Rebuilding Brings Evolving Financial Perspective For Rockets

This upcoming 2021-2022 NBA season would have been the first that the Houston Rockets would have qualified to pay the dreaded repeater tax, a reason provided in previous seasons as to why the franchise needed to annually shed costs, even during the heyday of James Harden’s prime. Under the rules of the league’s collective bargaining agreement, if a team has paid the luxury tax in at least three of the previous four seasons and is again over the tax line during the season in question, the team qualifies for the repeater tax penalty, a steep mark-up from the standard penalties.

But with the trade of Harden last season, it’s now a new era in Houston and rebuilding is underway. With that comes new financial motivations and a revised perspective with respect to salary cap management.

At the time of writing, the Rockets have $123.69 million in total taxable salaries, giving them ample space beneath the 2021 luxury tax threshold of $136.61 million. The team also still has its full non-taxpayer mid-level exception at its disposal, preserved after executing a sign-and-trade with the Chicago Bulls to acquire center Daniel Theis. Observers will recall that in years past, it was a dance with the tax line for the franchise annually with then general manager Daryl Morey needing to tiptoe the threshold in molding his team.

There is no tiptoeing now, and there is no expectation that the team pay the luxury tax, at least not in these initial stages of rebuilding. But that is not to say that there would not be prudent ways to use the space the team does have available. Indeed, general manager Rafael Stone should treat the team’s room under the tax line as an asset itself.

The most obvious route would be to utilize the mid-level exception to sign promising young players to longer term deals than is allowed at the league minimum. The Minimum Player Salary exception limits contracts to two seasons whereas the Mid-level Exception may be used for contracts up to four years in length. Under Morey, the Rockets routinely signed undrafted free agents and second round picks, such as forward Gary Clark, using portions of the mid-level so they could keep promising young talent under cheap club control for longer periods.

The higher upside path could be “renting” out some of the nearly $13 million the team has below the tax threshold to help a contender strengthen itself for the playoffs and also get under the tax line itself. It would be a role reversal from when the Rockets unloaded the contract of Brandon Knight to acquire Iman Shumpert in 2019, sending a 2019 first round pick to Cleveland in the process. Following that formula, the Rockets could send forward Danuel House to a contender and take back a longer term deal, netting an asset for their assistance. House’s $3.9 million contract is expiring and his skillset could have value to a contender.

Less likely given the length of the contract, but Theis could have value to a contender and his $8.3 million contract is fair value for a player with his production. Because the Rockets project to be a non-taxpaying team, they could trade Theis and take back amounts up to Theis’s $8.3 million outgoing salary plus $5 million. Such a deal could allow a contender to reduce its tax bill and also get back a valuable, rugged contributor.

Regardless of the nature of any maneuvering the Rockets do in-season, they’ll need to stay mindful of their cap sheet in 2023. That’s the summer the team’s books will be completely clean with John Wall’s $47 million coming off the cap (barring a highly likely separation before then) and Eric Gordon’s $20.92 million non-guaranteed. If exercising club options on the team’s talented young core (the Rockets will have club options that summer on each of this year’s first round draft picks as well as Kenyon Martin Jr.), the team will still have just $35 million committed that summer. With Christian Wood an unrestricted free agent and Kevin Porter Jr. restricted, Stone will have to be mindful of taking back any long-term salaries in trades which could hinder the team’s ability to offer a free agent a max contract.

In years past, Morey would beef up the roster for the stretch run leading into the playoffs with veteran minimum signings off of the waiver wire. Jeff Green was a prime example in 2019-2020. Green was originally signed to a ten-day contract before being signed for the remainder of the year. While his cap hit was a mere $91,557 during the duration of the 10-day, it was a figure the club needed to account for actively given how dangerously close it was to the luxury tax. This year, not only will Stone not need to tiptoe around pro-rated contractual figures, he also will likely not be seeking to add veterans to his team down the stretch.

Morey and Harden are gone now from Houston as are the franchise’s title aspirations. The product on the court isn’t the only thing that is different. The Rockets have new financial motivations as they begin their rebuilding.

Source: Forbes