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Salary cap implications in a post-pandemic world

Will this negatively impact the Grizzlies’ salary cap flexibility?

Los Angeles Lakers v Memphis Grizzlies Photo by Joe Murphy/NBAE via Getty Images

It has been two months since the NBA halted play, and finally there seems to be some traction on a way forward for the league. It looks promising that Adam Silver, the front offices, and players are trying to do everything they can to start this season back up again. However, there are still hundreds of remaining logistical questions left to be answered if the league does want to return from its hiatus.

ESPN’s Adrian Wojnarowski and other media outlets all reported that in a call with the players on Friday, Silver said that the most likely scenario of starting the season back would be finishing the rest of the games and playoffs at one or two locations. The reporting went on to say these two locations would most likely be Las Vegas and Orlando. While these two options are great to have basketball back in our lives, that means that each team has seen the last of their home games for the foreseeable future.

This rumored format then poses a few questions:

  • What is the financial fallout from all 30 home arenas losing out on revenues for the rest of this season?
  • In addition, if this virus impacts fan attendance going forward (which seems likely for most sports), what will arena revenues look like next season with ticket sales and concessions?
  • Finally, with these lost revenues, how will this impact the NBA’s bottom line which, in turn, will impact the salary cap implications for the next few seasons?

With these questions comes more uncertainty, but the goal of this article is to address issues that we could see with the fallout in a post-pandemic world. The Grizzlies front office will be the ones that have the challenge of planning around these uncertainties. Once the final revenue numbers come in, everyone will have a better idea of what new margins the teams are dealing with in the coming seasons.

It is first important to remember that the NBA’s business model is built around a sharing system to distribute the league’s revenue around equally to the 30 teams. All teams pool their annual revenue together (Basketball Related Income), and then it is redistributed around to where each team receives a portion equal to the salary cap of the year. The early reports were that the BRI for this season was a projected $8 billion, but now due to this change in circumstances they are looking at only $6 billion coming in. Arena closures would impact all teams equally with less total revenue distributed back out.

Without getting too far into the weeds, a team’s valuation is made up of revenue share, local television deals, branding merchandise, arena sponsorships, and ticket sales/concessions. Even with all the aspects involved, each of these factors would suffer tremendously without fans coming to games. All ticket sales and concessions would be slashed completely and sponsorships would not have much use in an empty arena. The only factors that would not be affected too much are the local TV deals (home arenas open but no fans) and branding merchandise. Team valuations would be completely turned upside down.

Forbes had an article from 2016 which showed each NBA team broken down by pieces of pie. It shows that the “Arena” piece makes up around a third of the team’s valuation. Of course, that changes given the team, but that would be ultimately wiped out. For example, according to this article’s visual, the Grizzlies would hypothetically lose out on $140 million of arena revenue of their $780 million valuation. That is just in raw ticket numbers. Add that loss up with the other teams only factoring in arena revenue and that would drastically lower the total revenue share for the following season.

NBA: Preseason-Atlanta Hawks at Memphis Grizzlies Jim Brown-USA TODAY Sports

In 2016, there was a jump in the salary cap after the lucrative television deal was completed. Because of that, big time contracts were given out like candy, much to the owner’s dismay. Now, we could be facing the reverse of this situation because of the financial hit the league may take because of this pandemic. The CBA language that set up the system was not prepared for this kind of fallout.

With any projected drop in the salary cap for next year or in the future, teams like the Grizzlies may be negatively impacted by this because of how they structured their cap space for the coming years. Early rumors show projections of the salary cap dropping from $115 million to the $90-$95 million range. This kind of decrease would immediately put most teams above the cap and in to paying the luxury tax.

Prior to the trade deadline, the Grizzlies were in prime position to have maximum cap flexibility. That calculation changed a bit after the trade deadline when they took in sizable contracts such as Gorgui Dieng and Dion Waiters (Dead Cap hit). The Grizzlies strategy was to have greater cap space when more free agents were on the market in the following off-season. Now, if the salary cap is reduced drastically because of changes in the arena protocol, the Grizzlies cap space will shrink and not be as valuable as it once was.

It will be a huge change that all teams will have to adapt to. Smaller and shorter contracts will probably be the new normal because the big-time, long-term lucrative deal will not be possible. Also, a player’s Bird Rights, which allow the incumbent team to go over the salary cap to re-sign him, will be more valuable than ever before. Teams were never planning for such a (possible) drastic reduction in their salary cap, so the new contracts are how they will have to correct their books.

Another fun Grizzlies rumor that is sure to emerge from this is the possibility of Robert Pera selling the team again. With the drop in value, the rumblings will begin that Pera is searching to cut bait with the team. Last time the speculation began after his company, Ubitquiti Inc., took a dose dive, however, now it may be because the market is not sustainable anymore to crowded sporting events. Even if unlikely, the rumors could start swirling about.

All in all, no one has the answers right now, and that is why it is so difficult. At the end of the day, profits drive income related decisions, so these owners and front offices will be doing everything they can do to have things back to normal. These are all things that are hopeful to be ironed out in the next version of the CBA. The league and Players’ Association will have this as a major point of focus.

The pandemic could change things like sporting events for a very long time. If public gatherings are not possible for the foreseeable future, everyone must prepare for what is to come. Without profits coming in, there is less revenue to divvy up between teams which inevitably means reduced salary cap in a post-pandemic world.

Resources for this article include: Investopedia, ESPN, Forbes, Spotrac

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