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The Gilbert Arenas offseason primer

We knew a year ago that Gilbert Arenas was going to opt out of his contract this offseason, but now that he officially submitted the paperwork, it's a good time to go over the possibilities for his summer as a free agent.  Things got infinently more complicated this year because of the injury, whereas before he likely would have signed a maximum contract with the Wizards right away.  Now, a maximum contract is certainly not a given, and to make matters more interesting, Arenas has said he'd take less money if it meant that Antawn Jamison would return. 

So what could happen to Arenas this offseason?  Here's a list of important questions and factors that will have an impact on what ultimately happens this offseason.

A very important distinction

Fans often confuse the difference between the "salary cap" and the "Luxury Tax."  Exact figures for this year won't be released until July 1, but it's estimated that the salary cap will be at around 57-58 million, while the luxury tax is at 71 million. The NBA has a soft cap, meaning there are exceptions teams can use in order to go over the cap.  The only provision is that, if teams exceed the luxury tax line because of all the exceptions they've used, they must pay an additional dollar to the league for each dollar over the luxury tax line.  That money goes to teams below the line, which is why the Wizards have been so adament about not exceeding the luxury tax.  They're allowed to do it, but it costs them a lot.

One such exception is the Larry Bird exception, which pertains directly to Arenas.  Theoretically, any other team could offer him that, but they must be that far under the salary cap (and not the luxury tax) to do it.  The Wizards, on the other hand, can offer Arenas any amount of money up until the maximum salary no matter their cap situation.  This is known as the Larry Bird exception. 

Additionally, the Wizards are the only team that can offer Arenas a six-year contract.  All other teams can do no better than five years.

Why can Arenas opt out of his current contract?

After winning the Most Improved Player award in his second season with Golden State in 2002-03, Arenas became a free agent.  Second-round picks become unrestricted free agents after their second season.  In 2003, Arenas became what's known as an "Early Bird" free agent, meaning the Warriors, if they were over the salary cap (as they were at the time), could only offer his as much as the mid-level exception, otherwise known as the NBA's average salary.  After his breakout season, Arenas was worth far more than that, so he instead signed a six-year 65-million-dollar deal with the Wizards after rejecting more money from the Los Angeles Clippers.  (This loophole has since been closed via the "Gilbert Arenas" Provision, which limits the amount of money teams can spend on second-round free agents).

Normally, contracts can only include options for the last year of the deal, but there is an exception with five- or six-year deals.  If a player signs a contract for five or six years, they sometimes are given what's called an Early Termination Option.  This allows them to seek a new deal following either the fourth or fifth season of the contract.  Arenas' contract allowed him to exercise this option after his fifth season, which occurred in 2007-2008, which is why he's able to become an unrestricted free agent before his contract ends.  If he didn't exercise this option, he would become a free agent in 2009.

Other players with Early Termination Options this offseason include Jemaine O'Neal, Elton Brand, Allen Iverson, Baron Davis, Ron Artest, Shawn Marion and Corey Maggette. 

What is the Wizards' cap situation?

The Wizards have three free agents: Arenas, Antawn Jamison, and Roger Mason.  Excluding those three players, the Wizards combined salary is 42,165,117 (the page says 54 million, but that includes Arenas' final-year salary on his old deal, which should be taken away).  That gives them about 16 million dollars under the salary cap and about 30 million under the luxury tax, meaning that the only way they could sign a major free agent would be to dump both Arenas and Jamison.  Keep that in mind when you hear fans complaining that we need to forget Gilbert and use his money to sign another big star.  To do that, we'd have to get rid of both Arenas and Jamison.

Alright, so what's the most Arenas could make?

Arenas' major goal, of course, is to secure a maximum contract, and the best way he can do that would be to re-sign with the Wizards.  The value of a maximum contract depends on the figure of the salary cap and the number of years the player has been in the league.  Arenas just finished his seventh season, which is perfect for him, because the maximum salary for players that have 7-9 years of service is larger than the salary of players who have been in the league for six years of fewer.  Last year, the maximum first-year salary of a seven-year veteran was $15,649,500.  That total is supposed to be just under 30 percent of the cap, meaning that if the salary cap is around 57 million, then a max salary would actually be 16.4 million.  (I came up with that myself, so let me know if that figure is wrong). 

That's the most Arenas can make in his first seson.  His salary can increase by 10.5 percent in each subsequent season, and 10.5 percent of 16.4 million is 1,722,000.  If each season increases by that much, a six-year maximum contract for Arenas would be for just over 124 million dollars.

That's the maximum that Arenas can make, and since no team will be more than 16.4 million dollars under the cap (except maybe Philadelphia if they don't extend qualifying offers to Andre Iguodala and Louis Williams) he can only make the maximum with the Wizards, unless...

