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I. Introduction

Once the Los Angeles Lakers submit a Qualifying Offer (“QO”) to Jordan Clarkson, he will become a restricted free agent (“RFA”) on July 1. Because Jordan Clarkson has only been in the NBA for two seasons, his restricted free agency period will be subject to the Gilbert Arenas Provision (making Clarkson an “Arenas RFA”). Due to the offer sheet rules applied to Arenas RFAs, the Lakers can potentially save money by not paying him his market value. However, it will be important for the Lakers to offer Clarkson enough money that he will not hold out into the season or choose to sign his QO and become a free agent next summer. Below I explain the offer sheet limitations Clarkson is subject to and how much the Lakers should sign him for.

II. The Gilbert Arenas Provision

The Gilbert Arenas Provision limits the amount non-incumbent teams can provide for in an offer sheet to an Arenas RFA. The first year of such offer sheet cannot exceed the amount of the Midlevel Exception for the upcoming season. The salary in the second year of the offer sheet can increase or decrease by 4.5%. The salary in the third year can be any amount up to the amount a max contract would have provided in year 3 had the player not been subject to this provision and signed a normal max contract at the outset. The salary in the fourth year can increase or decrease by 4.1% of the salary in the third year. Table 1 below shows the maximum amount a Arenas RFA can receive in 2016 in accordance with these rules:

Table 1. Arenas RFA – Max Offer Sheet

The player’s cap hit throughout the life of his contract depends on whether his incumbent team matches the offer sheet. If the incumbent team does match the offer sheet, his cap hit will be identical to the offer sheet values above. If, on the other hand, the incumbent team does not match the offer sheet, the non-incumbent team will acquire the player and his cap hit will be the average of the salaries provided for in the offer sheet. Table 2 below shows the cap hit for a max offer sheet if the incumbent team matches.

Table 2. Arenas RFA – Non-Matched Max Offer Sheet

III. Options for Signing Jordan Clarkson

Because of the drastic increase in the salary cap, most teams will have exorbitant amounts of money to offer free agents. This is driving every player’s market value far higher than anticipated. The Lakers have an advantage with Clarkson because he is an Arenas RFA. This is because, even if his real market value is $18,000,000 per year, Clarkson’s market value is artificially capped at $15,110,885 (see Table 2 for contract averages) for the Lakers.

The Lakers should use his artificial market cap as an anchor for their contract offer. Clarkson is an Early Bird Free Agent and, as such, the his contract is limited to a maximum of four years and and 7.5% salary increases or decreases. [2] Clarkson may desire a 1+1 contract, which the only the Lakers could provide, to take advantage of one last massive jump in the salary cap in 2017-18. But the Lakers have no incentive to offer such a contract since all offer sheets from other teams must be for at least 2 seasons. In fact, because any competing offer sheet will be based on the MidLevel Exception in years 1 and 2 the Lakers do not have any incentive to sign Clarkson for any fewer than 3 years.

The Lakers should keep in mind, however, that allowing Clarkson to sign an offer sheet is a disadvantage because his salary will jump in 2018-19, the same year the salary cap is projected to decrease. So it’s important that they try to sign him first.

            a. Option 1

The easiest option is for the Lakers to come out strong and offer a contract for $15,110,885 per year over 4 years. This is the maximum amount the Lakers can be forced to pay Clarkson through the matching of an offer sheet. This is $12,385,882 more than his QO of $2,725,003, [2] which will be difficult for Clarkson to turn down, especially because of the undervaluing of successful second round picks, even ones as valuable on the court as Jordan Clarkson.

The downside to this option is Clarkson can hypothetically make more money by signing his Qualifying Offer and signing a contract as an unrestricted free agent next season. Table 3 shows a comparison of two contract options over 4 years. The first is if Clarkson signs his QO and then a 3 year contract in 2017-18. The second is if Clarkson signs a contract with the Lakers for $15,110,885 per year over 4 years. To account for not knowing Clarkson’s true market value, let’s assume his 2017-18 contract starts at $18,500,00 with 4.5% raises.[4]

Table 3. Option 1 – Contract for Max Amount Lakers Would Have to Match

            b. Option 2

Another option for the Lakers would be to sign Clarkson to a large contract now that decreases in value each season. The Lakers are a few years away from contending and want to have maximum cap space in the future to sign free agents. For that reason, it would make sense to over pay Clarkson now and pay him less when free agents become more interested in the Lakers’ talent. This can be accomplished in one of two ways (see Tables 4 and 5 below).

Table 4. Option 2.1 – Front-loaded Contract

Table 4 shows a 4-year contract starting at $18,500,000 with 7.5% decreases in salary each season. This contract is more lucrative than either contract in Table 3, though the difference is relatively minor and paying Clarkson more than necessary creates goodwill that could benefit the Lakers in the future.

Table 5. Option 2.2 – Front-loaded Contract with $7,000,000 Signing Bonus [5]

By giving Clarkson a signing bonus, he will actually be paid $22,500,000 in the first year and the base salary for every other year.

The Option 2 contracts are more expensive for the Lakers than those in Option 1 but the increased base salary amounts are an attempt to combat Clarkson’s leverage of signing his QO and potentially more lucrative contract in 2017-18. Moreover, giving Clarkson a significant bump in salary at the outset of the contract in the form of a signing bonus or higher base salary makes the contract more difficult to turn down and makes the decreasing cap hit more tolerable from Clarkson’s point of view.[6] And lastly, having Clarkson on a contract that declines in value makes him a trade chip that becomes more valuable as the years pass, especially in today’s salary cap climate.

           c. Option 3

The third option for the Lakers is to offer Clarkson a contract far below his market value. For example, the Lakers could offer Clarkson a 3-year contract worth $30,000,000 per year. In fact, the Lakers could go as far as informing Clarkson and his agent that they are unwilling to pay anything more than $10,000,000 per year over 3 or 4 years. The best case scenario is for Clarkson to agree to such a lower offer, setting the Lakers up for financial flexibility in the years to come. The worst case scenario is Clarkson deciding to sign his QO and become an unrestricted free agent next summer.

But the most likely scenario is Clarkson signing an offer sheet with another team in which case the Lakers will, at most, pay $15,110,885 on averagee, as shown in Option 1. And because cap is projected to decrease in 2018-19, the year in which Clarkson’s cap hit would skyrocket, he is not guaranteed a max offer sheet or an offer sheet for 4 years. And, as a result, the Laker’s commitment to Clarkson would be under $15,000,000 per year.

IV. Conclusion

The fact that Clarkson is a RFA puts the Lakers in control and the fact that he is an Arenas RFA gives the Lakers even more power over the negotiation process. It will be important for them to understand the artificial cap on Clarkson’s market value and use that to their advantage in order to find the right balance of paying Clarkson a lucrative salary while also being able to spend as much as they want on bigger free agents in the coming offseasons.

[1] This amount is the third year of a 0-6 max contract based on the anticipated 2016-17 salary cap of $94,000,000.

[2] The Early Bird Exception requires a 2-year minimum but because the Lakers will be using cap space, Clarkson’s contract can be any amount of years between 1 and 4.

[3] Clarkson met the Starter Criteria in both minutes and games started so his QO is increased to the QO for the 21st pick in the 2012 NBA Draft.

[4] For frame of reference, the Clarkson’s projected max contract in 2017-18 would start at approximately $25,272,000 (based on a salary cap of $108,000,000).

[5] A signing bonus can be up to 15% of the entire contract value. For Option 2.2, the max signing bonus would be $8,253,750.

[6] It also benefits the Lakers because no other teams can offer Clarkson any form of a bonus.