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I thought about this following a couple of posts in the FA topic. I thought it would be a good reference point for the cap related issues Miami Heat face in the coming seasons, and why Riley/Arison etc. talk about 'financial constraints' despite having the most marketable trio in the NBA.

I'll start with some basics - those who know the CBA can skip ahead.

Salary Cap

2011-12 - $58,044,000
2012-13 - $58,044,000

Exceptions

Mid Level Exception:

- $5m, with 3% raises up to 4 years, for teams under the luxury tax threshold last season; or
- $3m, with 3% raises up to 3 years, for teams over the luxury tax threshold last season; or
- $2.5m, 3% raise up to 2 years, for teams under the cap for use once they have used their capspace.

Bi-Annual Exception:

- $1.672m, up to two years, for teams who did not pay luxury tax last season.

Luxury Tax

Threshold typically $70m ($70,307,000 for upcoming and prior two seasons)



A key thing to note here is how punitive the luxury tax is compared to before. The old CBA provisioned that for every $1 over the tax threshold a team goes, the team pay $1 luxury tax into a tax pool, which is redistributed to non tax paying teams at the end of the season.

In the new CBA, tax changes go as high as $4.25 for every $1 beyond the threshold, for teams well in excess of tax limits for four seasons. In its simplest sense, if you have a payroll of $85m, and offer someone a contract for $1m per year, you will pay $1m to the player and $4.25m to the tax pool for the priveledge.

Quick reference guide: http://en.wikipedia.org/wiki/NBA_salary_cap
More detailed reference guide: http://www.cbafaq.com/salarycap.htm


Miami Heat Financials

http://www.forbes.com/teams/miami-heat

For the 2010/11 season, Forbes estimated $158m turnover and $26m operating income, based on a $69m payroll. A successful season, considering we did not pay the luxury tax and the big 3 brought new excitiment to Miami.

We can make an assumption here that other operational expenses, e.g. arena operating costs, general staffing costs etc, are $63m, a figure I'll refer to later.

($158m - $26m - $69m = $63m)

Miami Heat Tax Payments

Now, our player contracts project at something like $80m / $84m / $84m for the next three seasons.
Assuming the lux tax threshold remains at $70m, we will have the following tax bills:

(Year - Salary - Tax Bracket - Tax Payable)

2012/13 - $80m - $70m = $10m = 1x tax (old CBA) = $10m
2013/14 - $84m - $70m = $14m, $5m taxed at $1.50 = $7.5m, $5m taxed at $1.75 = $8.75m, $4m taxed at $2.50 = $10m. Total tax $26.25m
2014/2015 - $84m - $70m = $14m, $5m taxed at $1.50 = $7.5m, $5m taxed at $1.75 = $8.75m, $4m taxed at $2.50 = $10m. Total tax $26.25m

Those figures look insane under the new CBA. Total payroll per season inc. tax:

$80m + $10m = $90m
$84m + $26.25m = $110m
$84m + $26.25m = $110m

The team will also likely have seen a revenue jump due to winning the title. I'll be generous and suggest $10m. So:

2012/13 - Revenue $168m - $63m costs - $80m payroll - $10m tax = $15m operating income
2013/14 - Revenue $168m - $63m costs - $84m payroll - $26.25m tax = $5.25m loss
2014/15 - Revenue $168m - $63m costs - $84m payroll - $26.25m tax = $5.25m loss

(worst case would be identical revenue, followed by £5m profit, and £10m losses x 2)

Summary

Even with additional income, the franchise is going to make losses for two of the next three years, due to the extortionate tax bill Arison faces. Whilst he is a wealthy man, remember this loss is before interest payments on any loans (which we do have) therefore is clearly not sustainable, particularly as it could easily increase if we were to use our exceptions in following seasons.

Other Financial Stuff

There were talks of a new TV deal, but I understand these were false and nothing is signed. It would be purely speculative to take this into account in the above.