What about a sign-and-trade? 

This is the only way that Arenas can secure a max contract and play for another team.  If there is a team out there that wants Arenas for the maximum contract, they can negotiate with him and work out a scenario where the Wizards sign him for six years (so that his Larry Bird rights are fulfilled) and then trade him for players of equal salary (unless it's to a team with cap room, but not enough to sign Arenas outright.  In this scenario, the team could match salary up until the salary, and the remaining money would give the Wizards a trade exception, which they could use to trade for a single player, a la Indiana and Al Harrington or Charlotte and Jason Richardson). 

In this scenario, though, the Wizards could get solid players back for Arenas, which is why it's really the only way Arenas isn't going to be here.  Who would make this trade?  I can't tell you for sure, obviously.  For example, Ivan Carter mentioned the Lakers and Orlando as darkhorses for Arenas in a recent blog post.  The Lakers seem pretty farfetched, because Arenas could only sign for the mid-level exception and they aren't trading anyone for him.  Orlando, on the other hand, could theoretically offer Rashard Lewis straight up, or they could trade Hedo Turkoglu (6.8 million), Jameer Nelson (7.6 million), and J.J. Redick (2.1 million).  I doubt the Wizards do either of those trades, but those are possibilities.

Others will present themselves over the course of the offseason, but keep in mind, if Arenas is to be a max player for another team, the Wizards are guaranteed to get some players back in a sign and trade.

Any historical precedents to this situation?

The only one I can think of is not a good omen.  In 2000, Grant Hill became a free agent after struggling with an ankle injury in the 2000 playoffs.  The Pistons, unwilling to give him a max deal, worked out a sign-and-trade with Orlando, who was willing to give Hill a seven-year contract for the maximum amount (which isn't allowed anymore).  The two teams worked out a sign and trade.  Orlando got Hill, and the Pistons got Chucky Atkins and Ben Wallace.  Hill was never the same player, and Orlando's cap situation suffered greatly. 

The worry is that Arenas will end up like Hill.  It's not the same situation, but the paranoia is understandable.

Alright, so no max for Gilbert.  What can he get?

Undoubtedly, Arenas wants more money than he had made before.  His salary for 2008-09 under his old deal is 12.8 million, meaning he'd like a starting salary somewhere between 12.8 million and 16.4 million.  That doesn't give the Wizards much wiggle room, but it's a little more that people think.  Carter wrote that he expects the Wizards to eventually offer the maximum, but I wouldn't be too sure of that.  Arenas could accept a contract with a starting offer of 14 million and still make much more money than his previous deal. 

My guess is that Arenas gets a contract somewhere between 14 and 15 million in his first year.  Accounting for 10.5 percent raises, that would be a six-year deal for between 106 and 114 million dollars total.  We could make the raises smaller and less proportional, but either way, Arenas' salary will probably be over 100 million.  If we sign Arenas starting at 14 million and Jamison for a deal starting at 11 million, we'd have about 5 million dollars, or most of our mid-level exception, to use before we hit the luxury tax.  However, if you add in the compensation for first- and second-round draft picks, plus the annual rasies that other players receive, that number drops to about 3 million, or roughly half of the mid-level exception.  The Wizards could always dump a role player for a similar one that makes less money, or they could renounce Dominic McGuire for just under one million dollars, but I don't think they'll find much of a market for their role players and it would be foolish to cut McGuire. 

But even at 14 million, no other team will likely have that amount to woo Gilbert, and even if they do (the Clippers and Philadelphia might), they could only offer five years.  Gilbert wants security, so my guess is he won't accept anything but a six-year deal.

Summing it all up

It's a risk either way.  If the Wizards re-sign Gilbert, they will probably have to pay over 100 million for six years, and that's a lot to invest in someone coming off two knee surgeries.  If the Wizards choose to not re-sign Gilbert, they'll have to explore sign-and-trades, and considering Arenas' recent injury history, I doubt too many teams will be offering enticing packages for him. 

I definitely think the Wizards should see what Arenas' sign-and-trade market is like, but barring any offers that blow them away, they should re-sign him, but not for the maximum contract.  Arenas is entering a free agent market that doesn't have any teams willing to pay him straight up.  His only way of making as much money as possible is to sign with the Wizards, unless he wants to hold out in order to force a sign-and-trade, which practically never happens in the NBA (I can't think of anyone who has ever held out).  His recent comments suggesting he'd take less money if it meant the Wizards would re-sign Jamison don't help his cause either. 

Gilbert might end up disappointed, but Ernie Grunfeld is in the driver's seat here, and should be careful not to offer too much too soon.  A deal in the 14-15 million range for the first season should satisfy all parties.  Gilbert gets a raise, and Ernie doesn't have to invest in a max contract for him.