The Subtle Value Of Three-Year Contracts

July 19 2013 at 7:25pm CDT By Chuck Myron

A check of the Hoops Rumors Free Agent Tracker shows several players have agreed to three-year deals this summer, but not all of the names are well-known. At first blush, it doesn't seem like Gal Mekel and Vitor Faverani should be awarded with contracts that last just as long as the ones David West, Al Jefferson and Monta Ellis have received. 

The simple answer for why players of such widely varying resumes wind up with three-year deals is that three seasons is the amount of time a player must spend with his team for the club to gain his full Bird Rights. If the Mavs want to re-sign Ellis to another lucrative contract in 2016, they may do so, even if they're over the cap. It doesn't seem nearly as likely that the team will have to break the bank to sign Mekel to his next contract, so that might leave fans puzzled.

The most obvious difference between the deals for Ellis and Mekel is the money involved. Ellis' contract is expected to be worth around $28MM, while Mekel signed for the minimum. Still, plenty of minimum-salary contracts are for only one or two years, so it's worth asking why Mekel and other unproven talents are getting long-term deals.

Part of the answer lies in the offer sheet Chris Copeland signed with the Pacers this month. Little was expected of Copeland last summer when the Knicks signed him to a non-guaranteed one-year deal that amounted to an invitation to training camp. He won a spot on the regular season roster, and continued to surprise during the season, shooting 42.1% from three-point range on 2.5 attempts per game. He mostly appeared off the bench, but he wound up starting 13 regular season contests and a playoff game. Copeland's performance resulted in a two-year, $6.135MM offer from the Pacers that the Knicks were powerless to match.

New York only had Non-Bird rights on Copeland, which allowed the team to give him 120% of the maximum salary. The capped-out, taxpaying Knicks could have matched the Pacers' offer if they had kept their $3.183MM mini mid-level exception available, but they had already used about half of the exception to re-sign Pablo Prigioni. That left GM Glen Grunwald and company with their hands tied as they watched the three days they had to match the offer tick away.

Even the benefits that come from two-year deals can leave teams in the lurch, as the Knicks learned last summer. The team's Early Bird rights weren't enough to keep Jeremy Lin around, since the Gilbert Arenas Provision allowed the Rockets to make a backloaded offer. The Knicks couldn't have foreseen "Linsanity" in 2011/12, and they weren't to blame for the length of his deal, which the Warriors handed out in 2010, more than a year before he wound up in New York. Not every fringe NBA player will develop into a worldwide sensation, but the Bulls found themselves in the same quandary as the Knicks last summer when the Rockets made an identical backloaded offer to Omer Asik, and there was no such thing as "Asiksanity." 

Players entering the NBA for the first time are unknown quantities, and it's not uncommon for lightly regarded prospects turn into solid pros. That's why it pays for teams to sign rookies to three-year contracts. First-round picks wind up with four-year deals, but teams are free to negotiate the terms of their deals with second-rounders and undrafted players. Three of this year's second-round draft picks have already inked three-year pacts, and there will surely be more. 

There are caveats to the advantages of three-year deals, of course. Teams that invite a player to training camp on a contract that extends beyond one year are on the hook for the player's salary if he gets hurt. So, had the Knicks given Copeland a three-year deal, they might have had to shell out about $500K to Copeland last season if he suffered a season-ending injury during training camp  — even though his contract was non-guaranteed. Three-year contracts aren't as valuable when it comes to proven veterans. For instance, it's not likely that after eight years of mediocre play, Ronnie Price will blossom into a sought-after free agent commodity and make the Magic regret signing him for only one season.

Perhaps most importantly, contracts that last more than two seasons aren't covered under the minimum-salary exception, which would force over-the-cap teams to use another exception to accomodate even the cheapest of three-year deals. That, more than any reason, explains why the Knicks didn't sign Copeland for three years. It wouldn't make sense for any over-the-cap team to sign all of its training camp invitees long-term, since tools like the mid-level exception and bi-annual exception are usually reserved for much more reliable help. It also explains why the Bulls, who gave a two-year deal to former second-round pick Asik in 2010, again risked trouble down the road when they signed 49th overall pick Erik Murphy to a deal for just two seasons. It's possible they could have held back the roughly $500K that Murphy figures to earn this year from Mike Dunleavy's mini mid-level contract, but perhaps Dunleavy would have signed elsewhere if Chicago hadn't given him the full value of the exception.

Teams under the cap don't have to make those kinds of choices, so three-year deals make more sense for them. Not surprisingly, most of the unheralded players who signed for three years this summer did so with teams that were able to open cap room. Clubs that keep some cap space into the season can swing deals similar to the Rockets' signings of Tim Ohlbrecht, Patrick Beverley and James Anderson this past winter. Their cases show how the lack of a full guarantee provides a team with even greater leverage in a three-year deal. The Rockets gave them contracts that were guaranteed for year one but non-guaranteed for years two and three. That allowed the team to waive Ohlbrecht and Anderson this summer while hanging on to the more promising Beverley.

In short, when teams give relative unknowns deals that last just as long as the ones they hand out to stars, it isn't necessarily because they think the unfamiliar players are keepers. It's because the teams think those prospects could become coveted players, and front offices want to have the maximum leverage that a three-year contract can provide.

Larry Coon's Salary Cap FAQ was used in the creation of this post.

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