Hamilton: For Knicks, Linsanity May Be Too Expensive

Though Jeremy Lin may be Houston-bound, in New York City, the Linsanity continues.

Earlier this month, news broke that Daryl Morey, the general manager of the Houston Rockets had reached agreement with Jeremy Lin on a four-year offer sheet that would pay Lin approximately $30 million.

That offer called for Lin to earn approximately $5 million in each of the first two years and approximately $10 million in each of the final two.

All along, the Knicks were expected to match any offer for Lin, but over the course of the past 72 hours, things have changed drastically.

First, on Friday, the Rockets and Lin agreed to alter their initial agreement. Instead of giving Lin a four-year deal worth $30 million in which the fourth year was a team option, the Rockets and Lin re-worked the agreement. The new deal was only for three years. The kicker, though, was that Lin’s third-year salary would increase by about 50 percent.

For the Knicks, instead of being on the hook for $10 million to Lin in the third year of the deal, the new offer made his third year salary about $15 million. By doing that, the Rockets may have made it prohibitively expensive for the Knicks to match their offer.

Beginning in the 2013-2014 season, the era of the NBA’s “Super Duper” Luxury tax—which I’ve written about previously—will begin.

What is most important to note about the luxury tax threshold is that it is a derivative of the league’s basketball-related income (BRI). As the league’s business grows and its profit increase, so will its salary cap, average player salary, and—yes—its luxury tax threshold.

Over the past 10 years, the NBA’s BRI has increased by an average of about 3 percent, per-year. The truth of the matter, though, is that it’s impossible certainly predict what the salary cap and luxury tax thresholds will be in the future because it’s impossible to predict how much money the league will generate over the next few years.

But, if we functioned under the reasonable assumption that the league’s revenues will increase by 4 percent each year, this season’s $70 million luxury tax threshold would about $76 million for the 2014-2015 season.

The Rockets knew that for that season, the Knicks already had huge commitments to Carmelo Anthony ($24 million), Amar’e Stoudemire ($23 million), and Tyson Chandler ($15 million).  And after re-signing Steve Novak, signing Jason Kidd, and trading for Marcus Camby, the Knicks tacked on about $10 million to their books for the 2014-2015 season. Meanwhile, they will hold a fourth-year option on Iman Shumpert’s rookie contract at $2.7 million.

And since the Knicks own their first-round pick in the 2013 draft, they could have another $2 million on the books heading into that 2014-2015 season.

All of that to say that the obligations to Anthony, Stoudemire, Chandler, Novak, Kidd, Camby, Shumpert, and whoever they select in the 2013 NBA Draft will amount to approximately $77 million in 2014-2015.

In all likelihood, even without Lin’s $15 million salary for that season, the Knicks will probably be a tax team. However, they are guaranteed to be a tax team if they re-sign J.R. Smith next summer and add one or two more players to their existing core.

So, even before the Knicks agreed to re-acquire Raymond Felton on Saturday night, retaining Jeremy Lin and his $15 million salary in year three was a very expensive proposition.

If, for argument’s sake, the Knicks payroll was equal to the luxury tax threshold, adding an extra $15 million for Jeremy Lin’s salary would cost the Knicks a total of $43 million. They’d have to pay Lin’s salary, and the luxury tax payment for a team $15 million over the tax threshold—in 2014-2015—will be about $28 million.

Now, after adding Felton, retaining Lin becomes even more expensive.

If the Knicks match Lin’s offer and end up being $19 million above the luxury tax threshold because of it, they would owe $41.75 million in luxury tax penalties, and when you include Lin’s $15 million salary, his total cost could be about $57 million.

When I pointed this out on Friday, most of my Twitter followers yawned at the numbers and reminded me that James Dolan prints money and probably doesn’t care. And as true as that may be, that’s an awful lot to risk on a point guard who has such a small body of work.

But now, after re-acquiring Felton, and after Anthony called Lin’s contract offer from the Rockets “ridiculous,” evidence seems to be amassing that the Knicks will elect to allow Lin to go to Houston.

For the Knicks, whether or not they match Lin has very little to do with their salary cap situation, and everything to do with their luxury tax situation.

During the Isiah Thomas regime, the Knicks routinely paid the luxury tax. However, one important thing to consider is that Madison Square Garden—the holding company that owns the Knicks—is now an independent and publicly traded corporation. After going public in 2010 with an initial public offering of about $20 per share, on July 13, MSG’s stock closed at almost $37 per share.

Linsanity has a lot to do with MSG’s good stock performance, and I’m no economist, so perhaps I’m way off. But, if the Knicks found themselves paying hefty luxury tax penalties, is it ridiculous to think that could have an adverse effect the company’s earnings and its profit margins?

Would that have an adverse effect on its stock price?

I’m sincerely asking because I don’t know. But it is definitely something worth knowing, and it’s definitely something worth pondering as we await the official word as to whether or not the Knicks will retain Lin.

That’s what makes this entire ordeal so compelling. The Knicks are being painted into a corner and will be forced to roll the dice—one way or another—on a player whose true value and talent is so difficult to gauge.

Linsanity may have been a flash-in-the-pan sham. But Jeremy Lin may be a future All-Star and Hall-of-Famer. Odds are, he’s something between.

But either way, we don’t know for sure. Only time will tell.

And only time will reveal just how much James Dolan and Madison Square Garden are willing to risk in finding out.

Moke Hamilton is a Senior NBA Columnist for SheridanHoops.com and will be providing the latest news and commentary during the NBA’s free-agency period. Follow him on Twitter to stay up-to date.