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"Trading" Cap Space


Last week, I discussed the financial implications of trading our financial flexibility in a deadline deal.  If we wait until this summer, there has already been plenty of discussion on free agents we should target.  However, if the best free agents sign with other teams, are we forced to overpay one of the remainders to save the summer?  Fortunately, a third alternative remains, and its one that could be very lucrative -- "trading" our cap space.

How does this work?

Why would it be effective now?

Who would our best trade partners be? 

Read on to learn more.

First, let me discuss the rules and how the Collective Bargain Agreement handles this.  Most readers who follow the Timberwolves are aware that if a team is under the salary cap, they can offer that amount of space (up to the max) in a contract to a free agent.  Teams strive to be far enough under the cap that they can outbid the mid-level exception (about $5 mil next year) that any team over the cap can offer.  However, teams under the cap also gain other benefits, and one is that they are not constrained by salary-matching trades within 125% + $100,000.  For example, if the Wolves were far enough under the cap, they could legally trade their $2 mil player for another team's $9 mil player.  The other team would get the $2 mil player and a $7 mil traded player exception.  TPE's could be considered IOU's to complete a trade within one year, but most teams simply allow them to expire, to reduce team payroll.  Its technically not "trading" cap space, but creating a TPE, but in effect, it moves financial relief from one team to the next -- and it can be a valuable asset in a trade.

Trading cap space has been very lucrative in the past.  In 2007, the contending Phoenix Suns traded Kurt Thomas to Seattle for an $8 mil TPE.  Thomas was an important part of the Suns team, and he was on an expiring contract, but the Suns were far over the luxury threshold, so Thomas would cost owner Robert Sarver $16 million.  In addition to getting Thomas, Sarver gave the Sonics two future first round picks for taking on Thomas for a year!

The Wolves are experienced trading cap space, having done so the last three years.  Most notably, in 2008 the Timberwolves traded a $2.8 mil TPE to Philadelphia and received Calvin Booth and a look at Rodney Carney, with the 76ers paying most of their salary, and the Jazz protected 1st on top of it.  The Sixers were desperate to increase their own space under the cap so they could make a max-deal offer to Elton Brand.  As you can see, if an owner is willing to spend the money, he can sometimes get a very nice deal if he can reduce another team's payroll.


Could we expect similar value this summer?  Its impossible to predict this with certainty, but current events point to  the ability to "trade" cap space as perhaps more valuable than in recent memory, because of a perfect storm of economic factors.

1.  2010 has one of the best free agent classes ever.  LeBron James, Dwayne Wade, Carmelo Anthony, Amar'e Stoudemire, Joe Johnson, Rudy Gay and many others headline a very strong free agent class that can make historic changes to any team that can sign them.  However, like Philadelphia with Brand, some teams don't have enough cap space to offer one, or two deals that they once planned on.

2.  Right now, more teams are over the luxury threshold than ever, at 13.  Next season, LAL, BOS, ORL, DAL, DEN, NOH, IND, and PHI are already over the lux, and CLE, TOR and PHO join them if LeBron, Bosh and Amar'e stay put.  Note that some of these teams aren't even contenders, and may be very motivated to get their payroll down to a more tolerable level, particularly with many teams losing money at a time when owners' net worths have fallen.

3.  As many as seven teams may be looking to sell, or at least re-locate.  A team will be far more attractive to buyers without big long contracts weighing them down financially, and hindering the flexibility that a new owner would need to put his stamp on the team.

4.  Its looking more and more likely that there will be a work stoppage after the 2010-11 season, when the current Collective Bargaining Agreement expires.  Owners may be anxious to cut ties with expensive stars before this happens.

5.  The NBA economy is shrinking, so available cap space will become more valuable.  For the five previous years, total NBA payroll has risen every year. This is understandable because, in addition to adding expensive free agents and extensions, most contracts have raises written in, either by the team or the CBA's rookie scale.  The major way to decrease salaries is through replacing expensive players with cheaper alternatives.  What's the NBA payroll looked like lately?

2005-06 INCREASE $112 million
2006-07 INCREASE $61 million
2007-08 INCREASE $106 million
2008-09 INCREASE $100 million

.. so what happened this year?

2009-10 DECREASE $40 million!

Besides the shocking $140 million U-turn, the NBA's payroll structure will also make raw cap space more valuable.  As teams cut payroll to be players in free agency, more will re-set their team payroll at the salary cap ($57 mil) than last year's (lux $70), further shrinking the size of the pie.  MIN will be one of the teams pulling their payroll down from $62 mil to $50ish in 2010.  On top of that, about $60 mil in guaranteed salaries for the 2010 1st round picks will eat up space.  All in all, there will simply be less available cap space to meet the previous long term plans of many NBA front offices.



Suppose that the Wolves are sitting with $15 mil in raw cap space this summer, and Rudy Gay demands a deal starting at $13 mil, which would be overpaying based on the current deals for non-max players.  If Minesota passes, where can they find the teams who would pay the most to acquire MIN's cap space?

NEW YORK:  Right now, the Knicks have the cap space for one max-deal free agent, but they can't afford two.  They covet LeBron, but would he want to come to the Knicks and be skewered by their media when he couldn't turn that young team into contenders?  Suppose he says, "get the cap space to bring in another elite free agent, and I'll come."  If it meant adding LeBron and Bosh, could the Knicks say "no" to trading their beloved Gallinari to get the cap space they need?

CHICAGO:  Same idea, different team.  The Bulls are close to having the space to bring in Dwayne Wade, but with cap holds to fill their empty roster spots, they can't offer a max deal.  If Noah + Salmons could get Wade alongside Rose, they'd have a hard time rejecting the idea.

PHILADELPHIA:  The Sixers are looking at being over the lux by at least $6 million dollars, and maybe more depending on their lottery pick.  Even $6 mil would cost the owner $16.  Why pay all this if you're not going to contend?  Philadelphia has a number of interesting young players.

INDIANA:  Second verse, same as the first.  The small-market Pacers suffered heavy financial losses last season and look to be in the same position this year.  The untimely death of their owner may reduce the front office's patience.

NEW ORLEANS:  The Hornets were able to slip under the luxury threshold this week, but with attendance falling and salaries higher, George Shinn still needs to cut more salary.  Next season, they may be about $8-10 mil over the luxury threshold, and the team may need to be about $10-15 mil under it to break even.

SOME OTHER GUY?:  The list of potential buyers won't be limited to these five teams.  Injuries may turn a contender into just another team over the lux trying to cut salary, like the Wizards this year.  A team who decides to sell may trade away top notch talent if its locked into long term deals, and may provide incentive to get it done.  Teams may decide that their current roster does not have championship potential, and they may simply decide that its time to rebuild.  The Wolves could also serve as a valuable financial intermediary in a three-team trade.


The point is, the Wolves are in a very enviable position.  They have acquired numerous assets with young players, prospects and picks, but perhaps their least-heralded asset is their cap space.  They are in no way locked into using it on a free agent this summer, and may find that its even more valuable as a trade commodity.