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Free Agency Glossary

Salary Cap

The NBA salary cap is a limit that teams can spend on player contracts, which helps to maintain competitive balance in the league. The basic idea behind a salary cap is that a team can only sign a free agent if its total payroll will not exceed the cap, so a team with deep pockets is on a more level playing field with every other team. For the 2022-23 season, the salary cap is $122 million.

Soft Cap

The NBA has a soft cap. A hard cap cannot be exceeded for any reason. A soft cap contains exceptions that allow teams to sign players or make trades that exceed the cap under certain conditions. In practice, few NBA teams are under the cap during a season. The soft cap promotes a team's ability to retain its own players. Certain components of the NBA's system function as a hard cap under specific circumstances.

Luxury Tax

The luxury tax is a mechanism that helps control team spending. It is paid by high spending teams — those with a team salary exceeding a predetermined tax level. These teams pay a penalty for each dollar their team salary exceeds the tax level. For example, a team with a salary that's $12 million over the tax level would have to pay a tax of $21.25 million. In addition to the financial penalties, a number of restrictions are placed on taxpaying teams. For the 2022-23 season, the luxury tax is $149 million.

Apron

If a team's luxury tax bill goes above the "apron," they are subject to further restrictions. Last season, the apron was $6.3 million above the tax threshold. For example, teams that are above the apron can't use the bi-annual exception, can't acquire any players via sign-and-trade and they have a smaller mid-level exception.

Hard Cap

If a team is hard-capped, it cannot exceed the apron under any circumstances. If a team subsequently needs to sign a player, they must first create room under the apron by waiving, stretching or trading players. When a team is below the apron and uses their bi-annual exception, acquires a player via sign-and-trade or uses their mid-level exception to sign a player to a contract larger than allowed by the taxpayer mid-level exception, the team becomes hard-capped at the apron for the remainder of that season.

Unrestricted Free Agent

An unrestricted free agent is free to sign with any other team and there's nothing the player's original team can do to prevent it.

Restricted Free Agent

Restricted free agency gives the player's original team the right to keep the player by matching a contract the player signs with another team. Once a restricted free agent signs an offer sheet with another team, their original team has two days to match the offer.

Option Clauses

An option clause allows a contract to be extended for one additional season after the date it is scheduled to end. For example, a three-year contract with an option for the fourth year means that if the option is exercised, then the contract extends through the fourth season. But if the option is not exercised, then the contract ends after the third season. Once exercised, an option cannot be revoked. Conditional options are not allowed. There are three types of options:

Team Options give the team the right to invoke the option. There can be only one option year (except in the case of rookie-scale contracts).
Player Options give the player the right to invoke the option. There can be only one option year.
Player Early Termination Options (ETOs) give the player the right to terminate the contract early. An ETO can't occur prior to the end of fourth season of the contract (which implies that the contract must be for five seasons). An ETO is not allowed in a veteran extension.

Repeater Tax

If a team has paid the luxury tax in at least three of the four previous seasons (not including the most recent season), they are a "repeat offender." They are taxed $2.50 for each dollar spent above the tax level rather than the usual $1.50 (or more depending on how much they've exceeded the luxury tax). For example, a repeater team that is $4 million over the tax level would have to pay a tax of $10 million.

Bird Rights

The Larry Bird exception allows teams to exceed the cap in order to re-sign their own free agents up to the player's maximum salary. Teams are said to have "Bird rights" to players who qualify. To qualify for this exception, a player essentially must play for three seasons without clearing waivers or changing teams as a free agent (although there are nuances). This means a player can qualify by playing under three consecutive one-year contracts, a single contract of at least three years or any equivalent combination. When a player is traded, his Bird rights are traded with him, and his new team can use the Larry Bird exception to re-sign him. These contracts can be up to five years in length, with raises up to 8% of the salary in the first season of the contract.

Sign-and-Trade

This allows teams to re-sign their own free agents and immediately trade them to another team. This is done by adding a clause to the contract stipulating that the contract is null and void if the trade to the specific team is not completed within 48 hours. A sign-and-trade is treated like a single, atomic transaction, and not two separate transactions between which one party can change its mind — if the trade is not completed, then the signing is invalidated. Sign-and-trade contracts must be for at least three seasons (not including any option year) and no longer than four seasons. The first year of the contract must be fully guaranteed, but the remaining seasons can be non-guaranteed. If a team acquires a player in a sign-and-trade, then the apron effectively becomes a hard cap for the remainder of the season.

Mid-Level Exception

This exception allows a team to sign any free agent to a contract with a starting salary up to $10,095,000 for non-taxpayers and $6,149,000 for taxpayers. Teams can use the mid-level exception (MLE) in consecutive years. Also, this exception may be split and given to multiple players. The MLE is available only when a team is below the apron. This determination is made after the exception is used, so a team below the apron cannot use this exception if doing so takes them above the apron.

Bi-Annual Exception

This exception allows a team to sign any free agents to a contract with a starting salary of $3,951,000. It can be used to sign players for up to two years, with raises limited to 5% of the salary in the first season of the contract. It may be split and given to more than one player. This exception may not be used two years in a row. This exception is available only when a team is below the apron, and it cannot be used by a team that has already used its taxpayer mid-level exception or room mid-level exception.

Gilbert Arenas Provision

Teams are limited in the salary they can offer to a restricted free agent with one or two years in the league. The first-year salary in the offer sheet cannot be greater than the non-taxpayer mid-level exception. Limiting the first-year salary in this way enables the player's original team to match the offer sheet by using the Early Bird exception (if applicable) or non-taxpayer mid-level exception (provided the team has it and didn't already use it).

Waivers

When a player is released by a team, the player enters the waiver process for 48 hours, during which time other teams may claim the player and assume his contract. If no team has claimed the player before the end of the waiver period (which is always 5 p.m. ET), he clears waivers and becomes a free agent and can sign with the team of his choice. If a team makes a successful waiver claim, it acquires the player and his existing contract, and pays the remainder of his salary — the waiving team is relieved of all responsibility for the player. If more than one team tries to claim a player on waivers, the team with the worst record gets him. Guaranteed salary must be paid even if the player is waived, and continues to be included in team salary after the player is released.

Stretch Provision

If a team waives a player whose contract has more than $250,000 of remaining guaranteed salary, the guaranteed salary for the remaining seasons is "stretched" and paid in equal amounts over a greater time span. The guaranteed salary is then paid over twice the number of years remaining on his contract, plus one.

Two-Way Contract

A two-way player is a hybrid of a standard NBA player and a G League player. A player on a two-way contract is principally a G League player, but he can spend up to 45 days with his affiliate NBA team. His salary is prorated by day, depending on which team he is on, and he can only play for the affiliated NBA team while on a two-way contract – he can’t be poached by another NBA team. A two-way player differs from a regular G League player because he receives a higher salary and can be called up to the parent NBA club while remaining under his two-way contract.

Courtesy of Larry Coon's NBA Salary Cap FAQ. For more CBA and salary-cap information, visit the FAQ.