Model 3 leasing

[UncleMoose]

The $7500 credits doesn't cut off to $0 dollars after 200,000 cars. It is a gradual decreases over time.

Please let me know if anyone finds anything wrong in the following (or if I should post it somewhere else):
The following is based on Internal Revenue Bulletin - November 30, 2009 - Notice 2009-89.
The up to $7500 Federal tax credit does not end when the 200,000th Tesla is sold. The wording on the IRS site is that the "credit phases out for a manufacturer's vehicles over the one year period beginning with the second calendar quarter after the calendar quarter in which at least 200,00 qualifying vehicles manufactured by that manufacturer have been sold for use in the United States." The phase out mentioned above is defined that the cars "are eligible for 50 percent of the credit in the first two quarters of the phase out period and 25 percent of the credit if acquired in the third or fourth quarter of the phase-out period."
So if I read that right I think it would work this way:
If Tesla hits the 200,000 mark in the 4th quarter of 2017, then anyone who gets the title to their Tesla by March 31st of 2018 gets the full credit, anyone who gets it between April 1 2018 and September 30th 2018 gets 50%, and October 1 2018 to March 31st 2019 gets 25%.

 

[Max*]

That actually makes a lot of sense. In general it is best to go with the lowest down payment — zero, if possible — on a leased car because if you crash it you will lose the money you have in it. The insurance company will pay off the lease but you will get nothing.

That's not exactly true.

The insurance company will pay for the car minus depreciation. If you put down more money than the car depreciated you will get a check from the leasing company.

For example, you put down $20k for a lease, and you crash on day 1, but the car only depreciated $10k, you'll get a check for $10k. Now, if you put down $1k for a lease, and the car depreciated by $5k, you get nothing back and the gap insurance (included in the lease) will take care of the remaining $4k.

 

[dgpcolorado]

That's not exactly true.

The insurance company will pay for the car minus depreciation. If you put down more money than the car depreciated you will get a check from the leasing company.

For example, you put down $20k for a lease, and you crash on day 1, but the car only depreciated $10k, you'll get a check for $10k. Now, if you put down $1k for a lease, and the car depreciated by $5k, you get nothing back and the gap insurance (included in the lease) will take care of the remaining $4k.

Yes. I'm talking about driving it off the lot — instant depreciation — and getting into a crash fairly soon after. Then you lose what you put into the car. It happens, although I would hope that it is a fairly low probability event, and it might be worth considering for those who are leasing.

 

[Max*]

Yes. I'm talking about driving it off the lot — instant depreciation — and getting into a crash fairly soon after. Then you lose what you put into the car. It happens, although I would hope that it is a fairly low probability event, and it might be worth considering for those who are leasing.

My point was that -- it depends how much money you put down vs. how much the car depreciated, it's not as cut and dry as "you lose what you put into the car".

I could do a 1-payment lease and crash it as I'm pulling out of the lot, and still have the leasing company cut me a check.

 

[ggnykk]

I'm way out of my depth with regard to how things will work in Canada, but if it follows the pattern used with USA leases the tax credit is added to the residual, thus reducing the "capitalized cost" and the monthly payments. [They don't have to do it this way, a better approach from the customer point of view would be to add the tax credit to the down payment, which would lower the capitalized cost and also lower the buyout price.]

What the residual value will be is an interesting question. For the Model S it tends to be around 51%, or a bit higher with lower mileage (kilometerage? is there such a word?) three year leases. Will the Model 3 get the same residual value as the higher priced S? I'm guessing that it will be a bit lower. But, assume 50% for three years @15,000 miles (24,000 km) per year. The numbers might look like this:

Cost = C$60,000
Residual = $30,000
Down payment = $6000
Tax credit = $14,000 (yes, the 3 will have five seats)
So, $60,000 - $6000 - ($30,000 + $14,000) = $56,000 - $44,000 = $12,000

That $12,000 capitalized cost, thanks to the generous tax credit, would make for a mighty attractive lease. I haven't the faintest idea of what lease interest rates are like in Canada but if it was at the current USA rate of 4.08%, the payments would be around $355/month, not including some small lease-only fees.

