Under the 2005 Collective Bargaining Agreement, which expired on June 30, 2011, teams above the salary cap could offer free agents contracts starting at the league's average salary, for a maximum of five years and with eight percent annual increases.
Many of the most notorious contracts signed between 2005 and 2010 - Drew Gooden's five-year, $32 million contract with the Bucks, for example - were signed using the mid level exception.
The Mid Level and the 2011 CBA
In the collective bargaining agreement that went into effect on December 9, 2011, the mid level exception will be a lot more limited.Teams under the luxury tax threshold can offer four-year contracts starting at $5 million, with three percent annual increases. Tax-payers are limited to three-year offers starting at $3 million. The base salaries will increase by three percent every year starting in 2013-14.
Teams that go under the cap at any point cannot use the mid level exception, but can sign players using the "Space Exception" introduced in the 2011 CBA.