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Jeff Teague's trade kicker and other cap dynamics

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TL;DR a team with enough cap space can give Teague a large raise for 2016-17 and then have a team friendly extension for 2017--18, 2018--19, and (if they wait 6 months) 2019-20. Basically, a signing bonus of $17m and yearly extension salaries as low as $11m. Cool.

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Back in 2013, Jeff Teague signed an offer sheet with the Milwaukee Bucks for a 4 year $32 million contract with a payout of exactly $8 million a year. Hidden within this contract was a trade kicker. At the time, reported the trade kicker was for the lesser of $600,000 and 15% of the remaining value of the contract. Currently, BasketballInsiders reports the trade kicker as 10% of the remaining value of the contract. This boils down to a trade kicker of either $600,000 or $800,000 which Atlanta would have to pay to Jeff as he only has $8 million left on his contract. There's an added issue that the trade kicker is spread evenly over the remaining seasons on the contract, which Eric Pincus discussed recently. If Jeff Teague is traded before July, then he has two seasons remaining and his cap hits will rise by half his trade kicker. If Jeff is traded after July, which marks the start of the 2016--17 NBA Fiscal Season, the full value of the trade kicker is applied to Jeff's cap hit.

This is kind of an interesting and neat aspect of Jeff Teague's contract, but it's not what I find to be the most interesting and meaningful benefit to his $8 million expiring contract.

The most interesting aspect is that Atlanta matched the offer sheet on July 13th, 2013. This means that July 13th of this year will mark the third anniversary and Jeff Teague's contract is eligible for an extension as well as a renegotiation. I detailed what this means back in September of last year, but I only evaluated the Hawks-centric options surrounding extensions and renegotiations. Let me give a short refresher on this from another article I had updating the cap:

With Cap Space, Hawks Have Renegotiate and Extend Potentials

I previously wrote about the potential for the Hawks to use their cap space in order to give current players under contract more money and potential more years on their contracts. This all depends on the third anniversary of a player signing a 4 or more year contract. This means that Kyle Korver becomes eligible on 7-12 while Tiago Splitter and Jeff Teague become eligible on 7-13 (dates found through searching NBA transactions on Pro Sports Transactions). These come into play right after the July Moratorium.

As a bit of a refresher, the Hawks would be able to use cap space in order to give one of the three mentioned players a raise and/or up to 3 additional years on their contract. Only Jeff, Kyle, and Tiago are eligible for this and if the Hawks have excess cap space this may be a potential use as opposed to attempting to sign other free agents. One of downsides to this is that a renegotiation/extension may only occur once every 3 years.

From: Atlanta Hawks Salary Cap Update: Odds and Ends

As we gain more clarity towards what Atlanta might do this off-season, their cap space appears to be limited. And using any of their cap space to give Jeff a raise would be puzzling. But for a team ripe with cap space, acquiring Jeff could help them attain an asset with a low cap hit in future years if they play their cards right.

Let me explain.

Renegotiation-and-Extension Mechanics

Jeff will become eligible for an extension and/or renegotiation on July 13th regardless of whether he is traded,1 but if he is traded then he has a restriction that his raises/declines in an extension are limited to 4.5% and can only add on 2 additional seasons instead of 3. This restriction wears off after 6 months, at which point Jeff could have his extension include 7.5% raises/declines and the 3rd season. But this is small potatoes, and anyway Jeff won't agree to an extension unless he gets a renegotiation of his $8 million 2016--17 Salary. As detailed before, this is because an extension is limited to start at most at 107.5% of the last Season's Salary and that's simply too far below Jeff's market value. So there needs to be a renegotiation.

The CBA allows for renegotiation of the compensation of particular contracts, which Jeff falls under. The renegotiation can only be for a raise in compensation and this raise can only be facilitated through a team's cap space (ie, there's no such exception that can be applied to exceed the Salary Cap in this scenario). Jeff will be in the same maximum category as Al Horford, which is roughly 30% of the Salary Cap and we can ballpark to be around $26 million. In short, Jeff is eligible for a raise of about $18 million on July 13th. Sweet.

The CBA also allows for extensions of a contract combined with a renegotiation. The starting salary for an extension cannot exceed 107.5% of the previous salary, which would put Jeff at a maximum of about $28 million if he gets the raise I alluded to above. The additional seasons beyond the first year in an extension (which can be for 3 additional seasons, including the first) is limited to 7.5% raises/declines or 4.5% if the player was traded within the past 6 months. However, the CBA only has a small snippet about how low the starting salary in an extension can be, it cannot be for less than 40% of the last season's salary. This is because Nick Collison once famously had a massive $6.5 million "bonus" to push his compensation in 2010--11 to $13.5 million and then his extension kicked in with a starting salary of about $3.2 million.

So if Jeff agrees to a renegotiation up to his maximum salary of $26 million for 2016--17, then his extension cannot start any lower than about $10.4 million. His salary could then further decline by 7.5%, although more realistically this would occur after a trade and the limit would be 4.5%.

Hypothetical Example Applied to Jeff

Jeff knows that he will make at least $8 million in 2016--17 and it might be bumped up to $8.8 million in guaranteed money if he's traded. But Jeff also knows that he is in line for a new contract in the 2017 off-season. What might this 2017 contract look like? Well, there's a chance that Jeff bounces back to his All-Star form. There's also a chance that Jeff has a down year or, worse, that he suffers an injury. He might have a reasonable expectation that he could see a 3-year contract somewhere between $30 and $70 million. I'm trying to convey that there is some uncertainty to this, but for argument's sake we can think that Jeff's earnings over the next 4 years would be around $40 million to $80 million. This is without a renegotiation and extension.

Say that a team like Philadelphia acquires Jeff. There's clearly some trepidation from fellow SB Nation blog Liberty Ballers that this particular trade may end up with Jeff Teague at "33 years old and commanding $25 million a year." But Philadelphia can use the renegotiation and extension tactic to reduce Jeff Teague's future salary by paying him more today. This can be mutually beneficial as Jeff could get more money now and reduce the uncertainty associated with his future earnings.

Philadelphia likely has too much cap space this off-season that they won't be able to spend it all efficiently. A Jeff Teague renegotiation-and-extension might be an efficient use of their funds today.

If Philadelphia negotiates Jeff's 2016--17 Salary up to $26 million, he'll see about $17 million more this season. Then, potentially his extension for the 2017--18 could be for a flat $18 million. Under this scenario, Jeff would lock in a guaranteed $80 million over the next 4 years. That's an average of $20 million a year, although the cap hits for Philadelphia would be $18 million for the 2017--18 through 2019--20. And to the extent that most people in this world are risk-averse, slightly less guaranteed salary is generally preferred to an uncertain salary later on, even if it is expected to be larger. After all, people do buy insurance.

The numbers I am tossing out here don't mean much and should not be interpreted as me setting specific valuations. If you go back up a few paragraphs, you'll see that I pegged $80 million over the next 4 years as a bit of an optimistic view for Jeff's next contract. So maybe the extension with Philadelphia will be for less total compensation. Maybe for more.

I am not sure.

But I do know that Jeff can net some extra money this summer if he is in a situation with a team that has excessive cap space.

1. There's one situation where this is not true and that is if Jeff Teague has to waive his trade kicker in order to facilitate a trade. The likelihood of this event occurring is extremely low, but still worth noting.