is also less than $13.63M, as it maximizes your traded player exception. If not, then your interests become signing him for the least amount of money possible.

We don't believe for a second that the team got buyer's remorse - our FO is too savvy for that. You don't sign a guy and then instantly decide you want to trade him. We either signed him with the intention of trading him, knowing it would be better to overpay and get something in return with a large trade exception or we intended to go with him and injuries made that plan high risk. If you look at the timing of DeMarcus Cousins wanting to be traded and the Nene injury, they coincide and it's impossible to tell whether that was the opportunity they were waiting for to maximize the trade exception or if the Nene injury forced their hand.

The players that the Nuggets wanted to acquire in exchange for Nene fit the same cap profile. Both McGee and Cousins are high upside guys on rookie contracts - the same types of guys Masai targeted in the Melo trade. This works for two reasons - as we described in our piece on how players tend to age, our players should all peak at the same time. Second, trading a veteran on his 2nd or 3rd contract for a rookie contract creates the largest possible traded player exception. We had a $7.5M traded player exception for trading away Raymond Felton's salary. Ronnie Turiaf's 2011-2012 salary was $4.36M which left us $3.14M. JaVale McGee's 2011-2012 salary is $2.46M which should have given us a $10.54M exception, combined with the $3.14M leaves us with a $13.68M exception.

The final piece of the puzzle is the NBA's increased luxury tax. In the 2005 CBA and the first 2 years of the 2011 CBA, the luxury tax is fixed at $1-for-$1. That is, for each dollar over the cap teams have to pay a dollar in luxury tax. Beginning in 2013 the luxury tax increases as follows:

Incremental Team Salary Above Tax Level: (Tax Rate)

$0M - 5M: ($1.50-for-$1)

$5M - 10M: ($1.75-for-$1)

$10M - 15M: ($2.50-for-$1)

$15M - 20M: ($3.25-for-$1)

The new CBA system tries to level the playing field between big market teams and small market teams by imposing what is essentially a hard salary cap. The new tax rules make it fundamentally unprofitable for a team to operate with a player expense that is significantly above the cap - and NBA teams, no matter what anyone tells you, are for-profit enterprises. At a $1-for-$1 above cap ratio, teams in big markets can afford to buy players and pay the tax. At a $3.25-for-$1 or a $2.5-for-$1 ratio, it quickly becomes unprofitable and teams will be looking to shed salary to avoid paying the luxury tax. Since teams are only allowed one amnesty of a pre-2011 CBA contract, most teams will have to jettison bad contracts at the 2013 trade deadline or immediately after the 2012-2013 NBA season. The table below shows this year's player salaries next to last year's operating revenue and operating income. We then adjust this year's salaries based on a $58M salary cap and show what a team would be paying in player expense in 2013:

Team

Tax Amount

Revenue (Forbes Estimate)

Operating Income

2013 Tax Amount

Miami Heat

$2,830,000

$124,000,000

-$5,900,000

$4,245,000

New York Knicks

$14,650,000

$226,000,000

$64,000,000

$36,625,000

Phoenix Suns

$5,000,000

$147,000,000

$20,400,000

$7,500,000

Los Angeles Lakers

$21,420,000

$214,000,000

$33,400,000

$69,615,000

A third of the teams in the NBA (not counting exceptions) are operating above the tax threshold. The Miami Heat lost $5.9M last year on total revenue of $124M. Roughly (these numbers aren't exact since we don't know how much tax each team paid last year), at 2013 tax levels, the Heat would owe $1.5M more and would be operating at a net loss of $7.4M (that's being super conservative, their situation is likely to be much worse). The Knicks would owe almost $22M more in tax and their $64M profit would be reduced to $42M. The Lakers would owe about $50M more and would be operating at a net loss of $17M per year.

CBA Implications

There are several implications of the new CBA. First, in the summer of 2013 there will probably be massive deflation of player salaries as the total pool of money will likely decrease. When the supply of money chasing after the same assets decreases, player salaries will likely go down and albatross contracts will hurt even more. Second, teams will be desperately trying to shed salary to avoid paying obscene amounts of tax. The vehicles for this will be the amnesty clause, which allows teams to amnesty one player from the previous CBA, and trades. Third, decisions will be made based on the business side of basketball rather than purely on player value. Finally, there exists a window where teams will still be operating under the constraints of the old CBA even though the landscape has changed due to the new CBA. The teams that have changed their player salary structures to fit under the constraints of the new CBA will have a once-in-a-lifetime opportunity to take advantage.

Enter Masai Ujiri...

The Nuggets were able to see the forest through the trees and have positioned themselves to take advantage of the teams that will need to shed salary. We've signed all of our young talent to 2011 CBA cap friendly contracts. Additionally, we have a giant trade exception that allows us to go $13M over the cap without paying tax. Our genius front office has essentially made it so the Nuggets are playing by 2005 CBA constraints in 2013 while most other teams will be operating under 2011 CBA constraints.

Imagine this conversation:

Masai: Mitch, I want Bynum - he has a lot of potential.

Mitch Kupchak: What??

Jerry Buss: Mitch, we need to dump salary, the team is hemorrhaging money.

Mitch Kupchak: Bynum, Really??

Masai: We don't want more - just Bynum.

Not only that, but teams will be reluctant to hand out large contracts this year so the only option for a lot of free agents wanting max money is a sign-and-trade to the Nuggets.

Theoretically, our young players should continue to get better and peak around the age of 27 - or around 3 years from now. If we can get a star player in their prime in the next year and pair them with our young nucleus, we have a 2 or 3 year window where our team should continue to get better and then another 2 or 3 years with our young players at their peak, paired with a star hitting the 33 year old mark.

Rest assured Nuggets fans, our front office is very sharp. We're building our team perfectly. Most teams are trying to tank, get a star, and then build around the star - this is an unknown quantity because you have the star when he hasn't peaked and it's no guarantee he'll resign after you've built your team around him. We're doing it the opposite way - we're assembling a quality supporting cast and then trying to acquire the star at the right time to open up a 5-6 year contending window. Not only that, but we're faced with a unique situation with the new CBA where the team is perfectly positioned to execute this plan.

**EDIT**

We said that the 13M traded player exception allows the Nuggets to operate above the cap without paying tax. That was a little incorrect - if they exceed the luxury tax threshold they still have to pay tax but the exception allows us to operate 13M above the cap, ideally bumping right up against the tax threshold.

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