The Chandler Parsons Contract: Salary Cap Implications of Exercising or Declining the Team Option

Chandler Parsons Contract

The decision on whether to exercise their team option on Chandler Parsons’s contract is among the Rockets’ biggest quandaries heading into the summer of 2014

Back on April 8, 2013, I (re)wrote a piece explaining the intricacies of the NBA player contract of Chandler Parsons.  This article is not intended to supersede that prior piece but rather is meant to expand upon it in certain respects and to explore the salary cap mechanics of Parsons’s contract this summer and next, depending on what avenue the Houston Rockets elect to take regarding Parsons.  For those who have not yet read the prior piece, I encourage you to do so, as it will provide some background that will be helpful in understanding some of the concepts addressed here.

Also, back on September 10, 2013, Ben DuBose wrote an opinion piece about the Parsons contract situation.  It is a terrific read.

This article is intended solely as an analysis of the salary cap effects of certain decisions that the Rockets make with respect to Parsons’s contract and is not intended to express an opinion on such decisions.

The Partial Guarantee And The Team Option

By Parsons having not been waived by the Rockets before January 1, 2014, Parsons’s salary for the 2014-15 season ($964,750) is now partially guaranteed for $624,771; and if Parsons is not waived by June 30, 2014, his 2014-15 salary becomes fully guaranteed.

And, as most avid readers on ClutchFans.net know by now, Parsons’s contract also contains a team option for the 2014-15 season, which presumably must be exercised by June 25, 2014, the day before the 2014 NBA Draft.  (NOTE:  Media reports often confuse a contract year having non-guaranteed salary obligations with a “true” team option.  There are differences between the two, which Larry Coon explains here in his excellent NBA Salary Cap FAQ.)

This means that, despite having already guaranteed Parsons $624,771 for the 2014-15 season, the Rockets have the right to decline their team option, essentially “eat” that money, and potentially make Parsons a restricted free agent.  If the Rockets instead exercise that team option, then when his contract expires in 2015, Parsons will be an unrestricted free agent.

Let’s take a closer look at the salary cap implications of the Rockets either exercising or declining that team option.

(In the interest of full disclosure, I have never before analyzed an NBA player contract that contained both a previously-earned partial guarantee and a team option in the same season.  Hence, my analysis is based largely on educated assumptions rather than an iron-clad understanding of the actual mechanics of this particular contract.)

Exercising The Option

If the Rockets elect to exercise their team option on Parsons’s contract, then Parsons will earn — and will count against the salary cap in the amount of — only $964,750.  And since $624,771 of that amount has already been earned, the marginal increase to the Rockets’ salary cap upon their exercise of the option will be a mere $339,979.  That is less than the rookie minimum salary or an incomplete roster charge (each of which is $507,336 for the 2014-15 season).

Because of Parsons’s miniscule 2014-15 salary, his cap hold on the Rockets’ books when he hits free agency until he is signed (either by the Rockets or another team) will be a paltry $1,833,025.  This figure is equal to 190% of Parsons’s 2014-15 salary, which is the method used to determine cap holds for players (other than those coming off rookie scale contracts, which Parsons is not) making below the average player salary and for whom a team holds full Bird rights.

By having such a small cap hold for Parsons, the Rockets would be able to use all of their available cap room in 2015 — except for that $1,833,025 cap hold amount — to pursue outside free agents (in a free agent class that is expected to include Kevin Love and LaMarcus Aldridge), then later exceed the salary cap to re-sign Parsons to any amount using his Bird rights.

Declining The Option

If the Rockets elect not to exercise their team option on Parsons’s contract, and if the Rockets extend a qualifying offer to Parsons (more on that below), then Parsons would become a restricted free agent.

By making Parsons a restricted free agent, the Rockets would have the right to match any offer he receives from another team.  Typically, restricted free agents whose teams are clearly interested in re-signing them do not receive the level of interest that a similarly-situated unrestricted free agent does, thereby “chilling the bidding” on the player and potentially allowing his original team to re-sign him at a relatively lower salary.

Because Parsons would have been under the same contract with the Rockets for three seasons (2011-2014), the Rockets would have full Bird rights on Parsons and could exceed the salary cap to re-sign him to a five-year deal at any amount up to the maximum salary (expected to be a starting salary in the $14 million range for players with 0-6 years of service).

(NOTE:  Parsons is not subject to the “Gilbert Arenas Rule” that governed the structure of the contracts that the Rockets handed out to Omer Asik and Jeremy Lin.  The Arenas Rule is limited solely to one- and two-year veterans.  There is no “poison pill” that another team could work into an offer sheet for Parsons.)

No matter what Parsons signs for as a free agent in 2014, his partial guarantee of $624,771 would count as an additional (and separate) amount on the Rockets’ salary cap.

If Parsons becomes a restricted free agent, then his cap hold next summer will be the greatest of (a) his “ordinary” cap hold of 190% of his 2013-14 salary (or $1,760,350), (b) the first year salary in any offer sheet he signs that the Rockets wish to match, or (c) his qualifying offer.

A qualifying offer is the minimum amount that a team must offer to a player (as a one-year deal) by June 30 each year in order to make him a restricted free agent.  Without a qualifying offer, the player automatically becomes an unrestricted free agent.  Under the prior CBA, this would have been a similarly low amount to his “ordinary” cap hold. However, the new CBA changed the rules regarding qualifying offers to young players who significantly outplay their draft status.

Under the new CBA, if a young player taken outside the first half of the lottery meets certain “starter criteria” in either the year prior to his free agency or averaged over the two years prior to his free agency, then he is entitled to a higher qualifying offer.  In Parsons’s case (as a second round pick), he would be entitled to the same qualifying offer as the 21st selection of his draft class.  That player was Nolan Smith; and although the Blazers declined a team option on Smith’s contract, had he been under contract until he hit restricted free agency, his qualifying offer would have been in the amount of $3,270,004.

Based on his performance this season and last, Parsons has presumably already met these starter criteria.  (For more information about restricted free agency, qualifying offers and the starter criteria, read this portion of Larry Coon’s NBA Salary Cap FAQ.)

Therefore, if Parsons is made a restricted free agent in 2014, his overall cap impact would be the sum of his qualifying offer ($3,270,004) and his partial guarantee stuck on the books ($624,771), for a total of $3,894,775.

On the other hand, if Parsons is not extended a qualifying offer and becomes an unrestricted free agent in 2014, his overall cap impact would be the sum of his “ordinary” cap hold ($1,760,350) and his partial guarantee ($624,771), for a total of $2,385,121.

While the Rockets do not expect to have much (if any) salary cap room in the summer of 2014 assuming that no further roster moves are made, it is entirely possible that subsequent roster moves (such as those involving Asik and/or Lin being traded for less salary or expiring contracts) could create a situation in which 2014 cap room becomes a legitimate priority for the Rockets.  In such an event, the amount that Parsons counts against the cap could become a material concern.

Conclusion

The Houston Rockets face a major decision on whether to exercise their team option on Parsons.  Of course, there are various other factors in play here besides just the salary cap mechanics associated with each decision.  Such factors include the team’s need for salary cap room in light of subsequent roster moves (such as an Asik trade), the availability of outside free agents, any additional leverage held by NBA super-agent Dan Fegan (hired by Parsons this past summer), and, perhaps most importantly, the “human element” of dealing with Chandler Parsons on a personal level.

When all factors are included, there is no easy choice for the Rockets.  But it is a choice that will be closely followed by Rockets fans.

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