Nene and the Rockets agreed to the deal Friday. Houston, however, was not permitted to offer a four-year contract because of the Over 38 rule.
The fourth season of the initially proposed contract would have been during Nene's 38th birthday. The Rockets have countered with a three-year, $10 million offer to Nene that he has not accepted, a source said.
Nene is now back in the free-agent pool and open to talking to other NBA teams, a source said. Houston, however, is optimistic it will work out a contract with the 34-year-old before he is eligible to re-sign.
One Rockets source said it's imperative that Nene is re-signed to play alongside All-Stars James Harden and newcomer Chris Paul.
Nene averaged 9.1 points and 4.2 rebounds primarily as a reserve in his first season with the Rockets last season. The Brazilian suffered a season-ending tear in a muscle in his left thigh during Game 4 of the Western Conference finals against the San Antonio Spurs last season.
The 15-year veteran averaged 10 points and 4.7 rebounds in nine postseason games last campaign.
12 days cost Nene his contract
Brian Windhorst and Amin Elhassan detail how the over 38 rule and a miscalculation resulted in Nene not returning to Houston.