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Well, a lot has changed for the Houston Rockets in the past week.
They added the shooting guard they so desperately needed in Kevin Martin.
They also obtained some potentially bountiful assets in the form of a recent lottery pick (2009 #8 overall pick Jordan Hill), the right to swap 2011 first round picks with the Knicks, and the Knicks' first round pick in 2012. (For those of you still wondering about the protection on those picks, there is a great explanation by Clutch in his article on the subject.)
But all of those assets came at a cost to the Rockets (aside from losing Carl Landry).
They just took on a TON of extra salary for the 2010-11 season. So much so that the Rockets went from a team stuck in limbo regarding whether or not to use its cap room to a team destined to pay a hefty luxury tax bill next year. Credit Rockets owner Les Alexander for putting his money where his mouth is and ponying up the cash to make the Rockets contenders again.
With that said, let's take a look at the Rockets' salary cap and luxury tax situation for the coming year:
First off, we will need to make a few general assumptions before proceeding.
Preliminary estimates for next year's salary cap vary widely. Prior to this season, the league issued a memo to all 30 NBA teams, warning them that league revenues are expected to drop between five and ten percent and that, as a result, the salary cap (which is a function of league revenues) could come in as low as $50 million. With the economy modestly improving in recent months, most GMs are planning for a salary cap somewhere between $53 million and $54 million. Just to be safe, let's use a salary cap figure of $53 million.
The luxury tax threshold, like the salary cap, is also a function of league revenues. While it is very difficult to accurately predict this amount, using figures from the past several seasons, if we are assuming a salary cap of $53 million, let's go ahead and assume a luxury tax threshold of $64.7 million.
So, let's begin.
The Rockets will have salary commitments next year to Yao Ming ($17.68M), Kevin Martin ($10.6M), Shane Battier ($7.43M), Jared Jeffries ($6.88M), Trevor Ariza ($6.32M), Jordan Hill ($2.67M), David Andersen ($2.5M), Aaron Brooks ($2.02M), Jermaine Taylor ($781k) and Chase Budinger ($781k). (All salaries courtesy of shamsports.com.)
That comes out to a total of about $57.67 million in guaranteed salary for the Rockets. It is well over any projected estimate for the salary cap. For those of you still entertaining the notion that the Rockets had cap room this summer, please dismiss it from your head right now. The Rockets gave that up the second they agreed to take on the salaries of Martin (to address a need) and Jeffries (to get the picks). But if it's any consolation, the Rockets likely would not have done anything with the estimated $7-9 million in cap room they could have had prior to this past week's trade, since they would have had to renounce their rights to Luis Scola and/or Kyle Lowry in order to use it.
 The team option on Hayes seemed like an easy decision, but it could now be difficult
With the Rockets' 2010-11 salary now looking like it will drift into luxury tax territory, the Rockets have a great deal of thinking to do about (a) whether they can afford to make what essentially amounts to a $4.66 million financial commitment in order to retain Chuck and (b) whether Hayes would stand to make more than $2.33 million on the open market this summer.
If the answers to both (a) and (b) are "no", then the Rockets will likely opt not to exercise the option and either will try to re-sign Hayes on the cheap (perhaps to a veteran's minimum deal of $1,069,509, only $854,389 of which would count against the Rockets' team salary for luxury tax purposes) or will simply—and regretfully—allow Chuck to ply his trade elsewhere next season.
If the Rockets extend qualifying offers to Luis Scola, Kyle Lowry and Hilton Armstrong by June 30, 2010, they will become restricted free agents, meaning that the Rockets will have the right to match any offer sheet to which those players are signed.
While much has been made in the past about the "cap holds" (which are the amount a player counts against team salary for salary cap purposes) for Scola and Lowry, this issue is largely moot now that the Rockets are hopelessly over the salary cap.
The qualifying offer amounts are (a) $4.11 million for Scola; (b) $2.97 million for Lowry; and (c) $3.85 million for Armstrong. Scola and Lowry will most assuredly receive qualifying offers. Armstrong will most likely not and will become an unrestricted free agent (although the Rockets will still have Armstrong's Bird rights).
In his post-trade press conference on February 18, Daryl Morey flat out said that the Rockets WILL be keeping both Scola and Lowry. This is a fairly bold statement, given that the Rockets have no idea how much other teams will be willing to offer them this summer. Perhaps this is Morey's veritable "shot across the bow" at any team even thinking about extending an offer to either Scola or Lowry.
