The numbers behind Mirotic's contract situation

This is the third of four articles on 2011 Chicago Bulls draft selection Nikola Mirotić. Today we’ll dig into the calculus behind exactly what options Chicago has to bring him over before the 2017-2018 season (yes, you read that right), given the limitations of the new CBA.

Sharp-shooting Real Madrid PF Nikola Mirotic has been tearing it up with Real Madrid, becoming the first player in the history of the Euroleague to earn the Rising Star Trophy two consecutive years.  Salivating Bulls fans have repeatedly asked what options the Bulls have to bring the Spanish-naturalized Montenegrin over before his contract expires, and beat writers have generally shrugged the question off by saying, in effect, “it’s complicated.”

As it turns out, it is very, very complicated.  So we’ve rolled up our sleeves to do all of the painstaking computations for the curious.  The rest of the article is like sitting through a high school math class, so I’ll start with the conclusions up front:

  1. It is cost prohibitive for Mirotic to come over before the 2014-2015 season.
  2. The Bulls will have to use an MLE, not the Rookie Scale, to sign Mirotic (they have this option beginning in 2014).  This means, barring trades, Mirotic will be the major addition in the year they bring him over - they will be unable to sign another major free agent (Chicago will only have minimum contracts and possibly the Bi-Annual Exception left to offer).
  3. The full Mid-Level Exception will probably be required to sign Mirotic.  The mini-MLE would be a significant pay cut even if the buyout were negotiated down to zero.  This means the Bulls will only be able to sign him in a non-taxpaying year.  Deng’s contract comes off the books in 2014, Boozer’s in 2015.

In the 2011 Draft, the Chicago Bulls traded their 28th and 43rd picks to Minnesota in exchange for the Rocket's 23rd pick (owned by the Timberwolves), which was used to select Mirotic.  They now own his “draft rights,” which is to say that he must sign with Chicago if he comes to the NBA.  Including a unilateral team option, Mirotic is under contract with Real Madrid through the 2016-2017 season.  The Bulls have his draft selection “on pause” until a year after his European contract expires, so they own his draft rights through 2018.

If Mirotic does not sign with the Bulls by 2018, he has the right to re-enter the draft and be selected by another team (this would be foolish, however, since the Bulls can pay him a lot more money).  If Mirotic does not sign with the Bulls by 2014 - three years after he was selected - Chicago can treat him as any other free agent, paying him with a Mid-Level Exception or…ahem…cap space (yeah right).  If Mirotic were to re-enter the draft in 2018 and be selected by a new team, he’d be stuck with a rookie scale contract again, though he would be selected much higher once free of his Spanish contractual obligations.  If he did re-enter the draft, but also failed to sign with his new team for an entire year, he would become a full-fledged free agent in the summer of 2019.

The Buyout

An early termination clause in Mirotic’s contract with Real Madrid sets his “buyout” at $3,149,000 [see Note 1] to defect to an NBA team any earlier than 2017-2018.  The new CBA limits the amount that the Bulls can pay without having it count against team salary.  Here is what they can contribute each summer:

Buy out rates

Signing Bonus Limitations

Chicago can pay more than the above listed amounts, but any more will count against team salary, and therefore essentially comes out of Mirotic’s pocket (Chicago is paying a portion of his salary to Real Madrid instead of Mirotic).  Money paid towards an international buyout (in excess of the excluded amount) is treated as a signing bonus for salary cap purposes.

Signing bonuses are often a raw deal for the players.  While they get a good chunk of change upfront (up to 15% of the total value of the contract), the overall value of the contract has to be slightly less in order to include the bonus.  While the entire signing bonus is paid right away, for accounting/salary cap purposes it is divided up evenly amongst guaranteed years (years not 100% guaranteed are prorated).  For example, normally a team (over the soft cap) could sign a free agent for the full MLE of $5 million (in 2012), with a max raise of $225,000 per year (4.5% of the first year salary).  A four-year contract would be worth $21,350,000.  If they gave him the maximum signing bonus, however, the bonus is divided up evenly amongst all guaranteed years (presumably all four) to count against team salary.

The first year still must fit within any exceptions or restrictions, leading to a smaller “base” salary.  The 4.5% raise only applies to the base salary, while the ¼ of the signing bonus remains constant in each year.  This leads to less money overall.  To maximize the signing bonus in the case of the 2012 MLE, this “base” salary would be $4,207,400.  The signing bonus would be $3,170,400, with $792,600 (one quarter) counting against team salary in each of the four years.  The first year base salary ($4,207,400) plus that year’s share of the bonus ($792,600) still falls within the $5,000,000 MLE.  But now the player’s raises are limited to $189,333 per year (instead of $225,000).  The total value of the contract now is worth $21,135,998.  In exchange for receiving a hefty payment upfront, the player gives up $214,000 overall (not too bad).