FWIW. These are just guesses on my part, based on incomplete information.

So Model S depreciate 49% in 3 years? it is very high. Typically, ICE cars depreciate around 50% in 5 years, not 3 years.

 

[ggnykk]

Please let me know if anyone finds anything wrong in the following (or if I should post it somewhere else):
The following is based on Internal Revenue Bulletin - November 30, 2009 - Notice 2009-89.
The up to $7500 Federal tax credit does not end when the 200,000th Tesla is sold. The wording on the IRS site is that the "credit phases out for a manufacturer's vehicles over the one year period beginning with the second calendar quarter after the calendar quarter in which at least 200,00 qualifying vehicles manufactured by that manufacturer have been sold for use in the United States." The phase out mentioned above is defined that the cars "are eligible for 50 percent of the credit in the first two quarters of the phase out period and 25 percent of the credit if acquired in the third or fourth quarter of the phase-out period."
So if I read that right I think it would work this way:
If Tesla hits the 200,000 mark in the 4th quarter of 2017, then anyone who gets the title to their Tesla by March 31st of 2018 gets the full credit, anyone who gets it between April 1 2018 and September 30th 2018 gets 50%, and October 1 2018 to March 31st 2019 gets 25%.

There are extensive discussion thread on this topic, just do a quick search (icon on right upper corner)

 

[Max*]

So Model S depreciate 49% in 3 years? it is very high. Typically, ICE cars depreciate around 50% in 5 years, not 3 years.

It's not an EV vs. ICE thing, it's a luxury car vs. standard car thing. Luxury cars depreciate much faster early on than non-luxury cars. Model S is a luxury car, the Model 3 will also be a luxury car.

 

[Az_Rael]

It's not an EV vs. ICE thing, it's a luxury car vs. standard car thing. Luxury cars depreciate much faster early on than non-luxury cars. Model S is a luxury car, the Model 3 will also be a luxury car.

The tax credit is also a factor right now. That instantly depreciates all EVs by $7500 once they drive off the lot. As soon as it is no longer available, the depreciation rate should settle down some.

 

[Rookie]

Actually, what happens -- based on my Model X lease -- is the leasing company, US Bank in my case, gets the $7,500 tax credit as the owner of the vehicle. Then, they add the $7,500 credit to the residual value of the X, which otherwise is 52%, 51% or 50% of the price for 10K, 12K or 15K miles per year. So, effectively it reduces the lease payments by $208.33 per month.

Just don't lease if you plan to buyout at the end, or you'll end-up paying an extra $7,500. Finally, the current lease "money factor" is 0.0017 x 2,400 = approx 4.08% interest. Unless you lease for a monthly business write-off, it probably makes more sense to finance the purchase at 1.99% today from Alliant or another credit union. Of course, who knows what the money factor and interest rates will be at the end of 2017 in Tesla Time!

Can you please elaborate 'just don't lease if you plan to buyout at the end, or you'll end-up paying an extra $7,500" ? Why would we need to pay that money ?

BTW I have been a lurker for too long. This is my first post to wonderful community of TMC.
Thanks in advance

 

[tga]

Can you please elaborate 'just don't lease if you plan to buyout at the end, or you'll end-up paying an extra $7,500" ? Why would we need to pay that money ?

Imagine you lease an ICE car for $45,000, that has an expected end-of-lease (residual) value of $25,000. Assume the fair market value at the end of the lease is $25,000 (so they guessed right on the residual value). Your payments are based on financing $20,000. For an EV, the residual is boosted by the value of the tax credit. The residual then becomes $32,500, so you are only financing $12,500.

Ignoring interest and TVM, both situations are equivalent from the leasing company's perspective. In the first case, they get $20k in payments from you, and $25k when the car is sold at the end of the lease. In the second case, they get $7.5k from the government, $12.5K from you, and $25k when the car is sold.

The problem is, if you decide to buy the car at the end of the lease, you don't pay fair market value - you pay the pre-arranged residual price. For the ICE, you pay $25k for a car worth $25k. But in the EV example, you're stuck paying $32.5k for a car worth only $25k (but the leasing company is happy, because they're $7500 ahead of the game).