"Hey, guys. You're just wasting your time and will inevitably have tied up your cap room/mid-level exception for a week and lost out on other, more available free agents, all for nothing. Why bother?"
 Both Scola and Lowry are restricted free agents this summer
There is another aspect of this entire restricted free agency process to keep in mind: it may get ugly.
If you recall the Carl Landry restricted free agent negotiations back in 2008, the process dragged on into September, with Landry eventually putting it to an end by accepting a three-year, $9 million offer sheet from the Charlotte Bobcats, which the Rockets gladly matched. Do not be the least bit surprised if negotiations with Scola, Lowry and their respective agents follow a very similar pattern.
Remember, if another team signs a player to an offer sheet, it can only be for a maximum of five years and with maximum annual raises of eight percent, compared with six years and 10.5% annual raises that the player's original team can offer. By simply waiting out a restricted free agent until he signs an offer sheet with another team, the player's original team can "get out of" having to pay higher annual raises or offering an extra year on the deal.
While I'm not ready to say that this will happen, don't be surprised if Morey takes this approach.
Scola and Lowry will most likely return to the Rockets next season, but it is entirely possible that there will be some feelings of resentment on their part that they'll need to get over quickly.
If the season ended today, the Rockets would possess the 14th slot in the NBA's Draft Lottery. While it is entirely possible that the Rockets break into the playoffs, or that they continue to slide further down the standings, let's assume that they end the season in that 14th slot.
The rookie scale salary for the 14th pick of the 2010 NBA Draft is about $1.52 million. However, since most first round picks end up signing deals starting at the maximum amount of 120% of their scale salary, the actual expected salary for that pick will likely be a little over $1.82 million. And because the Rockets expect to be over the luxury tax threshold, that pick will end up costing them a total of about $3.64 million in salary and tax.
This cost creates a very interesting situation for Morey and the Rockets. Do you incur that much in salary and tax for a player who, after the additions of Martin and Hill, likely will not even crack Rick Adelman's rotation next year? Do you try to package that pick with other assets in order to swing a draft day trade? Perhaps trading out of the draft entirely in exchange for multiple future picks to use in a year when the luxury tax won't be as large an issue for the Rockets?
Or, on the flip side, if the Rockets are going for broke next season, do they try to actually move up in the draft, using that 14th pick along with a future pick or two in order to move up a few slots? A team like the Clippers (currently in the 10th slot) may be willing to drop back in the draft in order to maximize its cap room this summer. The Clippers are very close to having enough cap room to make a run at a max salary free agent, and dropping back in the draft from 10th to 14th may actually make a difference for them.
From Morey's comments at his post-trade press conference, it sounds like the Rockets intend to select a "big" in this year's draft, one that Morey views as very deep at the power forward position. This is yet another reason why he eventually acquiesced in giving up Landry in the trade. So let's just go ahead and assume that the Rockets draft 14th and keep the pick.
Even though the Rockets will be well over the salary cap this summer, they will still have a couple of valuable salary cap exceptions at their disposal: the Mid-Level Exception (or MLE, which is based on the salary cap and should come in somewhere around $5.6 million) and the Bi-Annual Exception (often referred to as the "lower level exception" or LLE, which is a predetermined $2.08 million).
 Houston could pursue a free agent like Marcus Camby with the MLE, but it would cost them more than you may think
I expect that the Rockets will wait out free agency and see which players don't get offered huge contracts. Aside from the big names (none of whom would sign for the MLE), there are some decent free agents who are still in their prime and could possibly be had for the MLE or less (like a Raymond Felton or a Travis Outlaw). There are also a handful of aging veterans who may be willing to latch on with a contender like Houston at a perceived discount (like Ray Allen, Marcus Camby, Manu Ginobili, Brad Miller, Mike Miller, Jermaine O'Neal or Shaq).
But remember this: assuming that the Rockets re-sign Scola and Lowry, any free agent signed for the full MLE will cost the Rockets over $11 million in salary and tax next season. Is Les Alexander willing to pay that much for a player who likely would be no better than the fourth best player on the team?
As Morey alluded to in his post-trade press conference, and as Clutch discussed in his terrific article grading the trade, the Rockets now have a number of significant assets to include in any sign-and-trade for a major free agent this summer. But how does the Rockets' cap situation affect their ability to get such a deal done? Let's take a look, using Chris Bosh (probably the single best fit for the Rockets of any of the major free agents) as an example.