Rookie Scale

The situation is much more difficult, however, with rookie scale contracts.  For rookies drafted in the first round, there is a set salary scale for each draft position (#1 makes more than #30).  Teams must sign the player for somewhere between 80% and 120% of this scale (rookies are almost always signed for 120%).  All rookie contracts are for four years, 100% guaranteed in the first two seasons and not guaranteed in the second two seasons.  Any signing bonus (international buyouts count as signing bonuses) must be evenly divided between the first two seasons, with the first year salary falling within the 80%-120% restriction both with and without the bonus.  Mirotic was drafted at #23, so here is his set rookie scale salary in each year:

Mirotic’s max signing bonus for 2012-2013 would be $803,040, which is double the difference between his 120% salary and his 80% salary (because it is applied to both years 1 and 2) [Note 2].  But because his base salary is only 80% of the scale, Mirotic would take a pretty big financial hit over the life of his four-year contract.  In order to receive $803,040 upfront, he would earn more than $1 million less overall.  The NBA is nothing short of a loan shark, charging that kind of interest for cash advances (125% for a two year loan!), and it still wouldn't cover the entire buyout.  Mirotic is clearly better off with a private loan of some sort.  The table below shows the impact of accepting a max signing bonus to assist with the buyout:

But we haven’t yet factored in the opportunity cost of Mirotic giving up his $4,408,600 Real Madrid salary.  When we subtract his current salary, a negative number implies he's giving up money by coming to the NBA, a positive number means he's making more, and zero means he breaks even.  His Real Madrid salary runs through 2016-2017, but for the sake of comparison we’ll assume that after 2017 he could continue to sign one-year contracts with Real Madrid each year for the same amount (in all likelihood he could get a raise).  The updated chart shows the impact of the buyout and giving up his salary, and the total cost to Mirotic.  Note that the signing bonus is not included in the total value of the contract, since it is paid directly to Real Madrid (otherwise it would be double-counted since it is already reflected by Mirotic paying a smaller amount himself).

As you can see, Mirotic would have to give up an obscene amount of money ($14-$16 million) to leave a team and country that he loves for a Rookie Scale contract before his Real Madrid contract runs out in 2017.  Starting in 2014, though, Chicago’s options open up.  They will be able to pay him the full Mid-Level Exception (or the mini-MLE in years where they are above the Luxury Tax threshold), and they can minimize the negative impacts of a signing bonus by guaranteeing all four years of the contract (instead of just the first two).  The first table shows what MLE and mini-MLE contracts would look like (both with and without a signing bonus of the remaining buyout or the max 15%, whichever is less), while the second table includes the differential of his foregone ACB salary.

By subtracting his current Real Madrid salary from each year, it becomes clear where Mirotic’s break even point is:

Money isn’t everything, but anything short of the full MLE will cost Mirotic substantially.  All indications are that he is very happy living in Spain, a key contributor for one of the better teams in the league widely considered the best outside of the NBA (the ACB).  There is no reason to believe that he would pay millions of dollars to leave.  Starting in 2014, and only with the full MLE, it will begin to make financial sense for Mirotic to transfer over to the NBA.

Looking at the data, I predict that Mirotic will come over to the NBA in Chicago’s first non-taxpaying year on or after the 2014-2015 season.  This will either be in 2014-2015 (Deng’s contract expiring in conjunction with a Boozer amnesty), or in 2015-2016 (Boozer’s contract expiring, letting some non-guaranteed role players walk).  It will require the full MLE to pay off his entire buyout, and it will also require the full MLE for Chicago to match or raise his current salary.  I can’t see Mirotic coming early for the mini-MLE. Even after his European contract runs out the mini-MLE would be a pay cut, though it could be argued that he would be playing for a larger contract three years later.  All of the numbers could be tweaked slightly by fluctuations in the exchange rate (if the euro continues to tank, the NBA is more appealing) or by negotiating his 2,500,000€ buyout down (which the Bulls are allowed to do with Real Madrid), but I stand by the prediction that it will take the full MLE.  And he certainly seems to be worth it.

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All CBA information has been taken from Larry Coon’s legendary Salary Cap FAQ website.  Larry Coon is a computer scientist that is famous for being the only human on earth that understands the intricacies of the unnecessarily complex Collective Bargaining Agreement.

Note 1:  Based on the euro-dollar exchange rate on the morning of 15 June.

