HARD CAP: Payroll can not exceed X dollars, ever. Doing so results in a fine of some sort.
SOFT CAP: Payroll is allowed to exceed X dollars under certain restrictions. In the NBA, players who have been with a team for a certain length of time only have a portion of their contract counting towards the cap... this is known as the Larry Bird Rule.
LUXURY TAX: Team is allowed to exceed X dollars as long as team pays Y% of every dollar over X. Techically, a luxury tax is a version of a small cap but it in general terms, it's two different things.
2002 -- No tax
2003 -- $117 million
2004 -- $120.5 million
2005 -- $128 million
2006 -- $136.5 million
The following tax rates apply:
1st time over threshold: 17.5 percent in 2003, 22.5 percent in 2004 and 2005, no tax in 2006
2nd time over threshold: 30 percent
3rd and 4th times over threshold: 40 percent
2003: 64.25% of revenues
2004: 64.75% of revenues
Signing Bonus Information:
While signing bonuses are paid at the signing of the contract, they must be prorated over the life of the contract, so that a $5 million signing bonus to a player with a five-year contract counts as $1 million against the cap each year.
Unless, of course, the player is traded or retires, say, two years into his five-year contract, in which case the remaining $3 million counts against the cap immediately.
Basketball Related Income includes:
Regular season gate receipts
Exhibition game proceeds
Playoff gate receipts
Novelty, program and concession sales (at the arena and in team-identified stores within a 75-mile radius)
Proceeds from team sponsorships
Proceeds from team promotions
Arena club revenues
Proceeds from summer camps
Proceeds from non-NBA basketball tournaments
Proceeds from mascot and dance team appearances
Proceeds from beverage sale rights
40% of proceeds from arena signage
40% of proceeds from luxury suites
Proceeds received by Properties, including international television, sponsorships, revenues from NBA Entertainment, the All-Star Game, the McDonald's Championship and other NBA special events.
LARRY BIRD EXCEPTION -- This is the best known one. Players who qualify for this exception are called "Qualifying Veteran Free Agents" in the CBA. This exception allows teams to exceed the salary cap to re-sign their own free agents, up to the player's maximum salary. The free agent in question must have played for three seasons without being waived or changing teams as a free agent. This means a player can obtain "Bird rights" by playing under three one-year contracts, a single contract of at least three years, or any combination. It also means that when a player is traded, his Bird rights are traded with him, and his new team can use the Bird exception to re-sign him. These contracts can be up to seven years in length. A player can receive 12.5% raises using this exception. This exception is known as the Larry Bird exception because the Celtics were the first team allowed to exceed the cap to keep their own free agent, and the player happened to be Bird.
EARLY BIRD EXCEPTION -- This is a weaker form of the Larry Bird exception. Players who qualify for this exception are called "Early Qualifying Veteran Free Agents" in the CBA. A player qualifies for this exception after just two seasons without being waived or changing teams as a free agent. Using this exception, a team may re-sign its own free agent for 175% of his salary the previous season or the average player salary, whichever is greater. Early Bird contracts must be for at least two seasons (which limits its usefulness -- it's often better to take a lower salary for one season and then have the full Bird exception available the next season) and no longer than six seasons. A player can receive 12.5% raises using this exception.
NON-BIRD EXCEPTION -- Players who qualify for this exception are called "Non-Qualifying Veteran Free Agents" in the CBA. They are defined as veteran free agents who are neither Qualifying Veteran Free Agents nor Early Qualifying Veteran Free Agents. This exception allows a team to re-sign its own free agent to a salary starting at 120% of the player's salary in the previous season or 120% of the minimum salary, whichever is greater, even if they are over the cap. Raises are limited to 10% and contracts are limited to six years when this exception is used.
