Hoops Rumors Glossary: Gilbert Arenas Provision

Gilbert Arenas hasn’t played in the NBA since 2012, but the Mavericks and especially the Lakers are liable to owe him a debt of gratitude this summer. Jordan Clarkson has been a revelation in the two seasons since the Lakers made him the 46th overall pick, and Dwight Powell, the player drafted immediately before him, has emerged as a promising part of the Dallas rotation this season, averaging 11.2 rebounds per 36 minutes. The problem for their respective teams is that they’re due for restricted free agency this summer and their teams only have Early Bird rights on them, meaning, unless they clear cap space, they’ll be unable to exceed the cap to re-sign them for more than the NBA’s average salary. The situation would ostensibly leave the Lakers and Mavs vulnerable to losing assets to another team, but that’s where Arenas comes in.

The NBA introduced the Gilbert Arenas provision in the 2005 collective bargaining agreement as a way to help teams to retain their young restricted free agents who aren’t coming off rookie scale contracts. The name of the rule stems from 2003, when the Warriors had only Early Bird rights on Arenas as he entered free agency and signed an offer sheet with the Wizards starting at about $8.5MM. Because Golden State could only offer Arenas a first-year salary of about $4.9MM using the Early Bird exception, the Warriors were unable to match the offer sheet and lost Arenas to Washington.

The Arenas provision limits the first-year salary that teams can offer restricted free agents who have only been in the league for one or two years. The starting salary for an offer sheet can’t exceed the amount of the non-taxpayer’s mid-level exception, which allows the player’s original team to use either the mid-level or Early Bird rights to match it. Otherwise, a team without the necessary cap space would be powerless to keep its player, like the Warriors were with Arenas.

An offer sheet from another team can still have an average annual salary that exceeds the non-taxpayer’s mid-level, however. The annual raises are limited to 4.5% between years one and two, and 4.1% between years three and four, but a significant raise can be included between the second and third years of the offer. A team’s cap space and leaguewide maximum-salary limits dictate the average annual salary for the entire contract, since the average salary still has to fit under the cap and a player can’t make more than the max. Let’s use Clarkson as an example to see how the Arenas provision functions.

Clarkson under normal circumstances would be eligible for a maximum-salary deal that starts at a projected $20.4MM next season. Offer sheets in such a circumstance could cover four years with 4.5% raises, so the total value of the contract would be $87.108MM, based on that $20.4MM projection. However, the Arenas provision reduces the total value an offer sheet could cover to $56,893,260, again based on that $20.4MM max projection. Clarkson couldn’t make more than the mid-level in the first season and a 4.5% raise on the mid-level in the second season, and he’d be limited in year three — the year that the Arenas provision allows a massive raise — to no more than he could make in year three on a standard offer sheet. Here’s how the maximum Arenas provision offer sheet to Clarkson would break down:

• Year 1 — $5,628,000
• Year 2 — $5,881,260
• Year 3 — $22,236,000
• Year 4 — $23,148,000
• Total — $56,893,260

A few additional restrictions apply on such offers, since teams have to promise the full value of the mid-level and a 4.5% raise for year two in order to give the massive jump in salary between years two and three. Such an offer has to be fully guaranteed, and no bonuses are allowed.

The Lakers, with Clarkson’s Early Bird rights, are limited to offering him a contract with a starting salary of no more than 4.5% greater than this season’s average salary. That means it would start at roughly $6MM. The raises couldn’t exceed 7.5%, and it could run only four seasons.

• Year 1 — $6,000,000
• Year 2 — $6,450,000
• Year 3 — $6,900,000
• Year 4 — $7,350,000
• Total — $26,700,000

However, if the Lakers clear cap space, as they’ll likely be capable of doing this summer, they would be allowed to offer Clarkson a full maximum-salary deal that’s not subject to the Arenas provision rules. As with standard free agents, the incumbent team can offer an extra year and 7.5% raises. So, the Lakers could give Clarkson an offer like this, based on the $20.4MM max projection:

• Year 1 — $20,400,000
• Year 2 — $21,930,000
• Year 3 — $23,460,000
• Year 4 — $24,990,000
• Year 5 — $26,520,000
• Total — $117,300,000

Clarkson shouldn’t wait around for that sort of offer, since the Lakers have no incentive to give him a contract more than twice the value of what any other team could. It would behoove them to either offer him a deal in line with what another team could give or, as Eric Pincus of the Los Angeles Times argues, simply wait for him to sign an offer sheet with another team and match it. If the Lakers gave Clarkson a deal worth $56,893,260, the salaries — and the associated cap hits — would be spread out conventionally, with raises of no more than 7.5% from season to season. If the Lakers matched an offer sheet from another team, Clarkson’s salaries and cap hits would be back-loaded as in the first example above. That would perhaps be burdensome in years three or four, but having Clarkson at between $5MM and $6MM the next two seasons would represent a bargain that would give the Lakers added cap flexibility.

Because the first-year salary of the offer sheet doesn’t exceed the non-taxpayer mid-level exception, the Lakers could stay over the cap and use their mid-level exception to match it, even though that large a third-year raise wouldn’t typically be permitted when using the mid-level. If the Lakers chose not to match, the cap hits for Clarkson’s new team would be spread out in equal fourths of $56,893,260, even though he’d receive paychecks based on the back-loaded scale.

Of course, just because a club is given the opportunity to use the Arenas provision to keep its restricted free agent doesn’t mean it will necessarily have the means. Here are a few situations in which the Arenas provision wouldn’t help a team keep its restricted free agent:

• If the team only had the taxpayer mid-level exception or room exception available, it would be unable to match an offer sheet for a Non-Bird free agent if the starting salary exceeded the taxpayer mid-level or room exception amount.
• If the team used its mid-level exception on another player, it would be unable to match an offer sheet for a Non-Bird free agent. A team could use Early Bird rights to match if they have them, however.
• If the player has three years of NBA experience, the Arenas provision would not apply — only players with one or two years in the league are eligible.

Note: This is a Hoops Rumors Glossary entry. Our glossary posts will explain specific rules relating to trades, free agency, or other aspects of the NBA’s Collective Bargaining Agreement. Larry Coon’s Salary Cap FAQ was used in the creation of this post. An earlier version of this post appeared on May 9th, 2012, written by Luke Adams.