NBA Free Agency: Evaluating the Raptors’ salary cap situation

With the draft come and gone, and free agency rapidly approaching (this Saturday), let’s take a quick look at the salary cap situation for the Raptors.

Current Committed Salary

The Raptors have 11 players signed to contracts for next season. OG Anunoby will certainly be signed as well, so that brings the roster to 12 slots. The following outlines the committed salary for this summer.

DeMar DeRozan $27,739,975
Jonas Valanciunas $15,460,675
DeMarre Carroll $14,800,000
Cory Joseph $7,630,000
Lucas Nogueira $2,947,305
Jakob Poeltl $2,825,640
Bruno Caboclo $2,451,225
Delon Wright $1,645,200
OG Anunoby $1,645,200
Pascal Siakam $1,312,611
Norman Powell $1,471,382
Fred VanVleet $1,312,611

That comes to a total of $81,241,824. The cap projections recently dropped by $2 million, due to a shorter than usual playoffs, leaving the presumed salary cap at $99 million. That means the most cap room the team can have is about $18 million, unless they shed salary. But that does not consider the team’s own free agents.

Free Agents

If a team wants to use its rights to a free agent, a cap hold for that free agent sits on the books preventing the team from signing other players first, then re-signing their own players. The Raptors have four free agents this summer, all of whom they hold full Bird Rights to. Bird Rights allow a team to sign their own player without needing cap space, to a contract with a starting salary as high as the player’s maximum salary, and for a term up to five years with raises equivalent to 8% of their first year salary. Other teams can offer the same starting salary (if they have the cap room to do so), but are limited to four years and 5% raises.

In any case, the Raptors’ free agents this summer and their associated cap holds are listed below.

Serge Ibaka $18,375,000
Kyle Lowry $18,000,000
Patrick Patterson $11,495,000
P.J. Tucker $10,070,000

So as you might imagine, the $18 million of presumed cap space completely disappears with even one or two of those players being kept this summer. And they probably want to keep those players. Still, that cap room number might come in handy if the free agents decide to bolt this summer.

Nonetheless, we’ll focus on the scenario where the Raptors are able to bring back some free agents. By the rules, there is nothing preventing this from happening — the Raptors have full Bird Rights to all four free agents and can outbid the market with those rights, re-signing all four of them. Unfortunately, the NBA’s soft cap has measures in place to prevent that — specifically the luxury tax.

Luxury Tax

The luxury tax is a charge levied by the league against teams that spend well in excess of the salary cap. Set at roughly 20% above the salary cap ($119 million this year, it dropped along with the cap projection), any dollar of team salary spent above this line has a tax associated with it. That tax increases the more a team spends, so the tax rate on the first $5 million of over-spending is lower than the tax rate on money spent more than $20 million above the tax line, for example.

Although as fans we don’t really care about this stuff, it is a very real barrier for ownership groups. Masai Ujiri has been plain about ownership being willing to spend tax — but there’s spending into the tax, and there is spending a ridiculous amount into the tax.

As an illustration, if the Raptors were to bring back Lowry and Ibaka for a combined $50 million per year, that would bring their team salary to $131 million, placing them $12 million above the tax line. They would pay about $21 million in taxes, bringing their total salary cost to $152 million. That’s a lot to spend on a roster that seems to have hit a hard ceiling, but it would be the sort of tax spending that would be indicative of an ownership group that is willing to flirt with annual losses to put a competitive team on the floor.

For a contrasting illustration, let’s say the Raptors bring back all four free agents, and it costs them a total of $75 million annual salary for Lowry, Ibaka, Tucker and Patterson). That would put their team salary at $156 million, $37 million above the tax line. That $37 million would mean a tax bill of $109 million. The total salary costs would be $265 million. This is an unsupportable number, so even though the rules would allow them to bring back all those free agents, the Raptors will surely pursue means of shedding salary — either removing a large salary such as Carroll or Valanciunas, a redundancy such as Joseph, or simply letting one or two free agents walk. Masai suggested the latter might happen when he said it would be unrealistic to expect all the free agents back. Or possibly there could be some combination of all three.

With the Raptors having made their pick in this year’s draft, it seems unlikely they will be able to shed a large salary, though that is always a possibility in the summer. In any case, those scenarios are the ones to keep in mind when considering moves this off-season for the Raptors. Right now, the team looks like they could possibly bring back Lowry and Ibaka while incurring about as much tax as is reasonable to expect of them. Beyond that, or if one or both of them demand a maximum salary, salary will need to be shed somehow. The ideal candidates are Valanciunas, Carroll and Joseph, in terms of utility, fit, replaceability and cost — but the easiest salary to “shed” is the presumed salaries of Patterson and Tucker, simply by letting them walk.

