Back in October, I wrote that (a) the Houston Rockets had enough room to use the Jeremy Lin trade exception, possibly the Bi-Annual Exception (BAE) and still use salary matching rules to take on additional salary and (b) the luxury tax would not be a significant deterrent for Rockets owner Leslie Alexander.

Well, Rockets GM Daryl Morey has been busy following this very plan.

On December 19, Houston acquired Corey Brewer and Alexey Shved in a three-team trade with the Minnesota Timberwolves and Philadelphia 76ers, with the Rockets surrendering Troy Daniels and three second round picks in the process.  This trade was made possible by utilizing the Lin trade exception to absorb both Brewer’s and Shved’s (mid-sized) salaries without having to comply with the league’s normal salary-matching rules.  By consummating this trade as they did, Brewer and Shved will each be eligible to have their salaries aggregated with those of other Rockets players in trade packages on the NBA’s February trade deadline.

Then, just one week later, the Rockets signed Josh Smith to a one-year deal for the BAE after Smith was bizarrely waived by the Detroit Pistons.  A talented but troubled player was acquired for a song compared to his market value, thanks in no small part to Smith’s large guaranteed salary still being paid by Detroit.  Houston was able to outbid other contending teams because it did not spend its BAE during the offseason.  (As a free agent signing who will have been with his new team for less than 3 months as of the February trade deadline, Smith is ineligible to be traded during this season.)

To make room for Smith, Houston waived Tarik Black.  Black, who had done an admirable job manning the middle for the Rockets while Dwight Howard was out with injury, was the obvious (financial) choice to be cut, since his salary was mostly non-guaranteed.  When the Los Angeles Lakers claimed Black on waivers, the roughly $180,000 of his salary that would have otherwise remained on Houston’s books was cleared.

With these transactions completed, it’s time to once again take a look at the team’s current salary cap situation and where the Rockets can go from here.

Player Salary, Exceptions and Available Cap Room

(Salaries and contract information courtesy of ShamSports.com and some good old-fashioned digging.)

The Houston Rockets currently have the following player salary commitments, cap holds and salary cap exceptions available for the 2014-15 season:

Player salary commitments:

Howard ($21.44 million), James Harden ($14.73 million), Trevor Ariza ($8.58 million), Jason Terry ($5.85 million), Kostas Papanikolaou ($4.8 million), Brewer ($4.7 million), Shved ($3.28 million), Josh Smith ($2.08 million), Terrence Jones ($1.62 million), Donatas Motiejunas ($1.48 million), Clint Capela ($1.19 million), Joey Dorsey ($948,163), Patrick Beverley ($915,243, non-guaranteed), Isaiah Canaan ($816,482) and Nick Johnson ($507,336), along with guaranteed money owed to Jeff Adrien ($915,243), Francisco Garcia ($915,243), Ish Smith ($915,243*), Robert Covington ($150,000*) and Akil Mitchell ($150,000).

* Ish Smith (Oklahoma City) and Covington (Philadelphia) each signed deals with new teams and are eligible to have their salaries partially set off once their respective new deals become guaranteed on January 10.  This will result in some minor savings on both payroll and team salary, the latter of which should provide some welcome additional breathing room under the luxury tax threshold.  (Adrien’s new deal with Minnesota is not large enough to make his Rockets salary eligible for set off.)

Cap holds:  None.

Exceptions:  With the Jeremy Lin trade exception amount whittled down to a practically unusable amount, the Rockets’ lone viable trade exception is a small, $816,482 one generated in the trade of Daniels to Minnesota.  This trade exception could be used to acquire a player making the equivalent of the one-year veteran’s minimum but who is on a three- or four-year deal (meaning that he is ineligible to be acquired using the Minimum Player Salary Exception).

The Rockets are a little less than $1 million shy of the luxury tax threshold and nearly $5 million shy of the “apron” level that also acts as a hard cap for Houston this season.

Trade Season: Opportunities and Constraints

The Rockets have developed a sizable “middle class” (from a salary standpoint), which now consists of Ariza, Terry, Papanikolaou, Brewer, Shved and Smith.

While each of these players may end up as a key rotation piece for Houston, expect one, two or even three of these players (minus the ineligible Smith) to be shopped at the trade deadline as part of a package for a third star.  (While Ariza is far less likely to be traded — both due to his integral impact on the Rockets’ defense and the size of his contract — the fantastic early play of Brewer may make moving Ariza at least a little more plausible.)