MID-LEVEL SALARY EXCEPTION -- This exception is also called the "Middle Class Exception." This exception says that a team can offer a contract equal to the average NBA salary every year, even if they are over the cap. This exception is new to the current CBA, and is being "ramped up" to the average salary over a period of four years. Here is the value of the average salary exception for each year of the CBA:
98-99 $1.75 million
99-00 $2.00 million
00-01 $2.25 million
01-02 $4,538,000 (based on 108% of the average salary from 00-01)
thereafter 108% of the average salary for the previous season
This exception may be split and given to multiple players. It may be used for contracts of up to six years in length. Signing a player to a multi-year contract does not affect a team's ability to use this exception every year. For example, a team can sign a player to a six-year contract using this exception and still use the exception the following year to sign another player. Also see question #17 for more information on the availability and use of this exception.
$1 MILLION EXCEPTION -- This exception carries over from the previous CBA. Like the mid-level salary exception, it ramps up over several years:
98-99 $1.00 million
99-00 $1.10 million
00-01 $1.20 million
01-02 $1.30 million
02-03 $1.40 million
03-04 $1.50 million
04-05 $1.60 million
This exception may not be used two years in a row. It may also be split and given to more than one player, and can be used to sign players for up to two years. Also see question #17 for more information on the availability and use of this exception.
ROOKIE EXCEPTION -- Teams may sign their first round draft picks to rookie "scale" contracts even if they will be over the cap as a result.
MINIMUM PLAYER SALARY EXCEPTION -- Teams can offer players minimum-salary contracts even if they are over the cap. Contracts can be up to two years in length. For two year contracts, the second season salary is the minimum salary for that season. For example, when the capped-out Lakers signed Dennis Rodman in the middle of the 98-99 season, they used this exception to give Rodman the minimum salary, which was $1 million for the 10+ year veteran. This exception also allows minimum-salary players to be acquired via trade. See question number 64 for more information.
TRADED PLAYER EXCEPTION -- The Traded Player Exception is a "credit" teams can use to replace the salary of players they traded to another team. This credit cannot be used to sign free agents -- it is only available for trades. This exception is discussed in detail in question number 65. Also see question #17 for more information on the availability and use of this exception.
DISABLED PLAYER EXCEPTION -- This exception allows a team which is over the cap to acquire a replacement for a disabled player who will be out for the remainder of the season. This exception can also be granted in the event of a player's death. This exception can only be used to acquire one player. The maximum salary for the replacement player is 50% of the injured player's salary, or 108% of the league average salary for the previous season, whichever is less. Approval from the league (based on a determination by an NBA-designated physician) is required for this exception to be used. This exception can be used to sign a free agent, or to create additional room when matching salaries for trades. When used for trade, it is treated in a similar fashion to the traded player exception. If a team is under the salary cap by more than the combined amount of their exceptions, or drops below the cap by more than the combined amount of their exceptions after receiving this exception, then they lose this exception. If a team is under the salary cap and has this exception available to use, then it counts as team salary (against the cap).
If a player is disabled between July 1 and November 30, the team must acquire the replacement player within 45 days. If the player is disabled between December 1 and June 30, and the physician determines that the player will be out the entire following season as well, then the team has until October 1 to sign a replacement. If the disabled player comes back sooner than expected, then he may be activated immediately, and the replacement player (or exception, if it hasn't been used yet) is not affected.
Teams have had difficulty getting the NBA to approve an injury exception. For example, Danny Manning tore an ACL toward the end of the 97-98 season, yet the NBA would not approve the Suns for an injury exception. However, this exception was granted in the 1999 offseason to San Antonio, so they could replace Sean Elliott, who was disabled due to kidney problems. This exception was also granted to Charlotte soon after Bobby Phills was killed. A vote of the NBA Board of Governors is actually required for this exception to be granted. Also see question #17 for more information on the availability and use of this exception.
QUALIFYING OFFER -- Certain players become restricted free agents at the end of their contracts if their team submits a qualifying offer (see question number 33). Teams are given an exception in the amount necessary to make a qualifying offer. This exception is not necessary for players finishing the fourth year of their rookie scale contracts, because teams may use the Larry Bird exception for these players. For players who entered the NBA in 98-99 or later, up until their third year in the league, the qualifying offer must be for 125% of the player's previous salary, or the player's minimum salary (see question number 9) plus $150,000, whichever is greater. Teams are given an exception in this amount for the purpose of making a qualifying offer.