Player Buyouts and Player Options

[Mezotarkus]

Does a player option year count as a year when prorating buyout amounts over a contract's remaining term? For example, the Knicks must be assuming Eddie Curry is going to exercise his 2010-11 player option at $11m. Curry is also owed ~$10m for 2009-10. Could the Knicks buy-out Curry for $20m and that entire amount hit their cap in 2009-10 since the contract only has 2009-10 remaining as Curry has not exercised his player option yet for 2010-11?

[Three34]

When you buy someone out, you can defer the payment of the remaining salary over as long as time period as you can agree upon, but the cap hit must be divided equally amongst all remaining years.

And you can't buy a player out without their consent, since it is after all a mutual termination. So why wouldn't Curry just invoke his PO?

[Mezotarkus]

When you buy someone out, you can defer the payment of the remaining salary over as long as time period as you can agree upon, but the cap hit must be divided equally amongst all remaining years.

And you can't buy a player out without their consent, since it is after all a mutual termination. So why wouldn't Curry just invoke his PO?

I am proposing the Knicks strike an agreement with Curry to buy him out of his current contract for ~$20-21m, the amount he would be due if he collected his 09-10 salary and exercised his player option for 10-11. Curry would receive the same amount of money but what I am thinking is the Knicks could get the entire amount $21m to hit their 09-10 cap amount rather than be a $10m 09-10 hit and a $11m 10-11 hit as it would be if Curry's contract was left intact.

[Three34]

And I'm telling you they can't, because buyout cap hits need to be spread out evenly across the life of the existing contract.

[FGump]

There is no flexibility as to the number of years over which to allocate a buyout. All contracts with player options must have a clause indicating whether the player is to receive his salary for the option year in the event the contract is terminated, and that clause will take precedence regardless of whether Curry invokes his option or not.

[Mezotarkus]

So just to recap, if a player signs a contract for 5 years with a player option for a 6th year and the player does not need to make a decision on the player option year until the summer before the 6th year then the contract is still considered a 6 year contract for buy-out purposes? So if after season 3 the team buys out the player the buy-out cap hit is allocated over the next 3 years?

[answerthink]

Not necessarily.

As per Art. XII, Sec. 2(a), all contracts that have player options which provide for compensation protection in the option year contain language specifying how that option year is treated in the event the contract is terminated by the team before the player exercises his option. As FGump describes above, it is this language that determines whether any buyout will be spread across the option year as well (and to what degree).

In a buyout, a team waives a player and, if the player clears waivers, his compensation protection is reduced by an agreed upon amount. Therefore, the buyout allocated to any salary cap year cannot exceed the salary that was to be allocated for that salary cap year.

While I do not know the specifics of the Curry contract, I would imagine it is safe to assume his option year is fully compensation protected. If this is the case, he would still be entitled to his option year salary and any buyout would be allocated to such year as well.

[Three34]

I think Larry said once that as far as he knows, all contracts with PO's are fully compensated protected right now.

[benjamoats]

quick question here. lets say you are a team over the cap and have a player with 2 years left on his contract, both to's. what is the best strategy for letting him go? buyout, release? is there a date for the option to kick in?

[answerthink]

If a player’s contract contains a Team Option and the team wishes to let the player go, it needs only to not exercise the option.

The deadline for exercising an Option depends on the situation:

For players who would become restricted free agents if the option were not exercised, the deadline is the June 25 immediately preceding the season covered by the option.

For scale contracts of first round draft picks, the deadline is the October 31 immediately preceding the player's second (third) season to exercise their option for the player's third (fourth) season.

For all others, the deadline is the June 30 immediately preceding the season covered by the option.

[answerthink]

I have a question of my own as it relates to Option Buy-Outs. I will use Lamar Odom’s contract as an example. I believe his contract is set to pay out as follows:

2009/10 - $7,500,000
2010/11 - $8,200,000
2011/12 - $8,900,000
2012/13 - $8,200,000

However, I believe 2012/13 has a Team Option with an Option Buy-Out Amount of $2.4 million. Therefore, assuming the contract is fully protected for lack of skill, the $2.4 million would be allocated evenly ($800,000 per season) across his first three contract years for purposes of computing Team Salary (as per Art VII, Sec 3(b)(1)(ii) and 3(b)(2)).

The calculation of the luxury tax does not seem to have an adjustment mechanism to back out the Option Buy-Out Amounts (as they would not be considered Performance Bonuses). If the Lakers ultimately end up picking up Odom’s option year, the Lakers could end up paying tax dollars on an Option Buy-Out Amount that was ultimately never paid (and never get the bonus credits). Can this be possible? Is this an oversight by the NBA and the Players Association?

[FGump]

However, I believe 2012/13 has a Team Option with an Option Buy-Out Amount of $2.4 million. Therefore, assuming the contract is fully protected for lack of skill, the $2.4 million would be allocated evenly ($800,000 per season) across his first three contract years for purposes of computing Team Salary (as per Art VII, Sec 3(b)(1)(ii) and 3(b)(2)).

