Update (July 2): Nene and the Rockets have agreed to rework his contract.
One of the wrinkles of the new collective bargaining agreement is the over-38 rule, replacing the over-36 rule. The general suspicion has been that the over-38 rule was designed to reward star players like Chris Paul and LeBron James, the players' union president and vice president, respectively.
Late Friday night, it appeared that a role player, Nene, would actually be the first to take advantage of the new rule when it was reported he would sign a contract to return to the Houston Rockets. But by early Saturday, it was apparent that the Nene deal was not legal, and it was called off.
What happened? Let's take a look at the mistake the Rockets made and how they might fix it.
What is the over-38 rule?
When the 34-year-old Nene reportedly agreed to a four-year, $15 million contract on the first day of free agency, Houston thought it was bringing back a key contributor to its 55-win team with a clever move. The Rockets would accomplish two goals by retaining their veteran backup big while also preserving their full $8.4 million midlevel exception.
Nene would be signed with non-Bird rights, an exception that would allow the Rockets to start his first-year salary at $3.4 million, 120 percent above his salary in the previous season.
What the Rockets failed to calculate correctly is the how the over-38 rule would come into play.
Prior to the over-38 rule, the over-36 rule had been designed to close a financial loophole available to players and teams. Without the rule, a team could promise to pay a player a higher dollar figure but spread out the money over more years, even if the team had no intention of keeping the player in the final years of the contract. By doing so, the team could fit the player under the salary cap more easily.
Meanwhile, the player could collect the entirety of the contract even if his career ended before the contract did. The CBA's rules exist in part to prevent circumvention of the salary cap, and the over-36 rule was just such a measure.
The over-36 rule prevented this maneuver when a contract extended beyond a player's 36th birthday. The new rule -- the over-38 rule -- widened the loophole again. Still, the basic rule remained intact, while moving the age limit from 36 to 38, and applies to four- and five-year contracts.
For Nene to stay on the legal side of the rule, his 38th birthday would have to be after the beginning of the fourth and final year of the contract, which for NBA purposes is October 1, 2020. Instead, his 38th birthday is September 13, 2020.
No matter what the Rockets' and Nene's intentions, his birthday is 18 days too early for a four-year, $15 million contract.
What can the Rockets and Nene do?
Typically the problem would be solved by spreading the amount of the fourth year of the Rockets' contract offer over the first three years.
In this case, with Nene agreeing to a contract using non-Bird rights, increasing the first three years' salary would put it over the maximum allowed.
Given those two illegal options, the solution is relatively simple, if undesirable to the Rockets: Houston could sign Nene to a three-year, $15 million contract.
But in that case, the Rockets would be using more than half of their midlevel exception, reducing the amount available to sign additional free agents under the exception from $8.4 million to $3.4 million.
Houston needs the full midlevel amount to replenish a bench partially lost in the CP3 trade. Hence, the Rockets are stuck trying to persuade Nene to accept a three-year, $11 million contract that stays on the legal side of the over-38 rule and allows them to keep their full midlevel exception and build out the team.
Instead of jumping at the new offer, Nene has opened up his free-agent options to explore new offers or force the Rockets to make a more lucrative three-year offer.
The Rockets might try to wait him out. If they can do that successfully, they might come out ahead after all -- by paying him $4 million less than they originally offered him. But they might have an unhappy backup center on their hands.