This upcoming off-season should see an uptick in the number of sign-and-trades of free agents. A reason for this is the decrease in available cap space from 1) a lower projected salary cap and 2) previous off-seasons had team’s flush with cap space relative to current projections. While the 2011 Collective Bargaining Agreement (CBA) did limit some of the financial benefits to a free agent pursuing a sign-and-trade, there remains substantial reasons for why a free agent would pursue a sign-and-trade which could also benefit their new team and previous team.

I will explain the mechanics of a sign-and-trade and reasons for why this is worthy of pursuing. I will try to relate this to the Atlanta Hawks as much as possible.

What is a sign-and-trade?

A sign-and-trade is a transaction in the NBA where a free agent agrees to re-sign with their previous team to then be immediately traded to their targeted team. It involves the coordination between the free agent, the free agent’s previous team, and the free agent’s targeted team where the three parties agree to terms on a contract and a trade. Both the contract and the trade need to adhere to the NBA’s Salary Cap and its associated rules. Let me break those down a bit more.

The Contract

The free agent’s contract must be signed with its previous team and the contract needs to be signed either via cap space or through the use of the rights that the previous team has over said player (generally referred to as various levels of Bird rights I previously detailed). To further clarify, only the previous team may engage in a sign-and-trade transaction with the free agent. Or in other words, a team cannot sign-and-trade away a free agent that did not complete their last contract for that team.

While the contract can be signed with Bird or Early Bird rights, there are further limitations on the contract that supersede Bird rights. The contract cannot be for more than 4 seasons in length and it cannot have raises/declines in excess of 5% of the first season’s salary. Full Bird rights allow for 5 seasons and both Bird and Early Bird rights allow for 8% raises/declines, but these only apply if the free agent stays with their previous team. The 2011 CBA made this particular tweak to sign-and-trade transactions.

In addition to a maximum contract length of 4 seasons, there is also a minimum contract length of 3 seasons. The contract can also include a team or player option, but it can only be in the 4th season. And finally, the first season of the contract must be fully guaranteed. There is no other restriction on contract guarantees for the second, third, and potential fourth season except for the general restrictions outlined in the CBA.

The Trade

The targeted team to acquire the free agent needs to be able to acquire the free agent in some fashion. They can do this through:

1. cap space,
2. a trade exception (created in a previous trade as the difference in outgoing and incoming salary if that value is positive),
3. by trading out enough salary to end up below the salary cap after the transaction, or
4. if they end up over the salary cap, then by adhering to the NBA’s salary trade rules as follows:

The targeted team can send out as many contracts as needed to complete the deal, subject to roster limits. The free agent’s previous team can also combine other contracts with the signed-and-traded free agent in the trade if needed for either salary cap purposes or basketball purposes. The trade can also be between more than just the targeted team and the free agent’s previous team if need be, although there are additional restrictions.

The NBA stipulates additional trade restrictions outside of the CBA that teams must adhere to (more details from Larry Coon’s CBAFAQ). For any two team trade in the NBA, each team must send out and receive at least one of: a player, a future draft pick, a pick swap, the draft rights to a player, or at least $75,000. If a trade involves more than two teams, then each team must send or receive at least one of the following from at least two teams: a player, a future draft pick, the draft rights to a player, or at least $750,000.

More Nuance To Sign-And-Trades

There are two major complications for sign-and-trades to add on, one straightforward and the other more complex. The straightforward issue is that the targeted team that receives the free agent is hard capped at a value called "the apron" which is $6 million above the luxury tax for the rest of the season. There is no exception or provision that can change this and it severely limits the transactions a team can make throughout the season.

The other more complex issue is if the free agent receives an increase in salary in excess of 20% of their previous salary through the Bird or Early Bird exceptions they become what was previously referred to as base-year compensation¹ -- although this does not apply if the raise is given by the previous team through cap space. If this occurs, then the previous team does not use the free agents salary for trade calculations. The previous team would use the greater of 1) the previous salary or 2) half of the new starting salary. This does not affect the targeted team, they would still use the new starting salary as incoming salary.

This has the effect of reducing the amount of incoming salary that the previous team can acquire in a trade, which may complicate things as the targeted team may have a minimum amount of salaries they need to trade away:

By use of an upcoming example, suppose Paul Millsap and another team which does not have cap space to sign him agree on a contract starting at $35,000,000. Paul Millsap’s most recent salary was $20,072,033 and Atlanta would use his previous salary as outgoing salary since half of $35,000,000 is only $17,500,000. Atlanta could bring back up to $25,190,042 in salaries (1.25*$20,072,033 + $100,000). But a team receiving a $35,000,000 contract would need to send out at least $27,920,000 in salary (0.8*$35,000,000 - $80,000). Atlanta would not be able to receive the amount necessary for a team to acquire Paul in this scenario.

