Analysis: Houston and Nene get creative on new contract

UPDATE #2: According to a report from The Athletic’s Shams Charania, Nene’s contract was not approved as written. It will go through and Nene is under contract with the Rockets, but his incoming and outgoing trade value will be his base salary, without any of the likely bonuses attached to his trade value.

This ruling could really hurt the Rockets as they try to upgrade their team ahead of February’s trade deadline.

The remainder of his article is as it was originally written and therefore does not reflect the above ruling.

For those of us who are interested in the minute details of NBA team-building and the salary cap, Nene and the Houston Rockets have provided us with endless discussion topics. From Houston flubbing the Over-38 Rule in 2017 and almost losing him as a result to him opting out of the third year of that contract to become a free agent this summer to his latest contract with the Rockets, it seems the Rockets and Nene are trying to touch every clause in the CBA throughout the last bit of his NBA career.

The latest contract was signed last week and contains some very intriguing details. The full details of his contract, now that I have more than 280 characters to use:

Nene and Houston signed a two-year contract that will pay him the minimum in each year in base salary and enough likely bonuses to take him to $10 million in total salary each season. His 2019-20 base salary will be $2,564,753, with the remainder ($7,435,247) in likely bonuses. For 2020-21, his base salary rises to $2,692,991 and his likely bonuses fall to $7,307,009 to keep him at exactly $10 million in the second year.

The early speculation was that the bonuses were tied to minutes played, but a league source tells me that the bonuses are not tied to minutes. There are two things to which bonuses cannot be tied: games dressed and a specific date. For example, Nene could earn his bonus for playing in a certain number of games, but he cannot have a clause in his contract that states he will earn his bonus by being on his team’s Active List for a certain number of games, nor can he earn his bonus for being on the team past February 15. Outside of games dressed and being on the team’s roster last a certain date, bonuses can be tied to any positive individual or team statistical achievement.

UPDATE #1: ESPN’s Bobby Marks has the full breakdown of Nene’s bonuses:

The link Marks attached includes the pertinent information for the bonuses, all of which include team wins as part of the criteria. This extra information adds significantly to Nene’s trade value because any team that didn’t win at least 52 games last year cannot count his bonuses as likely for trade purposes. Therefore, if a team that did not win 52 games last year (of which there are 24 in the league) trades for him, he only counts for $2.6 million in incoming salary, while still counting for the full $10 million in outgoing salary for the Rockets. If that team were to send up to $12.6 million in salary to Houston for Nene, then that team would generate an even larger trade exception ($12.6 million minus $2.6 million), which makes him a better trade chip for those teams than for teams who did not win 52 games last year.

The fact that Nene’s bonuses scale up based on how much he plays throughout the year means that Houston still has full control over how much of those bonuses he earns, as they can sit him down and ensure he doesn’t make his games played bonus triggers.

It’s very important that the Rockets structured his bonuses as likely and not unlikely, as unlikely bonuses are capped at 15 percent of a player’s base salary in the first year of a contract, but likely bonuses are not capped in any way. Likely bonuses already count toward the cap, whereas unlikely bonuses do not, so there was never a need in CBA negotiations to put a limit on likely bonuses. Perhaps that rule will be revisited in the next CBA, but for now, Houston is able to take advantage of the loosened rules surrounding likely bonuses.

This isn’t the first time we’ve seen this sort of contract, but Nene’s is the highest-profile contract of this nature, at least in the last little while. In 2016, Yi Jianlian signed a similar contract with the Los Angeles Lakers, but the Lakers waived him after preseason.

For tax purposes, bonuses are only counted if they’re earned; the likely and unlikely designations have no impact on the team’s tax bill. If Houston were to keep Nene on the roster through the trade deadline, the only thing that would affect their tax bill is whether he actually earned the bonus or not. Assuming the team has full control over whether he earns that bonus, they will probably only have to pay him the $2.6 million base salary and he will count at that figure on their luxury tax bill. At this point, the Rockets are about $353k under the luxury tax threshold (including Nene’s $2.6 million), so they have a very good incentive to ensure he doesn’t hit that bonus.

The second year of the contract is fully non-guaranteed as long as he’s cut before February 15, 2020, which just so happens to be a few days after the 2020 trade deadline, which means that the Rockets (or another team) can cut him right after the deadline and he wouldn’t count against their 2020-21 books at all.

