Your questions about how NBA free agency works, answered

Learn how to speak the language of the NBA off–season.

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And you thought basketball season was over.

The NBA’s summer transaction circuit is about to begin, and it’s going to get hectic. Remember all the ridiculous-looking contracts from one year ago? All the money that changed hands? All that stuff that happened with DeAndre Jordan?

We don’t know exactly what this summer will bring, but it could be epic. Free–agent LeBron James is expected to re-sign with the Cavaliers, but Kevin Durant could be on the move. Dwyane Wade is a free agent, though he’ll likely stay in Miami. DeMar DeRozan and Al Horford will receive big offers to move from Toronto and Atlanta, respectively. Mike Conley is the best point guard on the market. 

Before the drama begins, familiarize yourself with the most important terminology of the NBA off–season so that you’re ready for free agency. 

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When can players sign contracts?

Free agency opens July 1, and players are free to negotiate at 12:01 a.m. They can agree to deals, but cannot actually sign until July 7 at 12:01 a.m. This is because of a moratorium period that prevents free agents from signing contracts, so that the NBA can take care of its accounting and calculate the exact salary cap number and luxury-tax figure for the next season as the new league year starts.

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What is the salary cap?

The cap places a limit on how much money teams can spend on player contracts. It’s designed to keep competitive balance so that teams cannot just outspend their opponents for the best players. Though team payroll numbers vary, and teams in bigger markets do tend to spend more, it’s at least a structural attempt to keep the field level.

There are two salary cap numbers: a soft cap and a hard cap. The hard cap is the player payroll amount teams absolutely cannot exceed. The soft cap is a lower number that teams can exceed under certain spending exceptions. It’s designed to help teams keep their own players.

There is also a salary cap floor, a minimum salary threshold teams are supposed to meet—the smallest amount you can pay your roster. If a team is below the cap floor, the difference is distributed among the rest of the roster, at a percentage determined by the NBA Player’s Association. 

The cap number for the 2016–17 season is currently projected at around $92–94 million, a historic high for the second year in a row. In 2015–16, the number was set at $70 million.

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Why is the cap number jumping?

The cap spiked last year and will take an even greater jump thanks to the NBA’s most recent television deal, worth $24 billion (!). The cap number is always tied to the NBA’s basketball-generated income, so the giant influx of cash naturally had an effect. This means teams are going to have a lot of extra money to spend this summer.

What’s the effect of this additional capital? The best free agents will be able to earn even more money. This means middle-tier free agents are going to get paid more than usual. Prepare for some eyebrow-raising contracts. The increased salary cap also means the cap floor will leap, so teams hovering around it will be forced to spend more. It’s expected to be another very busy summer—and the cap is expected to jump yet again for 2017–18.

Types of free agents

• Unrestricted free agents are those whose contracts have expired and are free to sign with any team. Players have full agency in the decision-making process.

• Restricted free agency is a little more complex. Here’s the simple version. It occurs when teams extend a qualifying offer (a one-year, guaranteed contract offer) to re-sign a player, and that player then declines it to test the market. Restricted free agents are either former first-round picks who have just finished the fourth year of their rookie-scale contract, or ones who have played in the NBA three years or less. If the player is coming off the fourth year of his rookie-scale deal, then his team can also offer him a maximum qualifying offer: a fully-guaranteed max deal for the next five seasons.

Once a restricted player hits restricted free agency, other teams are free to make them offers for least two-years under specific salary limitations to sign them away. Once they sign a contract offer sheet with a different team, their original teams have the right to match any offer and keep their players (known as “right of first refusal”). They can go over the soft salary cap number to do this. They have three days to match another team’s offer, or lose the player.

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Types of contract exceptions

Contract exceptions are scenarios in which teams can sign players and go over the soft cap.

• Larry Bird: The Bird exception, named after the Celtics great, allows teams to go over the cap to keep their own free agents. Basically, a player has to have played three straight seasons for one team without ever clearing waivers for that team to own his Bird rights. Teams can offer these players an extra contract year and higher salary package that no other team can. If a player gets traded in midst of his first three years with a team, his Bird rights are traded with him to his new team. Contracts signed with Bird rights can last up to five years.

• Early Bird: This is a variety of the Bird exception, in which teams can go over the cap to re-sign free agents to a more limited type of contract. Players have to be on a team for two seasons without clearing waivers to qualify for this and are called “early qualifying veterans.” This allows teams to re-sign their own free agents for either 175% percent of the previous year’s salary or the NBA’s average salary, whichever number is greater. These contracts must be between two and four years in length.