For the sign-and-trade to be legal, the team receiving Paul would need to find a third team to dump the extra $2,729,958 to make this legal. Another option could be for Paul to agree to reduce his starting salary to $31,587,553 to match the amount of salaries that is legal for Atlanta to take back. Alternatively, Atlanta could add on at least $3,899,940 in salaries to balance the trade equation.

Another creative option in this scenario would be for Atlanta to simply sign Paul Millsap with their cap space instead of using Paul’s Bird rights. If Atlanta uses cap space, then they would be permitted to receive up to $43,850,000 in salaries and would be able to exceed the salary cap in doing so. If Atlanta does not want that much in salaries, then they could take a trade exception in the sign-and-trade deal. This would require some expert timing because trade exceptions take up cap space. Atlanta would be well advised to clear exactly $35,000,000 in cap space for Paul so that after a sign-and-trade the team would fully utilize their cap space with the trade exception.

Why Would Anyone Do A Sign-And-Trade?

There are lots of reasons for a free agent, its previous team, and its targeted team would engage in a sign-and-trade even in spite of the limitations on term and raises/declines for engaging with sign-and-trade than with re-signing with their original team. Let me try and break down a few of the reasons with some examples.

For the Free Agent to Earn More Money

In the mid-aughts, Atlanta and Indiana were very involved in sign-and-trades. The first of which was for Stephen Jackson to earn a nice contract active his make-good million dollar contract with the 2003-04 Atlanta Hawks. Stephen Jackson was seeking more money than the clearly rebuilding Hawks were willing to give, but the championship seeking Indiana Pacers were willing to pony up some cash to Stephen. Indiana was capped out, but they did have Al Harrington making $6,325,000 and Stephen was intended to replace him. Indiana and Stephen agreed to a deal starting at $5.1 million with Stephen and also shed some payroll by moving out Al Harrington.

Atlanta was appeased because they received a serviceable player, Indiana was happy because they lowered payroll and added on a solid player, and Stephen Jackson got some money. All parties won.

To Use a Trade Exception

Along the same line as above, Atlanta and Indiana were involved in another sign-and-trade involving Al Harrington. It was the 2006 off-season and Indiana had just lost Peja Stojaković to the New Orleans/OKC Hornets. But Indiana maneuvered to create a trade exception in that scenario. After doing such, Indiana had a trade exception that they could use worth $7.5 million. Al Harrington was an Atlanta free agent with a desire to return to Indiana. Atlanta also was flush with cap space and no desire to compete any time soon (they just won 26 games and would win 30 the next season). As such, eventually Indiana and Atlanta agreed on another sign-and-trade involving Al Harrington where Atlanta ended up receiving a future 1st round pick that eventually became Acie Law.

To Gain A Trade Exception

In the 2014 off-season, Atlanta had cap space and a glaring need to upgrade their wing position. As such, Atlanta agreed to sign Thabo Sefolosha from Oklahoma City to a 3 year contract worth $12 million. Oklahoma City was over the salary cap that off-season with no realistic way to get under the cap and they were determined to not lose Thabo Sefolosha for nothing. What Oklahoma City realized is that they could carve out a trade exception by signing-and-trading away Thabo to Atlanta, conditional on Thabo and Atlanta agreeing to this.

Atlanta and Thabo had no incentive to agree to this because there was no reason to involve Oklahoma City in this deal as Atlanta had the requisite cap space to sign Thabo. Of course Oklahoma City realized this and they decided to pay Atlanta in order to generate a trade exception. Later on down the road, OKC used this trade exception for Dion Waiters and thus the cycle was complete.

Trade exceptions are valuable.

Atlanta’s Issues

I’ve already spoken about Paul Millsap above, but Atlanta also has other free agents which may wish to seek out a sign-and-trade. Atlanta has Ersan Ilyasova, Kris Humphries, Thabo Sefolosha, Tim Hardaway Jr., Mike Muscala, and Jose Calderon as free agents. The team has Bird rights over all of them with the exceptions of Kris Humphries (Early Bird) and Jose Calderon (Non-Bird). At the same time, most of these players will likely fall under the precarious base-year compensation category from receiving a more than 20% raise. But as I mentioned before, Atlanta can avoid this issue if they use cap space in signing the players.

For teams over the cap, a sign-and-trade may be the only option available to acquire an Atlanta Hawk free agent. But at the same time, Atlanta would need to receive salary or at least find a 3rd team that would receive said salary. And Atlanta needs a reason to engage in a sign-and-trade or else they are being a poor conduit in transactions. It depends on what Travis Schlenk wants to acquire and possibly how much that may hinder his flexibility (ie adding on salaries generally reduces flexibility).

So we shall see in just one week what Atlanta will do, but it should be an exciting time. But there are certainly reasons for Atlanta (and its free agents) to pursue a sign-and-trade.

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^{1. In the 1999 CBA, base year compensation was a status which lasted for an entire year (two years if the contract was signed prior to 2001). But since the 2011 CBA, base year compensation only exists in sign and trade transactions.↩}