As expected, LeBron James will opt out of his contract with the Cleveland Cavaliers and became a free agent on July 1.
When he returned to Cleveland last summer LeBron signed a two-year, $US42.1 million deal with an opt out clause after one year. According to ESPN’s Brian Windhorst, he’s expected to do the same thing this time around. He’ll be able to be a free agent in the summer of 2016 and, perhaps, 2017 as well.
By continuing to sign one-year deals, LeBron is going to make himself a ton of money in the long term. Based on our calculations, he’d make an extra $US30 million by signing a maximum contract in the summer of 2016 than he would by signing a max contract now, and he’d make an extra $US110 million more by waiting until 2017 to sign a max deal.
The value of LeBron’s max contract is tied to two things: the salary cap and the number of consecutive years he spends with the Cavs (an NBA provision known as “Bird Rights”).
The NBA salary cap is going to explode in the summer of 2016. As a result of the league’s massive new TV deal, the salary cap is projected to jump from $US67.1 million in 2015-16 to $US89 million in 2016-17 and a whopping $US108 million in 2017-18. Since LeBron has been in the league for more than 10 years, the value of his max contract starts at slightly less than 35% of the salary cap. With the salary cap about to jump, LeBron would be wise to wait and get ~35% of $US89 million in 2016 (or, even better, ~35% of $US108 million in 2017) rather than ~35% of $US67 million now.
LeBron’s max contract right now starts at $US22 million. Next summer it starts at $US29 million, and in the summer of 2017 it starts at $US35.6 million.
That’s a massive difference, but LeBron has an even bigger incentive to wait to sign a max deal when you factor in his Bird Rights status. Since LeBron has only been with the Cavs for one year, under NBA rules his max contract can only be four-years long, and his annual raises can only be 4.5% of his first-year salary.
But if he re-signs with the Cavs on a one-year deal, Cleveland will get his “Early Bird Rights” in 2016 because he will have been with the team for two-straight years. That means they can give him a four-year max contract with 7.5% annual raises next summer.
But if he signs two more one-year deals and waits to sign a max contract in the summer of 2017, Cleveland will have his full Bird Rights. As a result, they can give him a five-year max contract with 7.5% annual raises — the biggest contract an NBA player can get.
When you combine these two factors (the exploding salary cap and Cleveland getting his Bird Rights), you end up with wildly different max contracts depending on when LeBron signs it. In 2015, LeBron can sign a four-year, $US94.4 million contract. In 2016, he can sign a four-year, $US125.3 million contract. And in 2017, he can sign a five-year, $US204.4 million contract.
Here’s the full breakdown:
The smartest thing that LeBron can due financially is sign two more one-year contracts, and then get that $US200+ million deal in 2017. It’d certainly be a risk to pass up guaranteed money now in favour of chasing that mega-contract, but LeBron has never had injury problems, and if there’s one 32-year-old who’d be worth a $US200 million deal, you think it’d be LeBron.
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