Questions about leasing an MS

[XLR8OR]

Hi CapeOne,

Respectfully, I disagree, but perhaps on a theoretical point. The equity you refer to is external to the asset itself, namely the car. In neither case does the lessee have equity in the car, nor will they, because they don't own it. They have it elsewhere, and second-order effects don't count. No doubt someone will point out that if the residual of a car is $X, and the market value at lease-end is $X+Y, that's equity. Actually, it's not; it's arbitrage, which is different. Plus, from a practical standpoint it's hard to pull off: you have to buy the car from the lessor, get title, and then sell it. And why would the new buyer buy it from you, when they can buy it from the lessor?

I once had a finance professor, many moons ago, who beat into my thick skull the mantra to "never confuse the investing decision with the financing decision." People often do, but should keep this in mind. With very rare exceptions, a new car is not an appreciating asset; quite the reverse, which is usually an indicator that leasing is likely to be the better financing decision for a tax-sensitive investor (aka the guy with the car).

People lease for a number of reasons, but a very common one is that they really can't afford to finance the car through a normal auto loan, which requires up-front equity (the down payment). The purist in me says that's dumb, but who am I to say?

As buckerine correctly points out, when you lease you should think of yourself as locked in for the lease term. You can find someone to take over the lease, but it's a PITA.

Chilliban is also correct about BMW's leases. I've leased BMWs for years, and BMW's captive finance subsidiary does a good job. The leasing market for Teslas is still quite new, and right now USBank is the only volume player (note that Tesla isn't the lessor). When I leased a new car 3 years ago (a BMW 6 convertible that I'm replacing with a MS90D), there were no leases available for Teslas (Elon's value guarantee benchmarks against E-Class Mercedes didn't count, because you had the pink slip, whereas in a lease the lessor does). Back then, the lease-vs-buy analysis of the BMW vs the Tesla, two comparatively priced cars, was hugely in favor of the BMW. As the aftermarket gets more experience with the resale value of Teslas other lessors will enter the market.

As always, YMMV...

 

[CapeOne]

Respectfully, I disagree, but perhaps on a theoretical point. The equity you refer to is external to the asset itself, namely the car. In neither case does the lessee have equity in the car, nor will they, because they don't own it. They have it elsewhere, and second-order effects don't count.

I agree in that sense which is why I wrote "or at least similar." I just find the "no equity" argument against leasing unreasonable as it basically ignores the fact that to get that equity when financing requires much higher monthly payments compared to leasing. Sure, you can build equity in a car when financing but you're essentially paying for it or into it with your own higher payment money. In the end, as my example showed, you may be worse off financially financing than leasing.

 

[ChadFeldheimer]

Business deductions are not the only way leases can be financially advantageous.

For example:

1) Some states only charge sales tax on lease payments - versus the entire purchase price for an outright purchase. On a $100k car, this is not insignificant.

2) For EV leases, if your tax liability is less than $7500, a lease can help you capture more of the tax credit.

3) On a closed end lease, you "win" if the car ends up being worth less than the lease residual at lease end. Of course, you pay for the guaranteed resale value of the car via higher finance cost. Basically, leasing can be attractive if you are nervous about the resale value of the car (the Tesla RVG is much lower than the lease residual).

4) Scheduled maintenance on a leased car is more or less optional =) BMW and Mercedes are commonly leased and include scheduled maintenance for typical lease terms - I speculate that this is not a coincidence.

5) Again, EV specific: on a leased EV, feel free to use the battery as you see fit. Charge to 100% every time, supercharge as much as you'd like, etc. Given how much Tesla charges for battery upgrades, paying the higher finance cost on a lease and charging to 100% every time is almost certainly cheaper than buying a car with a battery upgrade and charging to 90%. Granted, with the battery upgrade, you can still charge to 100% for additional range - and receive the other benefits (faster charging, higher performance).

 

[XLR8OR]

As with much in life, nuance can be important. My narrow goal was to point out the basic facts of leasing and dispel much of the ignorance about it. Once educated, what or how people do with the insight is very personal. YMMV.

 

[ChadFeldheimer]

As with much in life, nuance can be important. My narrow goal was to point out the basic facts of leasing and dispel much of the ignorance about it. Once educated, what or how people do with the insight is very personal. YMMV.