You're better of giving back the car and buying an equivalent car in the used market.

 

[engle]

Imagine you lease an ICE car for $45,000, that has an expected end-of-lease (residual) value of $25,000. Assume the fair market value at the end of the lease is $25,000 (so they guessed right on the residual value). Your payments are based on financing $20,000. For an EV, the residual is boosted by the value of the tax credit. The residual then becomes $32,500, so you are only financing $12,500.

Ignoring interest and TVM, both situations are equivalent from the leasing company's perspective. In the first case, they get $20k in payments from you, and $25k when the car is sold at the end of the lease. In the second case, they get $7.5k from the government, $12.5K from you, and $25k when the car is sold.

The problem is, if you decide to buy the car at the end of the lease, you don't pay fair market value - you pay the pre-arranged residual price. For the ICE, you pay $25k for a car worth $25k. But in the EV example, you're stuck paying $32.5k for a car worth only $25k (but the leasing company is happy, because they're $7500 ahead of the game).

You're better of giving back the car and buying an equivalent car in the used market.

Exactly! I wonder if Tesla would allow one to return their leased vehicle and buy the exact same VIN back from them CPO? Also, I read my US Bank X lease and it says in paragraph #22:

"If you do not exercise your Purchase Option, you must return the Vehicle to us at the time and place we specify. If you fail to return the Vehicle, you must continue to make your Monthly Payment to us on a month-to-month basis as approved by us, but in no circumstance can the Lease Term continue for more than 6 months beyond the scheduled Lease termination date."

IIRC, my Mercedes lease agreements contained equivalent language.

PS. I'd wanted to buy our X outright since we have a low VIN and keep it, but my wife insisted on leasing to avoid technological obsolescence in 3 years if the range is significantly higher, or fully autonomous driving requiring new sensors is available, etc., etc. So far (first 5 days) I just love it!!! Our Mercedes ICE has been permanently kicked out of the garage waiting for its lease to end! LOL

 

[Rookie]

@tga

Thanks a lot for your reply. I am a novice in buying /leasing car thingy. So your kind elucidation was very helpful.

 

[Rookie]

Thanks to engle to for sharing your story

 

[pmich80]

I'm still trying to wrap my head around it because it sounds too good to be true. If in Canada, the car sells for $50,000 and the residual value is half of that after 3 years, $25,000 and then we add back the Ontario tax credit of $14,000 to the residual value I would arrive at $39,000. I would then only be on the hook for $11,000+interest for 3 year lease? only $300/month? Geeeez... I might as well go for the top model PXXD as long as it's under $75,000 (to get the full $14,000 credit)

Speaking of which, when a car's MSRP is noted, does it include the price of any added options and taxes when it's calculated or is it just the base model? Need to carefully stay under $75,000 MSRP.

 

[dgpcolorado]

I'm still trying to wrap my head around it because it sounds too good to be true. If in Canada, the car sells for $50,000 and the residual value is half of that after 3 years, $25,000 and then we add back the Ontario tax credit of $14,000 to the residual value I would arrive at $39,000. I would then only be on the hook for $11,000+interest for 3 year lease? only $300/month? Geeeez... I might as well go for the top model PXXD as long as it's under $75,000 (to get the full $14,000 credit)

Speaking of which, when a car's MSRP is noted, does it include the price of any added options and taxes when it's calculated or is it just the base model? Need to carefully stay under $75,000 MSRP.

You need to check with Canadian Tesla owners and make sure that leases are available. Also check to see how the tax credit is factored into a lease. It might be different from how they do it in the US.

 

[Infoe]

Unless you lease for a monthly business write-off, it probably makes more sense to finance the purchase at Tesla Time!

Great writeup I understood all this already but you expressed it perfectly.

My only non understanding is (and I guess my accountant knows so I dont need to worry) but like to understand is how does the lease when owning a business benefit on the tax schedule?
Is it a personal lease that is used for business use? Or must it be leased in name of business?

 

[redi]

FWIW, I think Tesla historically marketed the MS "price" as the net of the sticker price minus the tax credit.

Is the "base" $35k M3 really a sticker of $42.5K? This would make a difference in the base lease or purchase since nobody gets a tax credit or a $35K car.

