Exploring the sign-and-trade math with Fred VanVleet

We just touched on the slight cap growth we can expect in the NBA for next summer and how that opens up additional room for the Raptors to keep Fred VanVleet in free agency this summer. I think we can be pretty confident in saying that VanVleet’s market is somewhere near $20 million per year, and that the Raptors will happily pay that to keep him in the fold long term.

But there is a scenario where some team (or teams) decide Fred is worth more than that. In this scenario, this team (or teams) could take a page out of VanVleet’s own book and bet on his improvement too. Let’s say the market is now $25 million per year or higher — flexibility aside, that’s the sort of number that will give the Raptors pause. And, of course, they will certainly not put flexibility aside.

So, what should Toronto do in that situation? If Fred walks, the Raptors get nothing. The common response to that suggestion then is: what about a sign-and-trade?

Let’s talk about that.

Sign-and-Trade Deals

In case anyone is unaware, a sign-and-trade is a mechanism by which a team who owns a player’s rights can sign that player specifically for the purpose of trading him to another team. Usually after signing a player a team has to wait months before trading them, but in this specific instance, they can (and actually must) do so instantly. This requires the player’s cooperation, as a sign-and-trade is written right into the contract. So the player is functionally signing with the new team, not the team that owns his rights.

But why not just sign there directly? Well, there can be a few reasons, but the most common one is that the player wants to sign for more money than the destination team can offer. In every off-season, some teams have cap room and can offer large contracts to free agents, but many teams operate over the cap and only have exceptions to offer players — the largest of which is the Mid-Level Exception (this off-season worth about $10 million per year).

So, if a free agent wants to sign with a team that only has that to offer, but wants to be paid more than that, their only option is a sign-and-trade. The good news is, a player’s home team, as it were, can use their rights to sign them without concern for cap room, especially if the player has earned Bird Rights (requires three years of service without changing teams via free agency) which allows teams to sign players up to their maximum salary. Other forms of player rights limit players to much lower salaries.

Back to Fred

The relevance of all this to our example is that Fred VanVleet has earned his Bird Rights status with the Raptors. As such, Toronto can offer him any deal they please up to four years in length and starting at his maximum salary in a sign-and-trade to another team.

Now, if a team like the Detroit Pistons decide they want to spend their cap room on Fred, they can just sign him outright — they’ve got the cap space. It’s really only if he is interested in joining a team that doesn’t have cap room that this scenario matters. And that may be the more likely scenario: teams with large amounts of cap room tend to be bad teams, and competitive teams tend to be stuck near or over the cap, and VanVleet does not seem the sort to go to a bad team if there is an alternative with a better chance of winning games. So long as the pay is similar, at least. Got to cash out that bet at some point.

So, then: let’s pick a team that is competitive, that is up above the cap, and that might be interested in changing things up by adding VanVleet (and maybe other pieces from the Raptors) and moving on from some other pieces on their own roster. Ready?

I think the Indiana Pacers are a great example here, and pursuing a sign-and-trade with them in this example is a great opportunity to explore the mechanics of making sign-and-trades work under the current collective bargaining agreement (CBA).

The Pacers Situation

In this hypothetical case, VanVleet has explored the market and found some rich offers in the $25 million per year range. As we surmised above, the Raptors have decided that’s too rich for their blood. He has offers from a couple cap room teams but also has an offer from the Pacers, who think they can work out a sign-and-trade agreement with the Raptors.

We’ll make some assumptions about the Pacers here: they do not want to enter the luxury tax as a so-called small market team. That means not adding too much salary through trade. They are looking to move on from Victor Oladipo, who seems gone next summer in free agency regardless (and sounds ready to leave right now). They want to move Myles Turner to establish Domantas Sabonis as their full time centre and free up some cap space for other positions on the roster. Now, to be clear: it is possible none of this is true, but I don’t think any of it is crazy. For now let’s take that as given in this fictional scenario for the purposes of our demonstration.

Trade Rules

The easiest way to make a trade in the NBA is to finish the trade under the cap. If you do that, the NBA doesn’t care what salary you send out or bring back in. Teams that finish a trade over the cap though, they have to follow a bunch of rules about salary — specifically, they have to have roughly the same amount of salary going out as they have coming to them in the trade.

In any sign-and-trade scenario here, the Raptors and the team that wants VanVleet are both likely to end up over the cap, so you need the salaries to match for both teams. This seems like an odd thing to say, if the salaries match they match. But you’ll see shortly that you do have to look at the deal from each team’s point of view because of some other weird rules.

The rules for how closely you have to match salaries in a deal depend on how much salary you are sending out. It breaks down like this:

Outgoing Salary | Maximum Allowed Return
< $6.53 million: 175% of outgoing salary, plus $0.1 million
$6.53 to $19.6 million: outgoing salary plus $5 million
> $19.6 million: 125% of outgoing salary, plus $0.1 million

Most of the deals we will look at here have significant amounts of salary moving in both directions and will have to match within 25 percent. But some, as you’ll see in a second, will fall in that middle category.

The above limits are on maximum incoming salary. You can bring back as little as you like, it’s only the maximum amount coming back that has a limit. Of course, this is true for both teams, so it kind of applies as a minimum amount as well.

As an example, say the Raptors send out $25 million in salary, that would mean the most they could take back would be $31.35 million ($25 million plus 25 additional percent). And for the other team to be allowed to absorb that $25 million, they would have to send out at least $19.92 million (so that when they add their own 25 percent to that $19.92 million, they can absorb the $25 million). That’s the idea in a trade like this. Got to send stuff out to bring stuff in.

