Prorating contracts

[FGump]

I have a hodge podge of questions, expressed in a confusing fashion, but all centered around the concept of prorating contracts.

Let's say a player (like PJ Brown*) is signed exactly halfway through the season ("halfway" in regards to prorating).

If he wants to actually get paid $3M, must a team write it as a $6M contract and have cap room for $6M, and then they pay him only $3M as prorated amount? or

If his old team (Chicago) wants to use him as sign-and-trade fodder, can they write it as a $6M deal for trade-matching but actually only have the team he is traded to be obligated for $3M due to proration? or

Can teams write the contract either way they choose, ie can they take a player they intend to pay $3M for half a season and
(a) write it as a $3M deal for cap purposes even though technically he's getting paid at a "$6M/year" rate, or
(b) write it as a $6M deal prorated to a $3M payout

I can see situations where they'd be advantaged to do it one way, and other situations where they'd be advantaged to do it the other way.

Also, if you sign a player halfway through the season and pay him $3M on a $6M prorated contract, is their cap (and tax) hit with only $3M?

What about Base year issues for the ensuing year, if the deal is only written for the balance of the season?

So what are the rules and limits, if any? Does prorating kick in automatically? And how does it affect cap and tax accounting?


* In some details here the situation may not exactly fit, but I'm just using a name that somewhat fits.

[bgwizarfan]

My understanding is that only Minimum Salary contracts are prorated (rest of year, 10 Day Contracts - not sure what happens if a player signs a 2 year Minimum salary deal in the middle of a year). This could be wrong, but I don't think other contracts are prorated.

For instance, take all the Exceptions (Mid-Level, Bi-Annual etc.) that begin to reduce in value on January 10th each season. Let's say a player is signed with the Full MLE that a team has remaining on February 11th ($5,356,000-$5,356,000 X (33/170) = $4,316,306). If a player is signed with the rest of that Exception, then $4,316,306 is what he's paid that year (and not half of that or whatever else it is), and that's also the cap hit. Qualifying offers also don't seem to prorate (and just expire March 1st the absolute latest)

I would think cap room is the same way. I don't think they'd have to offer Brown $6 million for him to make $3 million.

I know Prorations come into play with Trade Bonuses when calculating how much "remaining salary" is left on the contract (and trade bonuses acquired between the last Day of the Regular Season and June 30th count for luxury tax purposes). That's my take on things - I don't think it would therefore affect the BYC issue then.

It also doesn't seem fair that a cap hit would be so much greater than what a player is paid. I can't see that happening... but can we remember a recent example of this happening where a player signed a multi-year deal mid-way through the season? Then we might be able to figure this out for sure

[Dunkenstein]

I agree with bgwiz that prorations really only affect minimum contracts.

However, the interesting question is what happens if a team wants to add an additional year on the contract.

In the case of a player signed to a prorated minimum contract, the second year is a full year at minimum.

If a player is signed using room, the second year salary is within 8% of what the player got in his first year ROS contract.

If a player is signed for a portion of the reduced MLE, I suspect his second year has to be within 8% of his first year ROS contract.

But say a player is signed for the full amount of the reduced BAE, is the second year within 8% of the full BAE or is the second year within 8% of the reduced BAE?

[Dunkenstein]

My agent friend said that while he has not particularly encountered such a situation, he believes that if a player is given all of the "reduced" BAE or MLE in year one, he is entitled to as much as an 8% raise over the "full" BAE or MLE in a second year of a contract. His reasoning is that the player got a contract for the full exception allowed at the time and his future salary should be based on the full amount of the exception.

[Three34]

The only instance of this that I think I know of was when Charlie Ward signed mid season with the Spurs. I think he got the full BAE for one year. Can't be sure.

Not a helpful response this, really.

