NBA grapples with midlevel exception

Midlevel Madness has taken over the NBA.

Changes to the NBA’s midlevel exception have been a major factor in the free-agency bonanza seen thus far in the league’s offseason. Some teams have gotten a competitive advantage from it, while others have been hamstrung. For players, it has meant fewer options and less money.

The midlevel exception allows teams to sign a player for a specified maximum. Under the 2005 collective bargaining agreement, the midlevel exception was set at $5.765 million and allowed for an 8 percent increase each year, up to five years. Pretty cut-and-dried.

The new CBA, however, created two midlevel exceptions. For non-luxury-tax-paying teams using the midlevel exception, a player’s base salary is maxed out at $5 million in 2012-13 and allows for only 4.5 percent increases over four years. On top of being a smaller contract for the player, it also carries with it a powerful sting for the team using it, which might be an all-out deterrent: implementation of a $74.3 million hard salary cap for the season.

A smaller midlevel exception, referred to as the mini midlevel exception, is available for luxury-tax-paying teams that are “above the apron,” meaning they’re $4 million over the tax level. The mini midlevel allows for a base salary of $3 million and a three-year limit. No hard cap is implemented in this case, but new luxury tax rules featuring escalating penalties will provide a deterrent for some teams.

We’ve already seen how some of the new midlevel exceptions are limiting options for some players. Ray Allen has been offered the full midlevel exception by the Memphis Grizzlies. In contrast, the Miami Heat, which Allen visited Thursday, can offer only the mini midlevel exception.

For the Brooklyn Nets, however, the mini midlevel exception could be a saving grace. Reports state the mini midlevel exception could enable the Nets to sign Dwight Howard, a prospect that looked nearly impossible just a few days ago. It all hinges on whether Bosnian forward Mirza Teletovic signs under the non-taxpayer midlevel exception or the smaller taxpayer midlevel exception.

If Teletovic signs for the larger exception, the Nets will be limited to a hard cap of $74.3 million. Given Howard’s nearly $20 million price tag and the contracts the Nets already have in place, signing him would be seemingly impossible. However, if Teletovic signs for the smaller exception, the Nets can exceed the cap and simply pay the luxury tax.

Lucky for the Nets, the new luxury tax provisions haven’t kicked in yet, making that possible scenario more affordable, at least for 2012-13. The following season will see new luxury tax rules implemented that involve an incremental rate based on team payroll (as opposed to the current $1 tax on every $1 over the cap). And the year after that, the repeater rate will be counted against teams that have previously paid the tax.

The Nets might not have to worry too much about the luxury tax down the road, if they added Howard. In addition to owner Mikhail Prokhorov’s personal wealth, there’s still money to be made in Brooklyn.

Howard’s addition would sell more season tickets at the new Barclays Center and perhaps create even more sponsorship dollars. On Tuesday, before announcing the return of Deron Williams, the Nets sold 500 new season tickets, which amounts to a seven-figure payday. Since then, the team has sold another 350 season tickets, according to Barry Baum, senior vice president of communications.

Adam Hanft, CEO of New York marketing and branding firm Hanft Projects, said a Howard acquisition, on top of the Nets' other moves, would assist the Nets in their transition to Brooklyn.

“It’s hard for a franchise to quickly establish itself in a cynical market like New York, but they’re doing a good job of coming in with the right lightning rod of attention,” said Hanft. “This is a market of excess. It buys you credibility to deal with the top.”