The NBA CBA: Explaining The Designated Player Veteran Extension and “Choice”
Wondering about some of the new ins & outs of the new CBA? Cole Zwicker makes his Sixteen Debut explaining some.
The NBA has made its hardline opposition of super teams post Kevin Durant exodus to the Golden State Warriors sentiment known in ironclad by pushing its pro competitive balance chips to the forefront of the recent collective bargaining agreement (CBA) negotiations. If you read through the summary of changes in the new CBA, you’ll notice a commonality: almost all components heavily incentivize star players to remain with their drafted teams.
Under the current structure, star players such as Anthony Davis are under cost control for 4 years of their rookie scale contract, and then usually sign a second contract/extension for another 4 or 5 years pending a designated player rookie extension given, a stepped-up 5th year max component when qualified, and player option status on the final year. Basically, teams have typically been afforded (barring exceptions like Kevin Love getting an early out in Minnesota) an 8 or 9-year window to build around stars and provide them legitimate incentive to remain with their drafted teams for a third contract due to a combination of restricted free agency status, risk mitigation for injuries and prior team-specific perks such as the 5th year max. One would think that is ample time for a coherent organization to craft a contending team, but apparently it was not enough.
The recent implementation of the designated player veteran extension (DPE), effective starting July 1, 2017 for qualified candidates, is a microcosm of the league’s small market owners’ last ditch effort to fortify their best chance to compete: retaining the franchise players that they draft (or trade for in the player’s first four years as we’ll see blow) over not only their second contract but for their third contract now, constituting the duration of the player’s prime.
The new rule stops short of a full-fledged NFL franchise tag, which is the ultimate freedom of movement killer, by still providing a conceptual choice. The choice is a punitive one monetarily, however, which begs the question is it really a realistic choice at all? Before diving into that, exploring the rule is necessary.
Thanks to Eric Pincus of Basketball Insiders, we have information on the designated player veteran extension (not to be confused with the disabled player exception), and it applies as follows:
Eligibility: only players entering their 8th or 9th seasons with their original franchise or if they were traded to existing team during first four years of career are eligible.
Qualifications: players have to satisfy one of the following:
1. Made one of the three all-NBA teams in season preceding the extension or in 2 of the previous 3 seasons.
2. Earned league defensive player of the year (DPOY) honors in the season preceding the extension or in 2 of the previous 3 seasons.
3. Earned league most valuable player (MVP) honors in any of the 3 seasons preceding the extension.
Time Period: players can only sign the extension in the off-season starting July 1st through the last day before the start of the regular season.
Signing Mechanism: eligible players can be signed via extension or re-signed as free agents.
Maximum: there can only be two designated player veteran extensions given per team.
Length: 6 Year length (really 5) and includes remaining years of contract
Signing Maximum: salary in first year between is negotiable but between 30 percent and 35 percent of the first year salary cap, enabling the player to jump maximum salary tiers.
Trade Restriction: players will not be trade eligible for one year post signing
Grandfather Clause: language in deal that grandfathers in recent extensions signed before CBA agreement (ie Russell Westbrook and James Harden)
That’s a lot to unpack, even if the provision is rather straightforward. As with most cases pertaining the to CBA, it’s best explored via example. To gauge the full power of the new DPE over time, we need a prospective candidate likely to achieve 5th year max eligibility on his second contract and DPE status on his third contract. That limits the qualifying pool a great deal, and because I value my life being followed by so many “Process” cult Sixers fans, where the mere mention of Joel Embiid leaving would result in my obliteration, we’ll use Karl Anthony Towns for purely educational purposes (Sorry, Minnesota).