• Non-Bird: Free agents that don’t qualify for Bird or early Bird deals fall under this exception. Teams can re-sign these players to deals worth 120% of last year’s salary, or 120% of the league’s minimum salary, whichever number is greater. These deals can last up to four years.

• Mid-level: Teams can use the mid-level exception (MLE) once each season to sign players and go over the cap. Teams are designated a certain amount of mid-level exception money, depending on whether they are over or under the tax apron, which is a salary number $4 million above the luxury tax line. This money can be split amongst players. The non-taxpayer exception allows teams the most spending money, followed by the taxpayer exception and the room exception, which is given to teams below the salary cap. Last season, the non-taxpayer exception was $5.45 million, the taxpayer exception was $3.27 million and the room exception was $2.725 million. 

To be clear: teams only get one of these Mid-Level exceptions to use based on their cap situation—they are mutually exclusive.

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• Bi-annual: The bi-annual exception allots a designated slot amount of money for teams to spend on salary, and cannot be used two years in a row. They must be under the tax apron to use it, and it is mutually exclusive with the other Mid-Level exceptions. It can also be spent on multiple players. The bi-annual exception is projected to start at $2.203 million entering the 2016–17 season. Once a team uses its Bi-Annual exception, it cannot go above the tax apron for the rest of the season.

• Trade exceptions: These allow teams to absorb players into a pocket of salary created through trades. Trade exceptions are most commonly created when teams increase their cap space in a trade (for example, when the Cavs officially traded LeBron James to the Heat in 2010, they received draft picks and an exception equal to his $14.5 million salary). The traded player’s salary becomes a credit teams can use to absorb another player’s salary in a second transaction.

From the date the trade is official, teams are given up to one year to use their exception in a different trade. They can absorb a player back into their exception as long as he is under contract and his salary does not exceed its value. Trade exceptions cannot be combined with another player or another exception to bring back a more expensive player, but they can be partially used or split up.

Trade exceptions count against the cap, but not the luxury tax, and can be renounced to create space. Teams under the salary cap do not receive trade exceptions.

• Rookie: This just means that teams can sign their first-round picks to rookie-scale deals and go over the cap to do it.

• Minimum Salary: Teams can sign players at the NBA’s designated minimum salary for up to two years. They can roster as many of them as they want.

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Types of contract options

• Player: This means players can decide whether to stay with their team for another year, or become an unrestricted free agent.

• Team: This means the team holds the power to keep a player or opt to let him go.

• Early termination (ETO): This means a player has the right to end his contract early. It cannot be exercised before the end of the fourth year of an existing deal.

Other terms to know

• Cap hold: When a player hits free agency, he still counts as part of his team’s salary structure until his contract situation is resolved. A cap hold is the corresponding figure that is charged to his team’s cap number. This prevents teams from using their entire cap to sign new free agents and then keep their own players using Bird rights. It’s a competitive balance measure that further incentivizes long-term deals. If they desire, teams can renounce their cap holds on players or waive them to create salary space.  

• Designated player: Teams are allowed to nominate players on their rookie deals to receive a more lucrative, five-year contract extension as a designated player. Teams can only allocate one of these contracts at a time, until it expires or the player is traded. Teams can trade to acquire one of these players — usually of considerable talent — but can only roster two designated player contracts at a time.

• League year: The NBA calendar turns over on July 1 with free agency and runs until June 30 of the following year.

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• ​Luxury tax: This is an additional measure that helps control spending. It is incurred when teams’ salaries exceed a predetermined number above the salary cap (this changes each year). If a team’s payroll exceeds it, they have to pay an additional tax, which essentially punishes owners for over-spending.

• Max contract: This is the maximum amount of money a team can pay a player over the course of his deal. The number changes relative to the cap.

• Qualifying offer: To further expound, teams must extend qualifying offers by June 30. This offer has to be either 125% of a player’s previous salary, or the player’s minimum salary plus $175,000 (whichever number is greater). If they agree to a qualifying offer, they become unrestricted free agents the next season. If not, they become restricted free agents.

• Sign-and-trade rule: This allows players to re-signed, then immediately traded to other teams. The contract they sign gets voided if the trade is not done in 48 hours. This does not apply with restricted free agents who have signed offer sheets with other teams already. Teams using the taxpayer Mid-Level exception cannot receive players in these deals. Sign-and-trades have to be completed before the first regular-season game of each league year.

• Tax apron: As previously mentioned, the tax apron is a number $4 million above the luxury tax line. In a nutshell, when teams are paying out above the apron, it means they cannot offer players several types of salary cap exceptions. It also limits their financial flexibility.

Now that you know how to speak the language of the NBA off–season, let the madness begin.