First and foremost, Bosh would need to (a) make it very clear to the Raptors that he has zero interest in coming back to Toronto, (b) actually want to come to Houston, and (c) have another team with cap room available (e.g., New York, New Jersey, Miami, Chicago) to which he could otherwise realistically threaten to go, albeit for $30 million less than if he were to leave via sign-and-trade.
Because the Rockets will be over the salary cap this summer and cannot use any cap room to facilitate a Chris Bosh sign-and-trade, they will need to send salaries back to the Raptors. The maximum starting salary for which Bosh could sign will be about $16.57 million. Under the league's trade rules that salaries of teams over the cap must fall within 125% + $100,000 of one another, the Rockets would need to send Toronto a MINIMUM of $13.175 million, unless a third team with cap room is involved. But let's just look at a two-team scenario here.
To match salaries, the Rockets would need to include either Battier or Jeffries in any sign-and-trade package, along with one or two other players like David Andersen and Chuck Hayes, although I don't think the Raptors would be particularly interested in paying those players' salaries. Hence, the Rockets would have to include a disproportionately large amount of talent/assets in any Bosh package, much more than other teams with cap room that can send back little to no salary. Also, Les Alexander would probably need to throw $3 million in cash into the deal in order to offset the salaries coming over to the Raptors.
 The Rockets have the assets to land a player like Bosh, but pulling off the trade could prove difficult
To sum up: a sign-and-trade for a max-level free agent will be extraordinarily difficult for the Rockets without including a third team with cap room (in which case, the Rockets would have to include even more assets in order to entice the third team to allow Houston to use its cap room). But if anyone can make it happen, it's Daryl Morey.
It is looking increasingly likely that the 2010-11 season will mark the first time that Les Alexander actually ends up paying the luxury tax. And, boy, will he ever!
Even with the most tax-friendly assumptions that (a) Chuck Hayes's option is declined, (b) Luis Scola and Kyle Lowry are re-signed at salaries on the low end of reasonable estimates, (c) the Rockets draft 14th overall and don't move up in the draft, and (d) the Rockets choose not to use their salary cap exceptions, the Rockets would be looking at a total team payroll next season of about $74.5 million, minimum, when you include the $5 million or so in luxury tax that Alexander would have to fork over. On the flip side, if the Rockets were to pick up their option on Hayes, trade up to the 10th pick, use their full MLE and LLE, and execute a sign-and-trade for a max-salary free agent, Alexander could have a total team payroll of over $102 million! In the end, I think you'll see the Rockets' payroll fall somewhere in between those two figures, though much, much closer to the lower end of that range.
For all those Rockets fans who have ever complained that Alexander is "cheap", you're about to get what you've always wanted: a substantial financial outlay by the team owner, well in excess of the luxury tax threshold.
There is another interesting angle on Alexander's willingness to pay the luxury tax next year. With New York (traditionally the biggest luxury tax payer each year) expected to drop well below the luxury tax threshold this summer, with Shaq's $21 million salary coming off Cleveland's books, with the Lakers opting not to trade for Kirk Hinrich and to instead allow some of their contracts to expire, and with several other teams expected to drop below the salary cap, one would expect the total pool of luxury tax revenues next season to drop considerably. Without a large pot of luxury tax revenues from which each non-tax-paying owner can take a 1/30th share, there will be far less incentive (e.g., the anticipated $4-5 million share of tax revenues owed to each non-tax-paying owner for 2009-10) for owners not to exceed the luxury tax threshold. If Les is going to pay the tax, at least he will be leaving less money on the table next year than had he paid the tax in years past.
If you've read this far (and haven't died of old age yet), then you should have a fairly good understanding of where the Houston Rockets stand with respect to the salary cap and the luxury tax. With the various assets accumulated by Morey over the last three years, along with the Rockets' draft position and the impending free agent frenzy, there is any number of courses that the team could take this summer and leading up to the February 2011 trade deadline.
What Daryl Morey and Les Alexander will do is anybody's guess.
But at least now you have a better idea of what they can and can't do.
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BimaThug is one of the original members of ClutchFans and, with threads like these, has earned a reputation of being well-versed in salary cap and NBA financial matters.
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