Although the Lin trade exception possessed value at the February trade deadline (as a more appealing avenue for another team to dump salary than to take on an expiring contract) or next July (either in trade or as a mechanism to facilitate certain sign-and-trade deals to acquire free agents from other teams), Morey and the Rockets elected to utilize that exception sooner rather than later.  The chief benefit in doing so — aside from getting good players now — is that splitting it into two mid-sized contracts allows for more trade flexibility.  A trade exception cannot be combined with other player salaries for salary-matching purposes; but come February 19, the salaries of Brewer and/or Shved can be.

While the Rockets have great flexibility in how they can structure trades over the next two months, there are new constraints facing them as well.

One such constraint is the more stringent salary-matching rules imposed against tax-paying teams.  Teams whose total team salary would exceed the luxury tax threshold following completion of a given trade may only acquire a maximum of 125% of outgoing salary, plus $100,000.  Teams who would fall below the tax threshold may acquire up to 150% of outgoing salary, plus $100,000 under many trade scenarios.  But with Houston so close to the tax threshold already, and with the Rockets looking to acquire a high-caliber player whose team would not want to take on more salary than it is trading out, any notable trade would likely result in the Rockets venturing into luxury tax territory.

An even bigger constraint to the Rockets this trade season will be the hard cap itself.  Houston cannot exceed the $80.829 million “apron” level at any point this season.  There is no salary cap exception, 10-day contract or other veteran’s minimum signing of which the Rockets could avail themselves to exceed this cap.  For example, if Houston sought to trade four players for one star player, with the Rockets taking on $4-5 million in additional salary in the process, there would be little (if any) room left under the hard cap for Houston to add a 13th player.  If the prorated two-year veteran’s minimum salary at that point in the season is greater than the Rockets’ remaining room under the hard cap, this hypothetical trade would be prohibited by the league office.

2015 Cap Room

Assuming the currently projected 2015-16 cap figure of $66.5 million ends up being accurate (more on that here), and assuming that no further trades are made, the Rockets could have about $7.6 million in available cap room next summer.

To get to this figure, Houston would need to renounce its rights to all free agents except for Beverley (who is inching closer to being due a $2.725 million qualifying offer for meeting the league’s “starter criteria”) and either trade away its 2015 first round pick(s) or have any such player(s) playing overseas next year.  (Since the original publication of this article, I have learned that Brewer officially declined his 2015-16 player option.)

While the Rockets could always open up some additional room by trading away salary, it is unlikely that — barring a trade of Ariza for little to no salary in return — they could generate enough cap room to make a legit run at a star free agent this summer.  Again, that assumes that the current projections remain intact.

This may explain why the Rockets seem to be going “all in” this season.

What To Do With Josh Smith After This Season?

Because the Rockets only signed Smith to a one-year deal, they will not have (full) Bird rights to re-sign him next summer.  Houston will hold “Non-Bird rights” to Smith, which would allow the Rockets to exceed the salary cap to re-sign Smith to a starting salary of up to 120% of his prior salary (in this case, about $2.49 million).  If Smith — who is due to receive about $5.4 million annually from the Pistons through 2019-20 — would be willing to accept this amount, that would be the most ideal scenario for the Rockets (short of Smith taking the veteran’s minimum salary).  But don’t expect Smith to be overly charitable in this regard.

Another option is to use the Mid-Level Exception (MLE) on Smith.  The Taxpayer MLE amount next year is $3.376 million, which the Rockets could pay without having to face many other cap restrictions.  The Non-Taxpayer MLE amount next year is $5.464 million.  Houston could pay this larger amount but would then once again become subject to a hard cap at the “apron” level.

The only way for the Rockets to be able to pay Smith more than the Non-Taxpayer MLE amount would be for Houston to create enough salary cap room to do so.  But this would require renouncing rights to several of their own free agents, losing other salary cap exceptions and otherwise constraining the Rockets’ ability to (re)construct their roster.

The options for re-signing Smith seem to get less and less palatable the higher the amount becomes.  Here’s hoping Smith’s play this season will make the decision as difficult as possible for Morey and company.

Conclusion

After a series of moves, the Rockets have built themselves a nice middle class, which should help them both on the court and in mid-season trades.  Unless the league’s salary cap projections for next season change dramatically, expect Morey to be aggressive in his attempts to add another major contributor to this roster by the February trade deadline.  While the team must maneuver around and under the constraints of dealing with the luxury tax and the hard cap, do not expect Alexander to be deterred by the prospect of cutting a luxury tax check to the league after this season.

The Rockets are very much in “win now” mode.  We’ll just have to wait and see what opportunities present themselves between now and February 19 for Houston to further vault itself up another branch on the very crowded championship contender tree.