Primer: NBA Contract Extension Rules

• As President of the NBA G League, Shareef Abdur-Rahim is responsible for all aspects of the NBA G League’s business and basketball operations, including the implementation of the newly formed professional path, ongoing testing of experimental rules and league-wide expansion efforts.
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The NBA and NBAPA are in discussions that will grant teams an additional two-way spot, allowing roster expansion, according to ESPN’s Adrian Wojnarowski. Amid thinning rosters in the darkest.

As Peter Novak and I were preparing for our nerd smackdown debate on extension values for Gordon Hayward and Derrick Favors, Peter aptly threw in a primer on extension rules. I decided to share those here as a companion post for anyone who wants to join in the argument while making sure they have all their facts right.

Peter put together the following description of what the fourth-year forwards are eligible for if they agree to an extension by the October 31, 2013 deadline:

Until October 31, either player is eligible to sign a 4 year extension with a first year salary in the approximate amount of 25% of the 2014-15 Salary Cap and annual 7.5% raises. Depending on what the Salary Cap ends up at next summer (really it depends on Basketball Related Income), a maximum contract extension would be about 4 years and $62.3mm.

There are two new 2011 CBA provisions which potentially could modify that figure. The first is the “Derrick Rose Rule” which allows two-time All-Star/All-NBA players or an MVP to get an extension with a first year starting salary of up to 30% of the 2014-15 Salary Cap. However, neither player will meet those conditions to get the bonus jump in salary.

The other new rule is the “Designated Player” provision which allows the Jazz to offer 1, and only 1, player on its roster a 5 year extension. The Jazz will be hesitant to offer either Hayward or Favors the extra year and should save their Designated Player provision for a more identifiable franchise player in the future.

If the Jazz and Hayward/Favors are able to come to an agreement within those guidelines by October 31, then the player would finish out the fourth year of the contract on the scale figure from their rookie contract and then the new numbers would kick in for the 2014-15 season.

If not – and here’s where the negotiating leverage comes in – then the team can make either player a restricted free agent next summer by extending a qualifying offer at a pre-set amount. Once that offer has been made, the Jazz then have the right to match any contract terms that are agreed upon by the player and another team, giving them the upper leg in re-signing either guy.

Peter brought this up later in our debate when he said:

I should also disclaim that there is a possibility that the Jazz do not want to extend either player now in order for them to maintain maximum salary cap flexibility next offseason. Since the Jazz can control the restricted free agency process next year they have little incentive to overpay now.

Restricted free agency is extremely pro-team and can work against the player, for a couple of different reasons. First, because many teams’ approach to RFA is to tell their player to go out and set a market value by negotiating with other teams. This is smart, given that the team doesn’t want to bid against itself, but getting serious bidders as an RFA is hard. If you’re a Bird free agent (both Favors and Hayward are), then any team that has an ounce of interest knows your team has the ability to match any offer, so they may not even mess around with you.

That happened to a number of RFAs this summer who were thought to be among the prizes of the free agent class but wound up signing very late because their old team only wanted to talk when the number was set by the market and no new teams wanted to help them out, at least at a dollar amount that the players found attractive.

Of course, the players do have one other chip — a veto threat, if you will. If they are really turned off by the team’s offer or handling of the situation, they can ride out their contract with no extension, accept the one-year qualifying offer and then become an unrestricted free agent after the fifth season. Very few take this route because of the bird-in-the-hand logic; now your career is five years in before you get your first major payday, and if you get hurt or suffer a slump before then, you may never cash in on the millions that may have been available to you in extension negotiations or as a restricted free agent.

So that’s basically what’s behind door number 1, 2 and a distant 3 for Hayward, Favors and the Jazz. Now that you’re primed, go watch Peter and me fight. Pay-per-view subscription not required.

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NBA expansion is a popular topic of discussion for NBA fans.

It’s fun to speculate about which cities might be deemed most worthy of joining the league via NBA expansion.

Those conversations often devolve into arguments about which cities most “deserve” a franchise based on population or enthusiasm.

Perhaps someone might think to point out which cities have basketball arenas. There’s not usually much more depth to it.

Today I’m writing about what really matters for NBA expansion — the criteria that the NBA and its team owners look for.

Sure, it’s a little outside the usual scope of this site, but it’s relevant, especially now!

I identified 4 key ingredients that need to be in place for a city to receive an expansion franchise in the future.

