Financial Impact Of Leonard/DeRozan Blockbuster

The blockbuster trade completed today by the Spurs and Raptors involving Kawhi Leonard and DeMar DeRozan will, of course, have massive on-court ramifications for both teams. However, it’s also worth taking a closer look at the deal from a financial perspective to see exactly how it worked, how it will impact the players involved, and how it will affect the Spurs’ and Raptors’ short- and long-term cap outlook.

Let’s dive right in and examine the financial implications of today’s mega-deal…

No more Designated Veteran Extension for Kawhi

By earning a spot on the All-NBA First Team in two of the last three seasons, Leonard became eligible for a super-max contract known as a Designated Veteran Extension. Generally, players with Leonard’s years of NBA experience are only eligible for maximum-salary contracts worth up to 30% of the cap, but Kawhi’s All-NBA nods qualified him for a deal starting at up to 35% of the cap in 2019/20.

As we outlined on Tuesday, a five-year Designated Veteran Extension starting in ’19/20 is currently worth a projected $221MM+ based on the NBA’s latest cap projections. However, since a player can only get that form of contract extension from the team that signed him to his initial rookie scale extension, Leonard will no longer qualify. Instead, he’ll be eligible next summer for a five-year deal with the Raptors worth a projected $189.66MM, or a four-year contract with another team worth a projected $140.6MM.

While many observers will say that Leonard “lost” $30MM+ (or $80MM) due to today’s trade, that’s not necessarily accurate. There’s no guarantee that San Antonio would have put that Designated Veteran Extension offer on the table for Kawhi as he came off an injury-plagued season, so it’s not as if he formally turned down $221MM+. Depending on how his 2018/19 season plays out, there’s also no guarantee he’ll be in line for a max deal next offseason — a lot can change in a year.

Still, Leonard’s maximum possible earnings for the next several years have a lower ceiling as a result of today’s trade.

Leonard gets a trade bonus

It wasn’t all bad news for Leonard, who lost access to that super-max extension and will move to Canada from Texas, a state with no income tax. His contract included a 15% trade kicker, so he’ll receive a modest bonus as a result of today’s trade.

Because player-option years aren’t taken into account when calculating trade bonuses, Leonard’s 15% trade kicker will only apply to his $20,099,189 salary for 2018/19. His 15% bonus will be worth $3,014,878, increasing his ’18/19 earnings to $23,114,067.

How salary-matching worked in the trade

Due to the size of the contracts changing hands in this deal, both the Raptors and Spurs were permitted to take back up to 125% (plus $100K) of their outgoing salaries. This was slightly complicated by the fact that Leonard counted for $20,099,189 (no trade kicker) from the Spurs’ perspective and $23,114,067 (15% trade kicker) from the Raptors’ perspective.

For the Spurs, simply sending out Leonard wasn’t enough to take back DeRozan ($27,739,975), let alone Jakob Poeltl ($2,947,320). San Antonio had to include more salary in the swap, which was one reason why Danny Green ($10,000,000) was part of the deal. Combining Leonard’s and Green’s cap hits, San Antonio was eligible to absorb up to about $37.72MM. DeRozan and Poeltl comfortably fit within that threshold.

For the Raptors, simply sending out DeRozan’s $27,739,975 salary allowed them to take back up to about $34.77MM. That was more than enough to absorb both Leonard and Green, even after taking into account Kawhi’s trade kicker.

Since Poeltl wasn’t needed for salary-matching purposes, the Raptors will create a traded player exception worth his $2,947,320 salary. It’s the only TPE generated in the deal, and Toronto will have until July 18, 2019 to use it.

Impact on 2018/19 cap outlook

In an unusual development, both the Spurs’ and Raptors’ team salaries will actually increase as a result of this deal due to Leonard’s trade kicker. That’s not a big deal for San Antonio, whose team salary will only increase very marginally — the Spurs are still well below the luxury-tax threshold.

For the Raptors though, the modest increase in 2018/19 salary will have an impact. By my count, the club now has about $138.99MM committed to 13 players. That would result in a total tax bill of about $29.59MM, and that number will increase when Toronto fills out its roster with a 14th player.

A cost-cutting move is a possibility for the Raptors. C.J. Miles ($8,333,333) and Norman Powell ($9,367,200) became more expendable today with Leonard and Green joining the small forward mix, so perhaps Toronto will explore moving one of them. For now though, this projects to be one of the league’s most expensive rosters.

Impact on 2019/20 and beyond

While the Raptors added a little salary for 2018/19, they cleared their cap for future seasons in today’s deal. DeRozan remains under contract for $27,739,975 in 2019/20, with a player option worth the same amount in 2020/21, while Poeltl has a ’19/20 team option worth $3,754,886. Conversely, Leonard and Green are on expiring contracts.

Prior to today’s trade, the Raptors had $113.27MM in projected guaranteed money on their cap for 2019/20, with player options for Miles and Jonas Valanciunas bringing that number up to $139.62MM. In other words, the team was a strong bet to remain in the tax again next season.

By removing $31.49MM from that total in today’s deal, the Raps no longer project to be a tax team in 2019/20. They probably won’t have cap room, which would be a problem if Leonard walks. But the club would be loaded with expiring contracts in that scenario — by 2020/21, only Powell ($10,865,952) and OG Anunoby ($3,872,215) remain on the books, creating a ton of flexibility for Toronto to go in any number of directions a couple years from now if the Leonard experiment doesn’t work.

As for the Spurs, they’ve significantly reduced their potential cap flexibility for next summer, with their projected guarantees increasing from about $59.16MM to $90.65MM, by my count. That total doesn’t include Marco Belinelli‘s player option or Bryn Forbes‘ salary, since the exact details of those newly-signed contracts aren’t yet known. With a cap of $109MM projected for 2019/20, the Spurs may not end up having any real space available.

The Spurs’ 2020/21 outlook might not be impacted by the deal, since DeRozan and Poeltl can both reach free agency that year. However, if DeRozan exercises his $27,739,975 player option and the Spurs look to lock up Poeltl beyond his rookie deal, those deals would once again eat into the club’s projected space.

Photos courtesy of USA Today Sports Images. Salary information from Basketball Insiders was used in the creation of this post.