LeBron's free agency: By the numbers
The best player in the NBA is officially a free agent. LeBron James has opted out of his contract with the Miami Heat and the 29-year-old’s agent, Rich Paul, has begun discussions with teams. According to ESPN’s Brian Windhorst, James has informed teams that he will only sign for a “maximum” contract under the NBA’s collective bargaining agreement.
As of today, there are reportedly seven NBA teams that could sign James to a max contract: the Heat, Mavericks, Lakers, Magic, Suns, 76ers and Jazz. Of those teams, the Heat, Mavericks, Lakers and Suns are thought to be the most likely destinations. There are also several teams that would be viable candidates for James but currently lack the cap space to extend a max contract offer. The Bulls, Cavaliers and Rockets are considered the leaders of this group. Through trades and other measures, these teams may be able to obtain the necessary salary cap space to offer James a max contract.
Prior to the start of free agency, James wasn’t thought to be fixated on signing a max contract. After all, he’s already rich -- very rich. James is reportedly worth in excess of $150 million. He also earns around $40 million a year in endorsements and should continue to rake in endorsements regardless of where he next plays. James also wants to promote his legacy. He’s surely aware of comparisons between him and Michael Jordan, a six-time NBA champion. To be regarded as the best NBA player of all-time, James will need to augment the two NBA titles he won in 2012 and 2013. Time may no longer be on his side. James turns 30 in December. Thirty isn’t “old” in general, but it is old relative to the average age of NBA players, which NBA.com data indicates is about 27 years.
Other signs, however, suggest James values high earnings. He’s engaged in various commercial ventures outside of the NBA, including owning a minority share of Liverpool F.C. in the English Premier League. Some also speculate that James wants to eventually own an NBA team. James’ salary is also of considerable interest to the National Basketball Players’ Association, which knows that the negotiation of player salaries is impacted by the salaries of better players. While James is legally entitled to sign with a team for less than his market value, the NBPA would likely have concerns if the best player in the league earned much less than the highest-paid player. Lower pay for James might harm other players in future negotiations with teams. James’ apparent desire to sign for the max should alleviate any concerns of the NBPA.
Two financial factors likely play significant roles in James’ decision-making. The first is the NBA’s collective bargaining agreement, which affords the Heat a significant negotiation advantage over other teams. As analyzed in our recent article on Carmelo Anthony, star players are financially incentivized to remain with their teams through what are known as “Larry Bird” rights. These rights allow a team to re-sign qualifying players for five-years instead of four-years and at higher annual increases than the player would receive if he signed with another team.
The second financial factor is state and municipal income tax rates. Some states and cities impose taxes on earners in addition to federal income taxes. Pat Riley and the Heat are similarly advantaged in this regard. Neither Florida nor Miami imposes income taxes. The same dynamic is true, it should be noted, if James signs with the Houston Rockets. Regardless of where James plays, he would still be required to pay “jock taxes” for playing as a visiting player in certain arenas. It is also safe to assume James will pay his representatives a commission on his contract, with a four percent commission representing a plausible cut.
One wildcard in assessing James’ projected earnings is his state of residence. Until last year, it was assumed that James became a Florida resident after signing with the Heat in 2010. The logic was based on the location of the Heat, James’ purchase of a $9 million home in the Miami area and the clear tax advantages he would obtain by becoming a Florida taxpayer. Last year, however, James reported for jury duty in Summit County, Ohio. One of the legal requirements for serving on a jury in Summit County is residency in the county. Ohio.com also reported that James, an Ohio native, planned on expanding his home in Akron last year. While we cannot confirm that James is currently an Ohio resident, these accounts suggest that he was one as of last year. As an Ohio resident, James would be obligated to pay state and local income taxes on all of his income.
Let’s now break down how much James would earn if he signs max contracts with the Heat, Lakers, Bulls, Cavaliers, Mavericks, Rockets or Suns. Our data considers (1) maximum allowable salary levels under the CBA; (2) relevant federal, state, municipal and jock taxes; and (3) a presumptive payment of a four percent agent commission. We also assume James would become a resident of the state where he plays, although we also run numbers on him playing for the Heat while residing in Ohio. Here are our findings:
Notice how much more money James can earn by remaining with the Heat, especially if he resides in Florida. In that scenario, he would be guaranteed $73.2 million. The Heat’s advantage is especially detectable in the fifth year, which only the Heat can provide in a free agent contract. Should James instead sign with one of the other teams, he would become a free agent at the conclusion of his fourth year. While he would likely be able to sign another lucrative free agent contract at that time, he would be 33 years old and perhaps no longer in his prime.
One thing is for sure: The Decision 2.0 for James has many variables at play.
Michael McCann, a Massachusetts attorney and the founding director of the Sports and Entertainment Law Institute at the University of New Hampshire School of Law. He is also the distinguished visiting Hall of Fame Professor of Law at Mississippi College School of Law.
Robert Raiola, a senior manager in the Sports & Entertainment Group of the accounting firm O'Connor Davies, LLP.