Second Contract
Avenue 1: Designated Player Rookie Extension with 5th Year Max
Let’s assume Towns meets the 5th year max requirements by making one of the three all-pro teams in his final year of his rookie contract. We can safely rule out DPOY given Towns is defending fours currently and he’s been a train-wreck doing so, while also taking valuable time away from learning the nuances of defending fives. League MVP is also likely off the table, given the award typically goes to one of the three teams with the most wins in the regular season, and the Timberwolves are worlds away from that level of play. How Towns is classified in terms of position (he’s a five playing the four currently) will go a long way in determining his all-pro status, but let’s assume for now he gets a center spot (he also had an avenue to achieve 5th year max if he was voted in as an all-star starter for two years on his rookie deal, but that criteria has been removed).
He’ll likely sign the designated player rookie extension with the stepped up 5th year max constituting 30 percent of the cap (this can be negotiated between 25–30 percent) before he achieves the 5th year max benchmark, which is fine because the CBA allows for conditional language in the contract for this specific reason. Again, let’s assume he signs for the full 30 percent stepped up max, and later qualifies.
The projected salary cap for the 2019–20 season is currently $109,000,000. Since maximum salaries are no longer calculated according to a lesser 42.14 percent of basketball related income (BRI) draconian formula, and are instead based on a direct percentage of the salary cap, Towns’ year one salary at 30 percent of the cap in 2019 would be $32,700,000 in this scenario.
Towns would thus be eligible to sign a 5-year, $189,660,000 extension (full 8% raises) prior to the start of the regular season in his 4th season at the age of 22, which is mind-blowing. It’s also likely that he’ll be able to negotiate for a player option in year five, which increases his leverage to obtain the DPE on his third contract, bringing the realistic likely second contract total to 4 yeas, $146,496,000.
Avenue 2: Designated Player Rookie Scale Extension
If he doesn’t qualify for the 5th year max, his max starting point would instead be 25 percent of the 2019 salary cap, starting at $27,250,000. With the same 8% raises over that year one salary figure, Towns’ extension would total $158,050,000 over five years, or $122,080,000 over four years if he opts out then. The difference over four years between qualifying for the 5th year max and not doing so is $24,416,000, a considerable chunk.
Other Avenues
There are other avenues available to both Towns and the Timberwolves respectively, of which I did not include because they’re fare less realistic.
Towns could wait for restricted free agency to sign a five-year 5th year max contract, as the 5th year max isn’t exclusive to extensions. The Timberwolves could utilize his lesser cap hold, even though that becomes more difficult in the new CBA with increased cap hold percentages coming off rookie scale contracts, and thus depending on what the estimated average salary is in 2019 that cap hold will be increased by 5–10 percent. Given the big contracts that are coming before Towns with Andrew Wiggins and Zach LaVine in 2018, it may be that with those two contracts on the books combined with other pieces the Timberwolves are already over the cap. Also, there is value in Minnesota locking up Towns early to minimize risk, like the New Orleans Pelicans did with Anthony Davis.
Towns could also not sign an extension and similar to Gordon Hayward with the Utah Jazz the Timberwolves could allow the market to dictate Towns’ salary in going out to sign with another team only for Minnesota to match. This will not happen for a plethora of reasons. First, Towns is unequivocally a max player, so there really isn’t any contract value in play. Second and more importantly, the Timberwolves allowing Towns to sign to lesser terms, mainly a shorter contract, would be disastrous. The Timberwolves would likely submit a qualifying offer to Towns, plus a maximum qualifying offer in the event he’s not extended. Doing the latter would make sure any signing team would have to offer at least three years guaranteed instead of the two required in a typical usual offer sheet, avoiding the dreaded 2 + 1 final year player option Chandler Parsons contract structure that minimizes team leverage in every year. Doing so would also likely escalate Towns’ cap hold to his max, eliminating any intended cap flexibility. I have argued before that the maximum qualifying offer, being defined in a different section than the standard qualifying offer of which is referenced in the cap holds section, would not necessarily be reflected as the cap hold, but I’m sure the NBA would disagree on that interpretation (we never found out in the 2015 offseason because the Chicago Bulls were over the cap when they gave the maximum qualifying offer to Jimmy Butler, and the San Antonio Spurs, who were under the cap, never utilized it on Kawhi Leonard).