Fair enough! I just found this:

So, what does it take to make leasing cheaper than owning? 1) be self employed; 2) have a high enough marginal tax bracket, say above 35%; 3) drive enough for business, say above 45%. It's a simple analysis

A bit simplistic

 

[XLR8OR]

It's a guideline, not a recipe. But I've run the analysis many times and played with the variables enough to feel comfortable that's generally what the solution space looks like. Everyone considering leasing should do their own analysis with the aid of their tax advisor and come to their own conclusion.

 

[ebwb]

Here's a blog post I wrote on some of the benefits of leasing:

8 Things You Should Know Before Leasing A New Car

One of the advantages (#6) is that some captive lenders, such as Honda and Toyota, allow you to cash out on lease "equity" -- which is when you've paid more in depreciation than the actual depreciation incurred.

On all my leases, the opposite occurred: actual depreciation was much greater than the sum of my lease payments. The lender took the loss by overestimating the residual value of the car.

 

[SUN-day Driver]

If you are not planning on writing it off for business/tax purposes, you may also like to consider financing your Tesla with the Resale Value Guarantee. It's pretty much identical to leasing in terms of the total cost of ownership if you invoke the turn-in at 36mo, but it works out better in your favor in terms of keeping your 7500 tax credit and so on in case at 36mo you really decide that you'd rather keep the car a little longer.

I did that for my first one (2013) because there was no consumer lease option from Tesla then and I knew I wanted to keep it for only 3 years and then get the latest and greatest. But the market supported a better private sale value than Tesla's price guarantee so I sold it on my own.

This time I am leasing because like before I kmow I want to get a more advanced vehicle in 3 years. Leasing keeps my payments lower and saves me the hassle of selling the car for the best price in 3 years.

If you know you only want it for 3 years I recommend leasing for the combination of lower payments and easy disposition.

 

[javawolfpack]

I think it's wrong to say that leasing is always more expensive and misleading to say it cannot provide "equity" or at least similar. Leasing can still allow someone to build up cash thanks to much lower monthly payments versus financing and potentially allows the lessee to end up better off financially.

Example: Person #1 leases a car with $0 out of pocket for $700/month for 36 months and person #2 finances same car with $0 out of pocket for 36 months for $1,450/month. Let's say at the end of the three years the car is worth $25,000.

Person #1 turns the car in and has $27,000 in the bank ($1,450-$700 x 36) saved from the lower monthly payments and person #2 has a car worth $25,000. Here, the person who leased has $2,000 more in assets at the end of three years.

I will be doing my first lease with my upcoming Tesla, and the factors for me include needing a new vehicle sooner than I'd planned for when I planned to buy a Tesla (due to the VW TDI scandal)... Leasing puts me in the Person #1 category of I can save money with the lease payment. Other factors include technology changing so fast that might want to upgrade in 3 years vs hold onto the car to maximize equity, if I sell at 3 years on a financed vehicle on like a 6.5-7 year financing then the financial hit is worse than leasing. I spend so much time in technology and reading about Tesla, that owning/leasing one will double as "entertainment" so if you factor that in... lot of factors beyond financing/$$ cost sometimes.

But the argument could also be made you should never finance/lease anything.

 

[Austin Powers]

But the argument could also be made you should never finance/lease anything.

Given where the rates are at right now, I would finance anything and everything. The longer term, the better.

 

[glusc2002]

I'm going the leasing route, mainly due to:
1. i got theS60 (90% of commute is local short distance)
2. i cant manage to keep interested in a car for more than 36mo's
3. i'm self employed and its more beneficial as a write off

my OC SC rep said the 60's now have a higher residual percentage as a promotion to push out. I believe the 70's are the same.

 

[Moneesh]

I'm going the leasing route, mainly due to:
1. i got theS60 (90% of commute is local short distance)
2. i cant manage to keep interested in a car for more than 36mo's
3. i'm self employed and its more beneficial as a write off

my OC SC rep said the 60's now have a higher residual percentage as a promotion to push out. I believe the 70's are the same.

I just picked up my MS 90D Tuesday and but I waited up until the day prior to delivery to decided on a purchase versus a lease. Since that was the case, I was still asking questions and comparing, leading up to the delivery. As a result, of me getting quotes within a day of delivery, they accidentally quoted me the lease terms based upon the higher residual promotion, which resulted in a $105/month reduced lease payment form my original lease quote when I ordered the car. Since they did it over the phone the day prior to my delivery, I didn't have proof of the numbers they quoted, but when I went to take delivery, they looked into it after taking my word for the discrepancy and honored the higher residual based lease quote, even though I wasn't eligible. Have to say, I was impressed and relieved. Good luck with your MS and your lease.