The calculation of the luxury tax does not seem to have an adjustment mechanism to back out the Option Buy-Out Amounts (as they would not be considered Performance Bonuses). If the Lakers ultimately end up picking up Odom’s option year, the Lakers could end up paying tax dollars on an Option Buy-Out Amount that was ultimately never paid (and never get the bonus credits). Can this be possible? Is this an oversight by the NBA and the Players Association?

Can this be possible?

With Odom? No.

1. It's important to note that Odom does not have that type of contract ....
2. ...in part because, there is no such thing as "a Team Option with an Option Buy-Out"
3. What Odom has is a partially guaranteed year.
4. The CBA in the portion cited is speaking of a "PLAYER option with an Option Buy-Out" with the team having the opportunity to buy out that option year to keep the player from exercising it (which would be a discount in the event the player at some point gets waived or bought out)

In theory is a "PLAYER option with an Option Buy-Out" possible? Yes.

Is this an oversight by the NBA and the Players Association?

I'm guessing not.

1. Should a team write a deal like this, they know before they put signatures on the deal what the cap hit will be ... this is not an accelerated adjustment after the fact ...so I'd say there's no mistake
2. If you write a deal with this sort of provision, it SHIFTS the tax hit a bit and taxes fall where they fall with no recourse, but in the long run the aggregate cap hit will either end up the same or become greater later ...so again that doesn't seem like a mistake in how the rule is written
3. This is a mechanism that changes a team's cap hit artificially from one year to another, and in every such contract, there is the potential downside of paying extra taxes early without a chance for a refund later ... maybe they wanted to discourage such a practice

[answerthink]

Thanks FGump.

Would you mind if I ask why you say it needs to be in respect of a Player Option? Art XII, Sec 5 does not appear to have such a qualification. I do see the logic of a buyout for the non-exercise of a PO (similar to a partially-guaranteed PO season), but I also see the potential logic of a buyout if a TO were not exercised (similar to a partially-guaranteed non-option season)…

I most certainly agree that the tax hit would end up the same or greater. The reference to the potential oversight was only because it seems odd to me that a team can suffer a tax hit for compensation that may ultimately never be paid. In other examples in which a team may suffer a tax hit because a portion of the player’s salary is shifted for team salary calculation purposes (e.g., a typical signing bonus), I believe the shifted compensation is always at some point received by the player…

Thank you for entertaining my question. These obscure sections interest me for some strange reason. I wonder why this one even exists, since the same concept seems able to be achieved via a simple partial guarantee (though I’m sure there are reasons that I’m not thinking of).

[FGump]

Thanks FGump.

Would you mind if I ask why you say it needs to be in respect of a Player Option?

Because it is a BUYOUT of an option that is being discussed, ie a payment to the holder of the option to keep them from doing it. The TEAM is the holder of a Team Option, and it would make no sense for a team to give a buyout to itself to keep itself from exercising that option.

If they want to have a partially guaranteed season, then they can write is as such. This is the not the means to accomplish that.

In other examples ... I believe the shifted compensation is always at some point received by the player…

And such is the case here as well. Using the example of a 4-yr deal paying $8M per season, final year being a PO with a team buyout of the option of $4M, at its inception it is guaranteed to be $28M over 3 seasons ...so the cap is charged that way.

[answerthink]

Art VII, Sec 3(b)(1)(ii) would have me believe the buyout would be allocated to the first three seasons (suggesting the cap hit in your example would be $9.33MM,$9.33MM and $9.33MM), whereas the fourth season would be charged at the full $8.0MM if the PO season were picked up, with the possibility for (but not a guarantee of) a "credit." This would suggest the cap hit for this contract could be as much as $36MM even though the max payout would be $32MM. This was the source of my initial question. Is your interpretation of the section different?

I will not bother you with this question anymore.

[FGump]

"Is your interpretation of the section different?"

Yes.

As I understand it (and the wording covering that section is quite complex) ,,,,

1. If option is bought out
9.33, 9.33, 9.33

2. If player declines his option
9.33, 9.33, 5.33

3. If player exercises his option
9.33, 9.33, 5.33, 8.0

In #s 2 and 3, there might also be a two-year cap credit carryforward under certain circumstances (whose application is quite complex) ... Such credit is designed to allow the team future spending room to compensate for cap room that can be accidentally lost, so they'll have actual added spending room in later years in exchange.

[bgwizarfan]

I guess the one part I dont get is how you know what that 3rd year is going to be in advnace.... like do they retroactively change the 3rd year amount, depending on what happens. The rest of it does make sense, however.

[FGump]

I guess the one part I dont get is how you know what that 3rd year is going to be in advnace.... like do they retroactively change the 3rd year amount, depending on what happens. The rest of it does make sense, however.

You don't know in advance. But you'll know by the time the NBA year (which ends June 30) is over, and then at that point if they need to the number is adjusted.

[turk3d]

If a player agrees to a buyout, can the team that picks him up sign him for the full MLE (assuming they have the full MLE available? And is so, could they make it a multi-year deal which would include max raises? This would be a case where the player wants desperately wants to leave his current team and may even be willing to sacrifice some of his salary long term? Is that something that could get them in trouble with the Players Union even if both sides were in agreement on it? Thanks.

[Three34]

Sure. Why not? If a player is bought out, they becomes FA's, and can do whatever the hell they want after that.