Needless to say, none of these avenues are likely, unless the Wolves make both Wiggins and LaVine their designated player rookie extension candidates (the CBA allows teams to sign two now), but it is unlikely they do so when Towns is the clear franchise player.
Third Contract
With the same allowable contract maximums (two per team) and contract length as the designated player rookie extension combined with the enhanced maximum salary tier of the 5th year max (but 35 percent of the salary cap instead of 30 percent), Towns is very likely to be eligible for the DPE in the prime years of his career if we realistically project improvement with him moving forward.
Towns could enter into this extension with conditional language if not qualified yet (I’m not 100 percent certain on this yet but it seems like the safe bet). He would be eligible to do so at 26 in 2022 entering his 8th season, or at 27 in 2023 entering his 9th season (if he opts in under the player option scenario I provided). The likelihood is of course he opts out after his 8th season to guarantee that he qualifies for the DPE instead of leaving it up to a minute chance that talks fail in extension negotiations that same year (though that’s an impractical thought).
Again, let’s assume he opts out in 2023, entering his 9th season as an unrestricted free agent, both because that’s a realistic outcome and most importantly it gives us the best position for comparative analysis. There are other CBA mechanisms available to Towns, such as renegotiating his contract up and/or extending three years after the signing of his second contract (it was three years after the signing previously as a wait time), but for simplicities sake we wont travel down that road.
Predicting the salary cap in 2023 is a dicey proposition at best. We don’t know when the bubble will burst on revenue streams driving up the cap. For now, $130,000,000 will be used as a clean and quasi-realistic projection.
The Designated Player Veteran Extension
35 percent of the $130 million cap in 2013 is a whopping $45,500,000, which would be Towns’ year one starting salary in his third contract. The total contract amount if he qualifies for the DPE would be $263,900,000 over five years, or $203,840,000 over four years if we again assume Towns gets the amenity of a final year player option which would allow him to opt-out entering his 13th season at 31 years-old.
Signing With New Team as an Unrestricted Free Agent
Let’s compare that amount to what he could accrue from another team on the open market, because that option contains crucial differences and is the crux of this piece.
Towns would not be eligible for the stepped-up 35 percent max in 2023 if he signs with another team because of two reasons. The first is that the DPE would only extend to the Timberwolves in this scenario (assuming Towns isn’t traded on his rookie scale contract). The second is that Towns would have only accrued eight years of service entering that year, which falls below the ten years service requirement to receive the super max. This is where the impact of the DPE is fully felt.
Towns could sign a three-year deal with another team negotiating a player option for the third year, affording him the security of an extra year and also allowing him to opt out after two years when he meets that ten years of service requirement for the stepped-up max. This might even be the likely recourse should Towns ultimately leave the Timberwolves.
Here’s the ultimate dilemma: if you were Towns would you rather take a (perhaps calculated) risk in signing a three-year $122,850,000 contract (5 percent raises) with another team, or sign a five-year $263,000,000 fully guaranteed contract with the Timberwolves (35 percent max with 8 percent raises)? That’s a $141,050,000 difference in guaranteed money! Even if Towns signs a four-year contract with another team, he’s looking at $167,700,000 guaranteed. That’s still $36,140,000 less than the DPE contract he could sign with the Timberwolves over the first four years, and $96,200,000 less in guaranteed money if you include the 5th year!
Towns may elect for a shorter contract to strike a third big money contract heading into his early-to-mid thirties. Hell, he’ll probably still warrant max money after his 12th season potentially given his value is tied largely to skill. The point is that the DPE is ruthlessly designed to make Towns’ choice a no-brainer from a financial perspective.