The 4 Ingredients for NBA Expansion

NBA commissioner Adam Silver, when asked about the possibility of NBA expansion to Seattle shortly after taking over in 2014, told ESPN, “Seattle is a wonderful market. It would be very additive to the league to have a team there. But we’re not planning on expanding right now, so it’s not a function of price.”

This statement encapsulates the first ingredient. The NBA and its owners need to be in agreement that the time is right to expand. It may seem obvious, but it’s often overlooked in theoretical expansion conversations.

If this NBA ownership consensus doesn’t exist, it doesn’t matter how “worthy” a city is of a team — it won’t happen.

For the other three ingredients, I’ll hand it off to Gary Bettman, the NHL commissioner who previously served as senior vice president and general counsel of the NBA. Bettman said three years ago on the criteria for NHL expansion:

You want to understand the market and can it support NHL hockey. Would it be a good addition to the league? Two, you’ve got to have an arena. And three, and perhaps most important, it comes down to ownership. At 10,000 feet, those are the criteria you’re dealing with.

Listed out, here are the 4 ingredients:

1. NBA owners’ desire for expansion
2. The right market
3. Proper NBA-ready arena in the right place
4. Capable ownership

I’ll explore each ingredient in order.

1. NBA owners’ desire for expansion

It’s not a matter of specific markets so much as it is a question of whether expansion at the current time makes sense for the NBA and its owners.

Simple math can explain part of the financial hesitance the owners might feel in expanding.

Steve Kyler wrote at Basketball Insiders in October 2014:

The NBA just closed a media rights package said to be worth $24.4 billion over nine seasons. Divided among the 30 current member teams, that comes out to roughly $813 million per team. Expand that out to 32 teams and that number drops to $762 million per team. Said differently, each teams loses $51 million from the current nine year deal by allowing two more mouths at the table.

For argument’s sake, let’s say a new team in an expansion scenario costs $1 billion, which is a massive number for a new team, divided out among the 30 existing teams, that’s an expansion fee worth $33.3 million per team.

So, let’s call it two new teams or $66.6 million per existing team in money coming in, in exchange for $51 million per team going out. That’s a gain of $15.6 million per team. Sounds like a good deal right? The problem is that’s $66.6 million coming in one time, but $51 million going out over the span of this current nine-year deal.

Those two new mouths get to eat from the pie forever, obtain players, hire coaches, poach ad dollars and national TV appearances. They’re competing franchises when it comes time to sell your franchise.

Put another way, expansion at a high enough fee might be profitable for current owners in the short-term. But over the longer run, the losses in their cuts of the media deal and revenue sharing add up.

How Would An Nba Expansion Work

The numbers suggest it is unclear whether adding two teams would be be a winning financial proposition for the 30 current owners, at least at Kyler’s hypothetical expansion price of $1 billion.

Mark Cuban told ESPN in 2014:

I just think the price of the expansion fee has to be so high that the NBA owners think, ‘OK, we’re crazy not to do it.’ What that number is, I don’t know. But I’m open to it.

It just depends on the price. When you sit in the board of governors meeting, you give a price, and each NBA owner calculates his share. You balance it to what you’re giving up in TV and shared revenue, and you say: OK, it’s worth it. Then you say you got to do it.

For expansion to make sense for the owners, there might need to be both CBA stability as well as expansion fees considerably higher than $1 billion.

Other more intangible questions include:

1. What effect would adding expansion franchises have on the spread of talent throughout the NBA? Would the basketball become too diluted?
2. Potential expansion cities such as Seattle offer value to owners as leverage in negotiations with their current city. These expansion candidates allow owners to threaten to relocate their franchises if they don’t receive certain benefits such as public money for a new arena. How much of a sacrifice would it be to give that up by awarding expansion franchises to other cities?

2. The right market

The market needs to be big enough, of course. Because this point is obvious, I’m going to jump right into other factors that you might not have thought about.

It must make sense geographically. Anywhere in the contiguous United States is probably fair game with the ease of travel today. Putting a team outside the mainland, however, would pose challenges with travel that would have to be taken into consideration.

Population growth poses a good sign. Cities rise and fall across North America, and a growing city represents opportunity and suggests a good investment for the NBA.

A healthy financial landscape is also a good omen. If the people living in a city or the surrounding area are experiencing financial hardship, they probably won’t turn out to support their team. Taking your family to the arena might cost money you don’t have.

(These next few ones are really big for NBA expansion. Pay attention.)

Other professional sports teams in the market could bring risk. If the market is already crowded with other pro franchises, it might be harder for a new team to gain traction and carve out a niche of dedicated fans.