Base Year Compensation

Now we get to the really ugly stuff.

The NBA doesn’t really like when teams do this sort of trade, especially when the player is getting a big raise. It feels a little like circumventing the cap, I suppose. Nevertheless, the league allows it. They just make it harder to do through a mechanism called base year compensation (BYC).

The idea here is that a team shouldn’t be able to decide to give a free agent a really high raise just to use them for salary matching. So that’s the part that BYC messes with: the salary matching.

For any player who receives a large (>20 percent) raise from their prior season salary and is being used in a sign-and-trade, they don’t count as their new salary for their home team’s salary matching purposes. They instead count either as (a) their previous year’s salary or (b) half their new salary, whichever is greater.

The really tough part is that for the other team, the one trading for the player, they do count as their full salary towards that team. Got that?

Let’s use the relatively simple example above. The Raptors are sending out $25 million in salary, but this time it’s in the form of a sign-and-trade with Fred VanVleet. Now Toronto only gets to use $12.5 million of that for salary matching (half of $25 mil, which is greater than the $9.3 mil Fred earned last season). This would allow the Raptors to absorb $17.5 million in salary ($12.5 million plus $5 million; the middle scenario in our table above). But recall also from above, the other team still needs to absorb $25 million in salary and therefore has to send out at least $19.92 million. You can see how that makes things difficult.

The way to fix that is to add salary on both sides of the deal until you have enough non-BYC salary in there to wash out the effect of the tricky salary matching above. But it means simple small deals don’t happen — you need a lot of salary moving both ways for it to work. That is unless more teams are included in the deal and willing to take on excess salary, which tends to be costly from an asset standpoint. We’ll set that aside and stay with our two-team example here.

Our Fun Example

OK, down to business — fictional business, but whatever. Recall our assumptions, Indiana wants Fred, they are open to moving Oladipo or Turner (or both!), and are offering a big contract for VanVleet, bigger than one the Raptors would care to match. Indiana also doesn’t want to increase their salary too much.

So, easy starting point. Same as above. Fred signs for $25 million in the first year of his deal (salaries can raise or drop each year by five percent of the first season salary, so that can mean an average salary between $23 million and $27 million). As noted, he only counts for $12.5 million outgoing, which means to absorb the minimum $19.9 million the Pacers will be sending the Raptors’ way, Toronto will need to send out more salary.

Let’s try adding a small amount first. For example, if/when Stanley Johnson picks up his player option for next season, he’ll be making $3.8 million in 2020-21. Add that to VanVleet’s $12.5 million outgoing salary and now we are at $16.3 million, so Toronto could now absorb $21.3 million in salary. Great!

But we’d better look at the Pacers’ side too. They were going to have to send out $19.9 million and now they can send up to $21.3 million. Well now, would you look at that, Victor Oladipo makes $21 million exactly and that fits perfectly into that narrow window. But wait, they are taking on Johnson’s salary now. So the total incoming for them is not $25 million, but $28.8 million. Which means they need to send out $23 million in salary.

So what, you ask? Just add some $3 million player to the trade. Done!

Not so fast. The incoming salary for the Raptors is now $24 million, which is outside that acceptable window of $19.9 million to $21.3 million. So the Raptors need to add even more salary to absorb that deal. And around and around it goes. You see the trouble here.

We’ll skip ahead a bit here and jump to where the math needs to be in order to fit all the assumptions we had above — specifically VanVleet making a significant amount annually on his deal.

Here is a framework that will satisfy the requirements for both teams.

Fred VanVleet ($24.9 million starting salary)
Norman Powell ($10.9 million)
Patrick McCaw ($4 million)
Stanley Johnson ($3.8 million)

for

Victor Oladipo ($21 million)
Myles Turner ($18 million)

I suspect the Raptors would need to include an additional prospect and pick, say something like Terence Davis (who thankfully can be absorbed through a different rule than the trade salary matching rule as he is on a minimum salary contract) and their 2021 1st rounder. But leaving aside whether either team would do this, you can see the amount of salary that needs to be added on each side to fit the deal. It’s a lot — and it barely fits.

The Raptors’ outgoing salary is $31.120102 million (you’ll see the need for the extra decimal points in a minute), which allows them to absorb $39.000128 million. To be clear: that’s just $128 — not millions, just dollars — more than needed to fit Turner and Oladipo’s combined $39 million.

Meanwhile, since the Pacers are sending out that $39 million, they can absorb $48.85 million in the trade. Add Fred’s full salary back onto the total and the incoming salary to them is $43.57 million. So, well within the window on that end.

The key to being as close as possible on the Raptors’ side is to ensure that the Pacers are not taking on too much salary — they only take on $4-5 million here, which should keep them just below the tax line. In this, VanVleet gets a deal that could average anywhere between $23 million and $26.8 million per year over four years. So there is some flexibility in terms of what Indiana would want to offer him, even if that first year salary needs to be close to the value we used ($25 million).

Anyway, this is the sort of nonsense the Raptors and some other team would need to consider. So before you let fly with the easy refrain of “sign-and-trade!” as the answer to the possibility of Fred VanVleet leaving Toronto in free agency, remember: it’s an option, but it’s not easy.

Better to just re-sign him outright.

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All salary information per basketballinsiders.com.