Remember when everyone expected the 1 + 1 deal to be so popular in the 2015 offseason, but LeBron James was really the only one to actually sign it, largely due to leverage reasons? Even guys in their mid-twenties like Kevin Love locked into five-year deals. Do not underestimate the dynamic effect of guaranteed money.
Cumulative Totals
As displayed in the chart, you can see the net total of guaranteed money available through the two avenues shown.
If Towns qualifies for both the 5th year max for his second contract and the DPE for his third, his guaranteed earnings under these cap estimates would be $410,396,000 over nine years total.
If Towns qualifies for the 5th year max for his second contract and signs with a new team for his third contract, his guaranteed earnings over that span would be $314,196,000, $96,200,000 less guaranteed.
That’s almost $100 million guaranteed in difference in guaranteed money made available by the DPE compared to signing with another team in free agency! Is anyone turning down a cool $100 million?
It is unfortunately commonplace amongst fans to ask questions such as “why doesn’t Player A just accept the qualifying offer and become an unrestricted free agent the following year when he can control his own fate.” That is largely because it is difficult for fans to empathize with the amount of money weighing on these multi-million-dollar athletes. What’s the downside of playing under a one-year, $10,191,266 qualifying offer in 2019 if you’re Karl Towns, and just signing the max contract the following offseason with the team of your choosing? If you were in Towns’ shoes would you take a $10,191,266 risk on yourself, even pulling out an insurance policy, or accept a life changing guaranteed $189,660,000 on your second contract? Any rational person would choose the latter when you simplify down to a meat and potatoes level that factors in risk assumption, and that’s exactly why the rules are crafted like they are. The same logic applies to the DPE.
Fallout: Free Agency and Draft Implications
I don’t necessarily blame small market owners for their inclusion of the DPE either. If you aren’t a destination city or more importantly don’t have the requisite stars to attract other stars, one-third of your available mechanisms to build a sustainably competitive team, free agency, is severed from the off. The second mechanism, trades, is fickle. You need to acquire the “assets” necessary to flip for blue chip players, and it’s an educated guess at best when James Harden types are going to become available. That leaves the draft as the most realistic avenue to acquire a star or the pieces to flip for one, and even in the former situation with the worst record in the league a team only has a 25 percent chance at the number one overall pick, which historically is the best avenue to acquiring a star. You’ve heard this diatribe before, but without the draft and the ability to retain star players via incentive, small markets really don’t have a chance.
That still doesn’t erase the incredibly loose concept of choice here for the elite players in the league. The reality is in most situations there probably isn’t even a real choice to consider. The money and security over both the second and third contracts is so skewed toward the drafting/first contract team, especially the third contract, that barring the well being irreparably poisoned, there is only one feasible road to travel down.
Does this provision mean the destruction of free agency as we know it? Maybe. The DPE is very limited in its application, applying only to the elite of the elite. It is incredibly difficult to win DPOY as long as Kawhi Leonard still draws breath and with cyborg Joel Embiid waiting in the wings. MVP might be out of the question with superhuman Giannis Antetokounmpo giving the NBA something it has never seen before. Making an all-pro team is easily the cleanest avenue, but it is voted on by position (2 guards, 2 forwards, 1 center), and center spot especially with the influx of elite talent is going to be a bear to make.
In reality, we’re only talking about the top 15 players in the league, conservatively the top 20, being affected directly. The counterpoint to that is the top 15–20 players in the league fundamentally impact the entire league both directly and indirectly. If their movement is being restricted, it absolutely impacts team-building and free agency specifically. Did thinkers like Sam Hinkie understand and anticipate this, choosing to double-down on the draft? It wouldn’t be surprising.
As league momentum continues to snowball, expect a majority of owners to quietly push for even more competitive balance components such as adjusting contracts to extinguish advantages for personal income tax free states with other potential carrots. The DPE has potentially altered the landscape of the league by restricting the rational choice of its superstars. Is limiting freedom of movement good policy? It’s hard to know at this juncture. What is known is it won’t be the last of its kind.