 

[Trev Page]

I'm still trying to wrap my head around it because it sounds too good to be true. If in Canada, the car sells for $50,000 and the residual value is half of that after 3 years, $25,000 and then we add back the Ontario tax credit of $14,000 to the residual value I would arrive at $39,000. I would then only be on the hook for $11,000+interest for 3 year lease? only $300/month? Geeeez... I might as well go for the top model PXXD as long as it's under $75,000 (to get the full $14,000 credit)

Speaking of which, when a car's MSRP is noted, does it include the price of any added options and taxes when it's calculated or is it just the base model? Need to carefully stay under $75,000 MSRP.

The EVIP rebate is calculated with only MSRP in mind. Options don't count against the cap.

If you think you're going to get a Model 3 for $300 a month lease in Ontario I've got a nice bridge to sell you.

If you lease a car that sells for $50k and you want to use the $14K rebate to reduce your capital cost calculation you will have to put up the rebate out of pocket up front since the rebate is paid back to you, not the lessor. You pay yourself back after you take delivery and submit your paperwork. So net is $36K. Residual you'd better figure is 50% after 36 months so monthly cost is $500 and that's before interest (figure 4% because you know, Canada) and our much loved 13% HST tax. You're very close to $600 a month which coincidentally is about half a base Model S lease cost per month. Go price out a Model S on the Canadian site and look at the lease rate and divide by half. Not 100% accurate given the different rebate amounts but it's a helpful guide.

I know this calculation very well because when I leased my Lincoln Mkc last year it was $50K and I reduced the capital cost with a trade in which came very close to what the rebate would be in Ontario. Residual is pretty much 50% as well, add in .05% interest (I wish we could get that for Teslas) then add tax. That's how it's done here.

Good luck!!

 

[Trev Page]

FWIW, I think Tesla historically marketed the MS "price" as the net of the sticker price minus the tax credit.

Is the "base" $35k M3 really a sticker of $42.5K? This would make a difference in the base lease or purchase since nobody gets a tax credit or a $35K car.

Model 3 is priced at $35K US *before* any potential tax credits. Tesla has made it very clear from the beginning with Model 3 that pricing would always be quoted this way given that the tax credit gradually expires once they reach 200,000 sales in the US.

Given the enormous preorders on this car everyone should really be doing their calculations based on the real $35K cost so as to not be disappointed should you not qualify orbrake delivery before the cap is reached. Just good financial planning.

 

[pmich80]

The EVIP rebate is calculated with only MSRP in mind. Options don't count against the cap.

If you think you're going to get a Model 3 for $300 a month lease in Ontario I've got a nice bridge to sell you.

If you lease a car that sells for $50k and you want to use the $14K rebate to reduce your capital cost calculation you will have to put up the rebate out of pocket up front since the rebate is paid back to you, not the lessor. You pay yourself back after you take delivery and submit your paperwork. So net is $36K. Residual you'd better figure is 50% after 36 months so monthly cost is $500 and that's before interest (figure 4% because you know, Canada) and our much loved 13% HST tax. You're very close to $600 a month which coincidentally is about half a base Model S lease cost per month. Go price out a Model S on the Canadian site and look at the lease rate and divide by half. Not 100% accurate given the different rebate amounts but it's a helpful guide.

Good luck!!

Thanks for your input. So essentially it doesnt matter what options are put into the Model 3, it will still qualify for the full Ontario rebate ($14,000 potentially).

As regards to the lease payments, while the actual payments will be north of $600 for a $50,000 car, the truth is when you get the $14,000 rebate cheque, you can essentially draw from that lump sum to subsidize the monthly payment down to $300 out of your own pocket (once you receive the cheque) eg. $300 out of pocket plus $14,000/36 = $388 Therefore $688 monthly payments. Obviously theres those taxes you mention and the interest rate to add in as well. But i assume my math checks out.

How long does the rebate take from when you submit it .. 2 months or so

Personally im going to aim for a monthly payment of $500-600/month out of pocket plus draw against the rebate (or put up $14,000 up front as a down payment) to keep it at that. Figure that would allow me to option it to $75,000