Amnesty Options

Amnestying Mike Miller is an interesting option. Assuming we are confident enough to replace all his minutes with Battier, Jones & Ray Allen, I've worked it through the financial model:

2012/13 - $74m - $70m = $4m = 1x tax (old CBA) = $4m ($6m difference in tax)
2013/14 - $78m - $70m = $8m = $5m taxed at $1.50 = $7.5m, $3m taxed at $1.75m = $5.25m; total tax = $12.75m tax
2014/15 - $78m - $70m = $8m = $5m taxed at $1.50 = $7.5m, $3m taxed at $1.75m = $5.25m; total tax = $12.75m tax

The tax difference in years 2 and 3 is $13.5m per year, which is pretty significant. I am not surprised Riley isn't amnestying him now, but I would be very surprised if he goes past next summer.

Don't forget if we amnesty him, we still pay him, it just doesn't count towards our salary cap...


Thanks caneaddict for helping with the numbers

Great work and the forbes estimate really helps put it into perspective. With the Heat winning the chip this year, I expect it to be a bit more, but still not enough to overcome the deficit.

In that case, Riley should look at the big three and work out a verbal agreement of some sorts - If he is able to construct a cast that is able to threepeat, all of the big three should opt out on year 4 and sign new contracts which allow for more financial flexibility. The Big Three preach how much they have sacrificed to win as many of our role players from Haslem to Battier to now Allen. Allen's probably will retire by 2014 along with Miller, so we have to look for more contributors which are willing to help a possible dynasty continue.

Wow at those tax numbers Hopefully that TV deal comes to fruition.

CommonSensei wrote:Great work and the forbes estimate really helps put it into perspective. With the Heat winning the chip this year, I expect it to be a bit more, but still not enough to overcome the deficit.

In that case, Riley should look at the big three and work out a verbal agreement of some sorts - If he is able to construct a cast that is able to threepeat, all of the big three should opt out on year 4 and sign new contracts which allow for more financial flexibility. The Big Three preach how much they have sacrificed to win as many of our role players from Haslem to Battier to now Allen. Allen's probably will retire by 2014 along with Miller, so we have to look for more contributors which are willing to help a possible dynasty continue.

As long as we keep winning I can see that happening. I could see LeBron and D Wade doing it since they make a ton of money off of endorsements alone.

Not to undermine their sacrifice but Lebron and Wade have enough endorsements to allow leaving money on the table to e an option and not financial suicide.

Mickey really deserves gratitude for as long as he holds this together. He is taking it on the chin with the Heat right now to bring something special to S Florida.

To lessen the tax stipulations, amnestying Mike Miller makes the most sense. He was great in GM 5 but he's injured more often than not and we just signed Ray Allen to replace him. He has a large contract and has been injured his entire tenure in Miami. It only makes sense to use the amnesty on him.

But reports are Riley isn't considering using the amnesty on anyone this offseason...

In regard to the Heat TV deal - i believe we currently make around 20mil$ per year for our broadcasting rights.

The new TV deal was rumored to be on an all diffrent scale, reaching up to 80 or 100Mil$ per year. Fox Sports Florida later denied this.

It's hard to tell if this deal or similar one will get done, but if it will it would provide a huge boost to our bottom line and therefore to our ability to sustain a high tax-paying roster.

DatD-Wade3 wrote:To lessen the tax stipulations, amnestying Mike Miller makes the most sense. He was great in GM 5 but he's injured more often than not and we just signed Ray Allen to replace him. He has a large contract and has been injured his entire tenure in Miami. It only makes sense to use the amnesty on him.

But reports are Riley isn't considering using the amnesty on anyone this offseason...

Yeah, if Miller isn't retiring this off season, I really see him staying on the books for the next seasons and then retiring in 2014 and not taking his player option

Deleted

Wow that's a huge difference in savings with amnestying Miller. And surely, Riley and Arison are well aware of the financial situation of the team going forward so I would also be very surprised if Miller stays with the team past next summer.

Question: Is the tax determined by the total player salary from the previous season or the total player salary by the deadline of when you'd have to pay the tax?

Ok...so what happens if Mike Miller decides to retire? Not counted on the cap... Then if Joel plays less and less of a role than amnesty him...right? Wouldn't that shed 10 million of salary...unless Miller comes back like the young 20something year old Miller I dont think he stays past next season...he knows he gets paid still...we would still have depth with what we have and amnesty Joel which will be our next biggest "bad contract"... 2013-14 season would be less than 70mil for will all options. is that correct?

Skip - there is no way we can get down below the luxury tax threshold for the 13-14 season, even if Miller and Joel are gone. the numbers are clear. our goal would be to minimize the tax hit, not to avoid it completely - that would be impossible.