Note 2:  It appears that international buyouts in conjunction with rookie scale contracts are exempt from the signing bonus cap (15% of the total value of the contract), as the rookie scale example in question 74 of the Salary Cap FAQ breaks the 15% rule.  Attempting to confirm.  If the 15% rule does apply, Mirotic’s max bonus in 2012 would be $732,878 (instead of $803,040) based on a base salary of 83% of the Rookie Scale and a 15% signing bonus allocated to the first two years.  

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  • This only takes into account his salary from teams. His endorsement potential goes up by an order of magnitude if he plays in the NBA. And if he is an all-star level player, it goes up by two orders of magnitude. Plus, if he is an all-star or near all-star level talent, it's his second contract where he really cashes in. For a scoring big man, he would easily be in the $10+ million range. In that case, it is in his best interest to get the countdown started on that deal as soon as possible. However, there is the risk of injury and it is a gamble to forego the guaranteed money you've demonstrated above.

  • In reply to bullshooter:

    A bird in the hand...

    I suppose you could make that argument for the mini-MLE, but a Rookie Scale contract is still too much of a financial bloodbath. Even if it wasn't a huge gamble, it wouldn't make much sense. His ceiling is probably five million euros/year in Spain, which is six and a quarter million dollars. To give up 16 million dollars (in both lost salary and actual payouts that he would owe immediately) to possibly be in the "$10 million range" four years from now would be pretty nuts - he wouldn't break even for eight years.

    Not only is there a risk of injury or decline, but there's no guarantee he'll thrive in the NBA or become an All-Star. And even if he does, he would be foolish to rely on endorsements. While the top players get ridiculous promotional contracts, mid-level players and borderline All-Stars get virtually nothing. I don't live in Chicagoland and I've never seen Deng on TV outside of games or NBA commercials.

    Chicago's going to have to match his present salary if they want him in 2014. If they low-ball him using future contracts and endorsements as an excuse, expect him to stay in Europe until 2016 or 2017.

  • In reply to Gringo Rican:

    Deng has endorsements overseas, just like Mirotic will if he is good. Do you think the only reason Deng is so gung ho to get his ass kicked in international play at the Olympics is because he lived there for a few years after escaping the Sudan? I think that's certainly part of it, but a not insignificant part of it is because he is the face of basketball in Great Britain. I bet you'd see him a lot if you watched TV there. The same thing would happen for Mirotic if he came over and won Rookie of the year or made an all-star team or went deep in the playoffs. If Mirotic is a good player, he would make up any buyout before the end of his first contract in additional endorsements overseas.

  • If the images appear cut off in your browser, right clicking them and opening in a new tab/window will show the entire chart. If you're on a mobile device and it is cut off, you can save the image and you will see the entire table when opening the file. There are some formatting limitations to the website, many thanks to Doug for making it legible.

  • Thank you for a most interesting analysis of the Mirotic financial/contract situation. Honestly, I still don't feel that I get all of it. But his situation looks potentially better for the Bulls than I had thought from your earlier articles.

    1) 2014/2015 looks like the season he will come. Not only does he make more money then on the full MLE, but he also starts the 4 years until he can get a major contract - perhaps up to $15 million per year.
    2) Even with the recent jump in the Illinois state income tax rate, he will still pay less tax in the USA than in Spain. (I believe it is 45% there!)
    3) Do we have any examples of big stars in Europe who came over to the NBA and had careers here that tanked? It is hard to see that happening to Mirotic.
    Injuries, of course, can happen to anyone, even a physical beast like Shaq or Howard or Oden. Or Rose!
    4) Mirotic's endorsements could even jump in Europe if he becomes a star over here.
    5) Thus the Mirotic rights could also be a major chip in landing a big trade.

  • Well, that was a massive amount of information. While I appreciate all the work that you have put in to compile this info, it doesn't really move the ball on the Mirotic argument from where it has been since we drafted him. I am assuming that the Bulls knew all of this when they picked him.

    Distilling it all down, basically, Mirotic will be a Bull in the 2014-15 season if he wants to be an NBA player, just as the Bulls planned when they drafted him.

    Really, the only question is does he want to be an NBA player. I don't think that even Mirotic can answer that question right now.

    I suppose that you could argue that the contract he signed, and choosing to become a Spanish citizen are signs that coming to the NBA is not a high priority for him. However, in the summer of 2014 it will have been 3-4 years since he made those decisions.

    My sense is that the odds are no better than 50/50 that he even wants to be an NBA player. He may decide that professionally, he has to at least try playing in the best league in the world. He may just be happy raising his family as a Spanish citizen and playing ball in Europe. Or maybe the Spanish economy will collapse into a complete depression that will infect even the isloated world of professional athletes, and Mirotic will be better off moving his family to the states. A lot can happen in 2 years, except of course, the current Bulls team winning a championship.

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