Nene’s trade value is perhaps the most important aspect of this contract. Likely bonuses count against the salary cap in the same way as base salary, which means they also count toward Nene’s value in a trade – he will count in Houston’s trade math as $10 million in outgoing salary, which gives them a rather large “human trade exception” to use as they approach the 2020 deadline in late January and early February. Should the Rockets trade Nene alone, he could bring back a player making up to $12.6 million, though that would severely impact their tax bill. Making that trade would add nearly $10 million to their taxable salary, which would push them well into the tax. The Rockets will have to see where they stand in the league’s hierarchy around the deadline to assess whether that extra expenditure is worthwhile.

His February 15 guarantee date for 2020-21 is another strong indicator that the Rockets signed this deal specifically to explore trade opportunities. The 2020 trade deadline is February 6, which gives whichever team has Nene at the end of the madness enough time to evaluate whether they want to keep him for a potential playoff run or cut him loose. Cutting him will leave no mark on their 2020-21 books, but keeping him would lock in $2.7 million in base salary for that year. Additionally, he would lose much of his trade value in 2020-21; assuming he misses his bonuses this year, those bonuses would be reclassified as unlikely going into 2020-21 and his cap hit and trade value would drop accordingly, down to his $2.7 million base salary.

To fully cross their Ts and dot their Is, the Rockets made sure that Nene could not block a trade in any way by adding the second non-guaranteed year to his contract. If a player signs a one-year contract and would have Early Bird or full Bird rights at the end of that deal, then he also has an implicit no-trade clause in his contract, as he would be bumped down to Non-Bird rights if he were traded. This clause affects quite a few players each year; Rodney Hood had to waive his implicit no-trade clause to join the Portland Trail Blazers last season, for example. However, by signing Nene to a two-year contract, even with the second year fully non-guaranteed, Houston avoids giving him that implicit no-trade clause and can trade him to any team in the league without his approval.

Nene won’t be eligible to be traded until January 15, rather than the normal December 15 for most free agents signed each summer. Since he was signed using his full Bird rights and received a raise of more than 20 percent over his previous year’s salary – $10 million is clearly more than 120 percent of the $3.65 million he made last year, and his full $10 million salary counts here as well, not just the base salary – he will not be eligible until January 15, which gives the Rockets just about three weeks to solidify a deal for him, should they find one they like before the deadline.

One other small bookkeeping note for the Rockets – Danuel House was previously signed using the Non-Taxpayer Mid-Level Exception, but because Nene’s salary would push Houston over the apron, they’ll have to convert House to the Taxpayer Mid-Level Exception, which doesn’t trigger the apron. Teams are allowed to retroactively convert players from the NTMLE to the TMLE, as long as the contract signed under the NTMLE does not break through the limits of the TMLE, which House’s deal does not. They cannot convert players the other direction, as Denver found out last year, nor can they convert any other type of contract to the TMLE.

How the Rockets move forward from here will be of great interest, both with a potential Nene trade and with Iman Shumpert, who is still unsigned as a free agent. Houston holds Shumpert’s Bird rights as well and could sign a very similar deal to give Houston yet another human trade exception to use around the deadline. Shumpert’s minimum salary clocks in at $2.32 million, which just so happens to fit under the tax for the Rockets, who would be $2.33 million under the threshold if they were to cut Ben McLemore, who is only guaranteed $50,000 on his $2.0 million contract for the 2019-20 season. Signing him to a deal with $2.32 million in base salary and a ton of likely incentives would be a great way for Houston to create another significant salary to be used in a trade, if Shumpert is amenable to it. The same cannot done with Kenneth Faried, who only has Non-Bird rights with the Rockets and therefore cannot be signed to a contract with massive likely bonuses, as Houston would have to dip into an exception to sign that contract and they don’t have an exception large enough to accommodate the base salary and bonuses.

All in all, this is a very creative contract from Daryl Morey and the Houston organization. Everything in the contract points to Nene essentially being a human trade exception and assuming the club fully controls his bonuses, he won’t push them over the tax for 2019-20 if they don’t want him to do so. Nene instantly becomes perhaps the most likely player to be moved during the upcoming season – it’s a fantastic opportunity for the Rockets to either trade him outright for a player who can really help them in their pursuit of a championship or aggregate his salary with other players on their books to land yet another big fish. There are endless possibilities, but if they were to aggregate his salary with Clint Capela, for example, they could trade for a player making up to $31.2 million. Eric Gordon can’t be traded, and presumably James Harden (and Russell Westbrook, perhaps) are untouchable in trade talks, but Houston still has plenty of bullets to fire if they want to get a deal done. Add in another small contract to Nene and Capela and they’re up to the minimum amount of salary needed to trade for a max player, should someone who signed this summer become unhappy in his new situation.