New Credit Tesla Leasing

[engle]

If you lease and decide to buy the car you loose the benefit of that $7,500 credit the way Tesla structures the leases because the $7,500 is not applied as a Cap Cost Reduction as it should be. Apart from that I agree with you in that you are paying to rent the car as well as the interest for financing the value of the car.

You do get the $7,500 tax credit benefit during the lease since it is added to the residual value, which lowers your monthly payments. For example, for the Model X, the residual values are: 52%/51%/50%; all + $7,500 more; for 10K/12K/15K miles per year on their 36 month lease. But if you buy the vehicle at the end, you end-up paying $7,500 extra, which is unfortunate.

When I asked why the $7,500 can't be used to reduce capitalized cost, instead, my very responsive Tesla Credit Specialist replied:

"1. The money factor for all customers who lease with us is 0.0017.

2. This is the only way our partnering bank (US Bank) allows us to pass the Federal Tax credit to our customers.

Since there is no way to adjust the $7,500 Fed Tax credit toward the cap cost, our current indirect lenders will finance up to 90% of your vehicle configuration price (you would be responsible for the 10% not financed plus sales tax and registration costs). Our current advertised rates are about 2.75% for 72 months and 2.45% for 60 months. "

To convert a money factor to APR, multiply by 2,400 so 0.0017 x 2,400 = 4.08%. This is for Model X. Model S may be less since I understand there is a lease special right now?

Since one can find 1.99% 60 month loans from credit unions, you are paying 0.46% higher to get Tesla's Resale Value guarantee.

I still decided to lease my X because I expect that in 3 years time there will be a higher capacity battery from the GF, and the next generation of AutoPilot with new hardware.

 

[brkaus]

I will be curious what buy out they offer to the owners when it actually comes time for these leases to close.

If the resale value is less than the residual due to the $7500 added back, will they offer the car for a lower price?

 

[ddawn]

This is not true.. Lease is paying for what you use.. if Tesla thinks the residual is 45% after 4 years.. then you pay for 55%..

The ONLY difference is you are paying for the interest on the 45% during that 4 years and never the capital.

With finance, you are paying more and a longer period.. but if your car is under water your situation is the same regardless of lease/finance.

With lease you are protected if your car sinks under the residual and if it is higher you can trade it in... With finance, you are financing the risk. This is car, always lease depreciating asset; so it comes out of a cash flow and its depreciation does not affect your net asset.

This is not true.. Lease is paying for what you use.. if Tesla thinks the residual is 45% after 4 years.. then you pay for 55%..

The ONLY difference is you are paying for the interest on the 45% during that 4 years and never the capital.

With finance, you are paying more and a longer period.. but if your car is under water your situation is the same regardless of lease/finance.

With lease you are protected if your car sinks under the residual and if it is higher you can trade it in... With finance, you are financing the risk. This is car, always lease depreciating asset; so it comes out of a cash flow and its depreciation does not affect your net asset.

 

[ddawn]

I agree with XG35 and engle

The subject of leasing has two separate components-

1) Financing cost

With a lease, the lessee is financing the difference between the purchase price and the residual value. The "implicit" rate in the lease is the calculated internal rate of return (IRR) on all cash flows related to the lease, including the purchase at the end of the lease term for the residual. Unfortunately, this rate is not stated in the lease documents which is why it is "implicit". Maybe the Consumer Financial Protection Bureau can prompt some greater transparency on this issue in the future. The financing and lease people internally refer to this concept by using the term "Money Rate Factor" or "Money Factor", which they use as a short cut method to calculate the lease payment. However, the money factor is also not stated in the lease and even if it was it is meaningless by itself without multiplying it 2400 as engle notes above.

2) The option the end of the lease

The automobile lease contains a very customer favorable one way option.

If the value of the vehicle is greater the residual value at lease termination the lessee can purchase the car at less than market value. This can be viewed as an in substance reduction of previous lease payments made, because that difference can be converted to cash upon a sale or trade in.

If the value of the vehicle is less than the residual value at lease termination, the lessee turns the vehicle back to the lessor and the lessor absorbs the loss. Over the decades, the captive leasing companies and independent banks have most likely lost into the billions overestimating residual values at lease termination. In fact, all major leasing companies regularly provide in their financial statements provisions for losses on guaranteed residual values. This does not receive much press coverage as a consumer friendly issue. A current example is the VW diesel debacle. Customers who leased simply turn in the vehicle at lease termination. Those who purchased will have to accept a settlement or fight it out in court, but it is unlikely that in the final analysis they will be reimbursed for the full decline in value of the vehicle relating to this issue.