Furthermore, per NBA territorial rules, no team can relocate or expand to a city within 75 miles of another NBA team without the incumbent team’s permission.

The history and presence of basketball in the market already can help predict the future. The NHL expanded and relocated to untested markets in the southern United States in the 1990s with mixed success at best. The NBA would be wise to look for evidence that a market would support basketball. College teams or previous professional teams in the market can offer valuable information.

A strong corporate presence in a city can bring a financial windfall and assure stability. While it’s important to have a large amount of families willing and able to spend $70 to attend games, corporations represent huge opportunities, too.

Daniel Rascher, a professor at the University of San Francisco, wrote in a 2004 paper on the topic of NBA expansion and relocation:

The success of sports teams in the modem era is largely dependent on corporate support via the purchase of luxury suites, club seats, sponsorship (including naming rights), and other premium services … It is expected that large corporations might want to entertain clients or employees in the luxury suites of a professional sports franchise located in the city in which they are headquartered.

Many NBA teams built new arenas in the 1990s to take advantage of this corporate trend. These corporations offer a lot of value to the NBA and its teams when they spend generously at the arena and via sponsorships. Markets without a strong corporate presence might lack long-term opportunity.

3. A proper NBA-ready arena

Ah yes, the arena — a major sticking point for many past, present, and potential future NBA cities.

As mentioned above, an arena with an array of luxury suites and club suites is a major factor in a team’s corporate support.

But the building itself isn’t the only concern.

Location matters.

Major League Baseball’s Tampa Bay Rays have struggled consistently to draw fans since they joined the league in 1998.

These low attendances are due in part to the location of their stadium.

As Jonah Keri wrote in his 2011 book The Extra 2% about the organization:

Tropicana Field was in an awkward location in South St. Petersburg, making the Rays the major league club with the smallest percentage of fans (only 19%) within a thirty-minute drive of the ballpark … Public transit was nearly nonexistent … “Tropicana Field was built on the wrong side of the bay.”

If your fans can’t get to the arena without spending an evening on a long drive and/or sitting in traffic, they’re not going to come out to your games.

The financial and legal circumstances surrounding the arena play an important role, too.

The Rays are entangled in a long lease they can’t get out of, stuck in their stadium on the wrong side of the bay through 2027.

Seattle is finally settling their arena question.

We’ve seen similar situations take time to resolve in NBA cities such as Sacramento and Milwaukee in the last decade.

A city needs to be able to clear legal, financial, and political hurdles to get it done in a timely fashion. NBA expansion might not be able to wait for a city to get everything resolved.

4. Capable ownership

Nba Expansion Draft Rules

Ownership situations play major roles in whether or not a city has an NBA team.

Having a ton of money is a prerequisite. Paying the massive expansion fee while remaining solvent is something only a handful of people can accomplish.

Owning a professional sports team is often a personal goal as much as it is a professional endeavor. For a city to obtain an expansion franchise, it needs a wealthy owner who wants a team in that specific city.

Nba Extension Rules

It’s not only a question of money.

The Hornets originally left Charlotte after owner George Shinn’s poisoned relationship with the fans blocked a potential new arena and led to poor attendance for the team.

A different Sonics ownership group might have pursued another course to keep the team in Seattle.

The aforementioned Tampa Bay Rays famously suffered in their first decade because of their first owner Vincent Naimoli. He alienated the city’s government, businesses, and fans. His actions led to poor performance on the field and the box office. It also made his team a punchline.

Keri wrote of Naimoli in The Extra 2%:

At the heart of Naimoli’s hardball approach was a sense that local government, businesses, and baseball fans for bringing the Rays to life … His combination of ego, pride, combativeness, and obsession with getting the best deal led to requests that he believed should be honored but that others saw as ridiculous, if not insulting.

The right owner (or ownership group) has the money, skills, relationships to help bring a team to a city, into the right arena, and get key people and fans on board. With all the political and legal challenges that can arise, a good leader can help get things done.

The owner needs to be someone the incumbent owners are on board with, too.

Wrapping up NBA Expansion…

Again, the 4 ingredients are as follows:

1. NBA owners’ desire for expansion
2. The right market
3. Proper NBA-ready arena in the right place
4. Capable ownership

Expansion Draft Rules

Keep them in mind as you think about the possibility of NBA expansion over the next few years.

How Does Nba Expansion Work

If you hear someone bring up the subject, point them toward this article.