Extra Notes

There are all sorts of other considerations for this summer. I’ll touch on a few of them here to try to cover all the bases.

Exceptions

But what about the Mid-Level exception, you may ask. It’s true the Raptors do have exceptions to use: the Mid-Level ($8.4 million per year), the minimum salary exception, the Bi-Annual exception ($3.3 million per year). The team has all these at hand, but with their primary concern being total salary against the tax, the ability to sign players is not the problem. So the MLE and BAE will likely go unused (except possibly to sign players to minimum salary contracts with more than two years), while the minimum salary exception can be used to round out the roster if there are any spots left (they currently have three open spots, and four free agents, so if two or fewer free agents come back, they will have room).

It’s certainly possible they decide to use the Mid-Level to add a more expensive depth role player, especially if they do manage to shed some of the bigger contracts currently on the roster. However, using the full Mid-Level exception or the Bi-Annual exception triggers a hard cap $6 million above the tax line. So if the team is interested in really spending into the tax, it is unlikely they go that route. They could use the smaller Tax-Payer’s MLE instead ($5.2 million starting salary, which doesn’t trigger a hard cap), but would also return a far inferior talent, in theory.

Kennedy Meeks

Yes, it was reported that the Raptors are going to sign Meeks to a summer contract. That would be a minimum salary contract that is only guaranteed for a small amount, meant for players who will attend summer league or training camp and then either make the team (and earn more of their minimum salary) or get cut and only get the guaranteed portion.

With the new two-way D-League (yes, it is called the G-League now, but that’s going to take some getting used to) contracts in play now, in all likelihood Meeks’ deal would have at most $50,000 in guaranteed money, which would allow the contract to include a two-way conversion option, where if the player does not make the team, the Raptors can convert his deal into a two-way D-League contract instead of cutting him entirely. The team can have up to two players on these two-way contracts, and they do not count against the roster limits, nor are they free to sign with other teams (as is the case with players who are waived in training camp, even if they sign with your team’s D-League affiliate).

However, these two-way deals have limitations — a player cannot have more than 45 days of service (practice, travel or game days) at the NBA level on a two-way contract. Service days before the start of NBA-DL training camps or after the end of the NBA-DL season don’t count towards this limit. If the player reaches this limit and the team wants them to play for the NBA team, they must convert the contract into a full minimum salary contract. They would need a roster spot to do so.

Remember These Guys?

Nando de Colo. Jason Thompson. DeAndre Daniels. These guys are (or were until recently) still relevant to the Raptors.

The Raptors still own Nando de Colo’s restricted free agent and Early Bird rights. He has a cap hold just under $2 million. This hold doesn’t impact the team’s tax situation (no cap hold does, only real salary). It would however impact the team’s cap space if they wanted to use it. The good news, with him signed for the next couple of seasons overseas, the cap hold disappears, as he is guaranteed not to play in the NBA this season. So it is costing the Raptors practically nothing to hold onto his rights. One thing to note: the Raptors cannot perform a sign and trade to move Nando to another team, as he has been out of the NBA for at least a year. If they use his rights at all, it will be to sign him to play for them.

The Raptors also still own Jason Thompson’s free agency rights. This is basically meaningless, and if ever the Raptors needed the cap space they would certainly waive those rights with no hesitation.

Meanwhile, the Raptors made a surprise move a short time ago by waiving their draft rights to DeAndre Daniels. This was not a move that would benefit the team — as a second round pick, he did not even have a cap hold associated with his rights. This was probably a move to do good by the player and mollify his agent. Daniels is now free to sign with any NBA team and is not associated with the Raptors anymore.

Slight Tax Complications

Because the NBA hates simplicity, there are a few other complications to the tax calculation. For example, any minimum salary player counts as a 2-year veteran minimum salary for the purposes of calculating tax. So a low salary player like Fred VanVleet will cost the team an extra $100,000 in the tax calculation.

One other thing to note is DeMar DeRozan’s incentives. He has bonuses built into his contract that at least up until now have been considered unlikely (total of $1.5 million per year in incentives, with $1.2 million being categorized as unlikely). Unlikely bonuses don’t count against the cap, leaving more cap space for the team. A bonus being unlikely just means the player didn’t earn that bonus the season before. In any case, the problem is that the salary numbers looked at above do not include his incentives, so that adds just over $1 million to the books when calculating tax payments right now. The actual tax won’t be calculated until the end of the season, when the league will know whether those incentives are actually earned, and the actual amount earned will be used in the calculations.

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I think that covers most of it. Please let me know if you have any questions or think anything was missed, and I’ll happily address it in the comments.

As ever, all salary information comes from basketballinsiders.com.