Conclusion

The implicit rate in the lease effectively includes the cost of the option at lease termination( via a higher IRR to cover the residual value exposure) , although this component it is not explicitly stated. I will not try to value the option here. However, I think its fair to say if the implicit rate in the lease lower or anywhere close to the purchase finance rate it is more economically advantageous to lease rather than finance the vehicle, due to the value of the option at lease termination.

 

[Crazy Cabbie]

I agree with XG35 and engle

The subject of leasing has two separate components-

1) Financing cost

With a lease, the lessee is financing the difference between the purchase price and the residual value. The "implicit" rate in the lease is the calculated internal rate of return (IRR) on all cash flows related to the lease, including the purchase at the end of the lease term for the residual. Unfortunately, this rate is not stated in the lease documents which is why it is "implicit". Maybe the Consumer Financial Protection Bureau can prompt some greater transparency on this issue in the future. The financing and lease people internally refer to this concept by using the term "Money Rate Factor" or "Money Factor", which they use as a short cut method to calculate the lease payment. However, the money factor is also not stated in the lease and even if it was it is meaningless by itself without multiplying it 2400 as engle notes above.

2) The option the end of the lease

The automobile lease contains a very customer favorable one way option.

If the value of the vehicle is greater the residual value at lease termination the lessee can purchase the car at less than market value. This can be viewed as an in substance reduction of previous lease payments made, because that difference can be converted to cash upon a sale or trade in.

If the value of the vehicle is less than the residual value at lease termination, the lessee turns the vehicle back to the lessor and the lessor absorbs the loss. Over the decades, the captive leasing companies and independent banks have most likely lost into the billions overestimating residual values at lease termination. In fact, all major leasing companies regularly provide in their financial statements provisions for losses on guaranteed residual values. This does not receive much press coverage as a consumer friendly issue. A current example is the VW diesel debacle. Customers who leased simply turn in the vehicle at lease termination. Those who purchased will have to accept a settlement or fight it out in court, but it is unlikely that in the final analysis they will be reimbursed for the full decline in value of the vehicle relating to this issue.

Conclusion

The implicit rate in the lease effectively includes the cost of the option at lease termination( via a higher IRR to cover the residual value exposure) , although this component it is not explicitly stated. I will not try to value the option here. However, I think its fair to say if the implicit rate in the lease lower or anywhere close to the purchase finance rate it is more economically advantageous to lease rather than finance the vehicle, due to the value of the option at lease termination.

Ddawn, thanks for that analysis. What is your take on open-ended leases? I live in a state that does not allow Tesla leasing. It appears that if I want to lease, I can only get an open-end lease.

 

[ddawn]

Ddawn, thanks for that analysis. What is your take on open-ended leases? I live in a state that does not allow Tesla leasing. It appears that if I want to lease, I can only get an open-end lease.

The the lease I described above is a closed end lease-where the lessor bears the risk of loss at lease termination with the guarantee residual value. It is referred to as a closed end lease because the lessee's exposure is closed by virtue of making all the scheduled lease payments.

In an open end lease, the lessee has the upside on the residual (like the closed end lease) but also the the downside on the residual , unlike the closed end lease. Therefore, the lessee's exposure on the lease is open, depending on the value of the vehicle at lease termination. Because the lessee's exposure is open, it more resembles a traditional financing agreement than the closed end lease.

The benefit of a closed on lease vs a purchase financing is the lessee's cash out flow during the term of the lease prior to Lease termination is less because on;y the difference between the purchase price and residual value is financed. However at lease termination, a payment is due to the lessor from the lessee if the value of the vehicle is less than the residual value. So, over the term of the lease term including lease termination, the cash flow may or may not be more favorable than a financing depending on the length of financing and the amount of residual guarantee that possibly needs to be made. For example, it is not unusual for a financing to be "under water" where the remaining loan amount is greater then the vehicles. This is normally the case on longer term financings. With an open end lease, there is a true up to market value at the end of the lease term, and for this reason the cumulate cash flow may be more on a open end lease over the same time frame.

Open end leases are most commonly used in commercial, not consumer leases. Because of the lessee's residual risk, the stated residual values on these leases are often less than they would be otherwise, inorder to make the possible residual value differential payment less of a shock and more easily paid by the lessee.

Of course, the purchaser should always analyze the both the cash flow issues noted above and the implicit rate of the lease vs. the external financing rate. Depending on what is most important in the trade off between cash flow and financing costs, the best solution could differ depending on what is more important to the individual.