[LarryCoon]

Dunkenstein's understanding matches mine. A $2M contract, prorated to $1M, is still considered a $2M contract for all purposes EXCEPT for writing the checks. Raises are based on the full amount, free agent cap holds are based on the full amount, tax is based on the full amount, etc. BTW, these are special categories of contracts called "Rest of Season" contracts in the CBA.

[bgwizarfan]

^ wait Larry, that confuses me a little bit. I thought we determined that only Minimum Salary Contracts are prorated.

After reading Article II, Section 10 and the Definition of Minimum Salary in Article I again, it seems like these contracts aren't actually prorated at all.

"Section 10. Rest-of-Season Contracts.
(a) At any time after the first day of an NBA Regular Season, a Team may enter into a Player Contract that MAY provide Compensation to a player only for the remainder of THAT Season (a

[Dunkenstein]

Dunkenstein's understanding matches mine. A $2M contract, prorated to $1M, is still considered a $2M contract for all purposes EXCEPT for writing the checks. Raises are based on the full amount, free agent cap holds are based on the full amount, tax is based on the full amount, etc. BTW, these are special categories of contracts called "Rest of Season" contracts in the CBA.

Larry, are you sure the tax is based on the full amount. I would tend to think the salary for tax purposes would be prorated as well.

[bgwizarfan]

^ Sorry to be difficult, but I'm still not following what's going on. When would a $2 million contract ever be pro-rated to $1 million?

Are you saying for all these exceptions, if a player is signed with the full Exception in the middle of the year, he's not actually paid the full Exception (i.e. the full Exception counts for all cap purposes, except he only gets paid the prorated amount?). Thanks for the clarification

[FGump]

I was confused by these issues, and wondering if there are multiple choices in the way a team may opt to write a contract (ie do they have the ability to prorate or not prorate, at their entire discretion? do they have the ability to make the same actual payroll represent more money or less money on the cap number as needed, at their discretion?). It sounds like I'm not the only one not exactly sure.

The question becomes relevant with a player like PJ Brown, if Chicago wants to sign-and-trade him this season as filler for a team-changing trade at the deadline. If (using their Bird rights and excess space under the tax limit*) they can sign him to a $7M contract (with said amount going on the cap total of whatever team has him) but the team getting him in trade only has to pay a partial-salary of $3M or less because they opted to prorate that $7M for the actual days played, that's a highly advantageous way to add filler for a trade.

There's certainly something to be said for the argument that if you want to put a player at the $7M level for his contract for future raises and so on, you should be able to prorate that initial paycheck downward if he signs considerably late and doesn't give a full year of work. But who am I to say?


* Yes I know Chicago doesn't have this much tax-free space this season, but pretend they do, for purposes of illustration.

[Dunkenstein]

As I understand it, the only contracts that are either pro-rated or reduced are minimum, full BAE and full MLE contracts.

A contract using Room, Bird rights or a portion of the reduced BAE or MLE for say $1.2M would count as $1.2M for raises, cap holds, BYC issues or tax purposes. (FGump's PJ Brown example falls into this category.)

A contract for the prorated minimum, all of the reduced BAE or all of the reduced MLE would count as the full minimum, BAE or MLE for raises, BYC issues or cap holds (Larry and I differ on whether this would hold true in calculating salary for tax purposes).

So to answer BGWiz's question, if a player signs tomorrow for the full BAE, he actually only receives the reduced amount of the BAE as he himself outlined in the second post of this thread. If he signed a two year contract, the second year could be as much as 108% of the full BAE, but no less than 92% of the full BAE.

[bgwizarfan]

awesome thanks... Dunk, what did you think of what I showed above going through the provisions, though.

Doesn't it seem like Minimum Salary Contracts for 2 years aren't prorated, since they don't fit under the "Rest of Season" provision. In other words, if a team signs a player now for a 2 year Minimum Salary (the remainder of this year and next), my understanding of the provision is that he would receive the Full Minimum for this year (and not a prorated amount) and the Full for next, and that would be what he's paid along with what it counts against the cap. Thanks for clearing up the stuff above

[Dunkenstein]

^^In a two year minimum contract, the first year is prorated and the second is full. Several teams did this last year. I remember Philly did it with Amundson and Denver did it with Carter.