OP-

Nice work, a few small errors though. The Repeat Offender status is only for teams that have paid luxury tax 4 of previous 5 seasons. So earliest we would enter that status would be the 2016/2017 season. That's the season after all the big 3 contracts expire including player options.

Also, the tax system is not cumulative, each level of tax only applies to amounts over that levels threshold.

2012/2013 $80MM - $70MM = $10MM (1 to 1 tax) total tax $10MM
2013/2014 $84MM - $70MM = $14MM, $5MM taxed at $1.50 = $7.5MM, $5MM taxed at $1.75 = $8.75, $4MM taxed at $2.50 = $10MM. Total tax $26.25MM. Total payroll: $110MM.
2014/2015 same as previous year.

The big money hits when we cross $80MM in actual payroll. I think we will try to stay below $80MM by amnestying Miller or some other mechanism because that will keep our total payroll including tax below $100MM.

^ The Repeat Offender - what makes you think it will only apply to us at the 16-17 season?

2010-2011 - we paid the luxury tax (pretty sure)
2011-2012 - we paid the luxury
2012-2013 - we are paying the luxury tax
2013-2014 - we will pay the luxury tax without a doubt
2014-2015 - we are the repeat offender.

RexBoyWonder wrote:^ The Repeat Offender - what makes you think it will only apply to us at the 16-17 season?

2010-2011 - we paid the luxury tax (pretty sure)
2011-2012 - we paid the luxury
2012-2013 - we are paying the luxury tax
2013-2014 - we will pay the luxury tax without a doubt
2014-2015 - we are the repeat offender.

We actually didn't pay luxury tax last year.

ifrosty13 wrote:

RexBoyWonder wrote:^ The Repeat Offender - what makes you think it will only apply to us at the 16-17 season?

2010-2011 - we paid the luxury tax (pretty sure)
2011-2012 - we paid the luxury
2012-2013 - we are paying the luxury tax
2013-2014 - we will pay the luxury tax without a doubt
2014-2015 - we are the repeat offender.

We actually didn't pay luxury tax last year.

Are u sure?

If so, The Repeat Offender killer **** tax only kicks in at the 2015-2016 season. that's good, we earn another year of spending.

going into that season, we were under the cap. We signed everybody and a bunch of minimum guy, we barely made it under the luxury tax. Im about 90% sure this is how it was.

You might be right, i remember we got big Z for practically nothing and we didnt have Battier yet, i just remember we had a ton of guys on the payroll even though they were overseas.

One thing is for sure - we need the luxury tax threshold to be as high as possible. it's currently at 70Mil, if it goes up to 75-77 it could be a huge break for us. im not sure what mechanism is used to determined the luxury tax threshold.

Everyone became a CFO!!! If you leave player personal decisions to these realCFO's (lol get realGM, realCFO) our pay roll lineup would look like this:

PG: ifrosty13 ( $3.5 per hr plus tips)
SG: Dwayne Wade ( $14m)/mopper ($10.00 per hour)
SF: Lebron James ($14m)/ lukearts (internship)
PF: Chris Bosh ($14m)/ dflash3 (volunteer)
C: RexBoyWonder (Temp Agent)

Haha im 6"2 on a good day, i'll get killed at Center...switch me with iforsty.

But you know, in todays game all these Financial issues play a HUGE role if you want a successful team. the new CBA really made fans pay attention. so it's a cool thing lukekarts open this thread.

ifrosty13 wrote:going into that season, we were under the cap. We signed everybody and a bunch of minimum guy, we barely made it under the luxury tax. Im about 90% sure this is how it was.

RexBoyWonder wrote:You might be right, i remember we got big Z for practically nothing and we didnt have Battier yet, i just remember we had a ton of guys on the payroll even though they were overseas.

That's correct, we were about 3.25M under the tax threshold: http://www.shamsports.com/content/pages ... 1/heat.jsp

RexBoyWonder wrote:im not sure what mechanism is used to determined the luxury tax threshold.

In 2012-13 the tax level was determined by taking 53.51% of projected BRI, subtracting projected benefits, and dividing by the number of teams in the league. For 2012-13 the tax level was guaranteed to be no less than $70.307 million.
http://www.cbafaq.com/salarycap.htm#Q21