[bgwizarfan]

thanks Dunk, but did my analysis of the provision make sense? Taken literally, it would seem that 2 year minimum contracts aren't prorated, since according to the CBA, they wouldn't be Rest Of Season contracts

[FGump]

bgwizfan on MLE and BAE deals, what is prorated is the size of the EXCEPTION but not the contract itself. So maybe there is no such thing as a prorated "contract." There is a ROS contract which is based on the days that remain, but the contract itself isnt written for the full minimum.

Is that what you are saying? If so, it makes sense and erases some confusion for me.

[bgwizarfan]

no I'm clear about that... if you get a prorated MLE or BAE deal, you get the full raise the next year as if it wasn't prorated.

My question comes when a team signs a player to a 2 year Minimum Deal in the middle of the year (so if the Grizzlies signed Mike Wilks right now to a 2 year minimum deal for the rest of this year and next year). A literal reading of the CBA makes me believe that the first year Minimum would NOT be prorated. I cited this on the first page, but here's the applicable portion:


"Section 10. Rest-of-Season Contracts.
(a) At any time after the first day of an NBA Regular Season, a Team may enter into a Player Contract that MAY provide Compensation to a player only for the remainder of THAT Season (a

[Dunkenstein]

bgwiz, I tried to explain to you what happens in the real world of the NBA and you're trying to convince me with some law student analysis of the CBA that I should agree with you that what I told you is wrong.

Well, it ain't gonna happen.

[bgwizarfan]

^ he was asking me what I was saying so I explained it to him.... I'm not in law school anyway or a lawyer, but that to me seemed like the literal view. I believed you the whole time, but I do find it fascinating that a literal take of it seems wrong as to what actually goes on

[grizzfan1204]

I'm not in law school anyway or a lawyer, but that to me seemed like the literal view. I believed you the whole time, but I do find it fascinating that a literal take of it seems wrong as to what actually goes on

As Dunk knows, I AM in law school...and while basic first-level classes like to teach grounded rules and guidelines to abide by, as I progress through school, I, along with many classmates, continuously find that what a textbook tells us is sometimes pretty different than what someone actually does in practice. I think that concept can carry over to almost any profession, such as the NBA example mentioned here.

[bgwizarfan]

wanted to bring this up again in light of the Kidd trade. Here's an interesting part from Hollinger:

"The Nets will likely buy out Stackhouse, but there's no guarantee Dallas will be able to re-sign him; in fact, by rule they aren't allowed to for 30 days.

In the meantime, is it that hard to imagine bench-starved Cleveland diving in with the $4.1 million remaining on its midlevel exception, or the Pistons ($3.86 million) bringing him back to Motown to replace the struggling Jarvis Hayes? For that matter, what about the Spurs ($4.4 million) or Suns (full midlevel) breaking out the wampum just to spite their Western rivals? Keep in mind, too, that these salaries would be prorated for the rest of this year, lowering the luxury tax hit those teams would take."

Granted that the media gets this wrong sometimes, but you'd think he would have checked with a league official or somebody before posting that.

So just so I'm clear (even with our explanations before, this topic still confuses me a little bit for some reason):

If Stackhouse were to sign a 2 year deal for the full remaining MLE amount (which has been decreasing since Jan 10), then next year's salary would be anywhere from 8% less to 8% more of this years FULL MLE (the amount before it starting decreasing)

Now, for this year's purposes, Stack's cap hit would be the reduced MLE amount. He's also under the impression that the luxury tax amount would be the same reduced MLE amount (I think this is where Dunk and Larry differed in opinion).

We also determined that stack would actually get paid whatever the reduced amount is, correct? Sorry, just wanted to throw that out there now that we have a potential real NBA example and an analyst commenting specifically about our topic. Thanks