 

[CapeOne]

my OC SC rep said the 60's now have a higher residual percentage as a promotion to push out. I believe the 70's are the same.

I thought the lease promotion (subsidized residual) recently ended. I believe Tesla had been adding 4% to the standard 50% residual on leases for 60 and 90 Model Ss.

Is there another new ‘promotion’ now or coming soon?

 

[javawolfpack]

I thought the lease promotion (subsidized residual) recently ended. I believe Tesla had been adding 4% to the standard 50% residual on leases for 60 and 90 Model Ss.

Is there another new ‘promotion’ now or coming soon?

I know I was told that the vehicle needed to be ordered before the end of June to make use of that promotion. It might be another will be coming soon...

 

[brian45011]

right now USBank is the only volume player (note that Tesla isn't the lessor). .

XLR80R:
I'm interested in the topic as a TSLA investor.

The most recent quarterly report stated:"In April 2014, we began offering a leasing program in the United States, and subsequently began to offer similar programs in Canada and Germany. Qualifying customers are permitted to lease a vehicle directly from Tesla for 36 or 48 months." Tesla reported initiating 1,405 direct leases in the first quarter (bring the total inception to date to over 5,100 cars.)

The reports also discuss leases by banking affiliates and the residual value guarantee to the banks (I assume USBank is in this category).

I do not understand how anyone gets the benefit of the $7,500 federal income tax credit when Tesla is the direct lessor since Tesla has no income and lots of tax losses to carry forward?

Do you know how the credit works when Tesla is the direct lessor? Thanks

 

[Moneesh]

XLR80R:
I'm interested in the topic as a TSLA investor.

The most recent quarterly report stated:"In April 2014, we began offering a leasing program in the United States, and subsequently began to offer similar programs in Canada and Germany. Qualifying customers are permitted to lease a vehicle directly from Tesla for 36 or 48 months." Tesla reported initiating 1,405 direct leases in the first quarter (bring the total inception to date to over 5,100 cars.)

The reports also discuss leases by banking affiliates and the residual value guarantee to the banks (I assume USBank is in this category).

I do not understand how anyone gets the benefit of the $7,500 federal income tax credit when Tesla is the direct lessor since Tesla has no income and lots of tax losses to carry forward?

Do you know how the credit works when Tesla is the direct lessor? Thanks

I picked up my lease on Wednesday and was told by my Delivery Specialist that Tesla does not receive the $7,500 credit, that the lessor (US Bank in my case), receives the credit and thus creates the finance terms, money factor, residual, all to support their lease program. On my paperwork, it indicates that Tesla was paid in full for the car and that US Bank holds the title, thus is eligible for the credit.

 

[brian45011]

On my paperwork, it indicates that Tesla was paid in full for the car and that US Bank holds the title, thus is eligible for the credit.

Thank you. I believe US BANK is one of Tesla's "bank leasing partners" under this:

"In the fourth quarter of 2014, we also began offering residual value guarantees in connection with automobile sales to certain bank leasing partners. As we have guaranteed the value of these vehicles and as the vehicles are leased to end-customers, we account for these transactions as interest bearing collateralized borrowings as required under ASC 840 - Leases ."

I think there may be about 9,000 cars on that program (which is different from a direct lease with Tesla) with yours now being one of them. Enjoy it!

 

[Seattle Tom]

4) Scheduled maintenance on a leased car is more or less optional =) BMW and Mercedes are commonly leased and include scheduled maintenance for typical lease terms - I speculate that this is not a coincidence.

5) Again, EV specific: on a leased EV, feel free to use the battery as you see fit. Charge to 100% every time, supercharge as much as you'd like, etc. Given how much Tesla charges for battery upgrades, paying the higher finance cost on a lease and charging to 100% every time is almost certainly cheaper than buying a car with a battery upgrade and charging to 90%. Granted, with the battery upgrade, you can still charge to 100% for additional range - and receive the other benefits (faster charging, higher performance).

I hadn't considered these two "savings" or benefits on a lease. Tesla annual maintenance is what - $2000 or something for the Service Center visit? That's an expense worth roughly $170 per month if you finance.

And yeah, I can charge to 100 pct every day. Seems like that wouldn't be allowed but I guess it would be in the paperwork if not. Then drop that car with the broken down battery off after 36 months and get a new one? Wow...

 

[Super_Popular]

I hadn't considered these two "savings" or benefits on a lease. Tesla annual maintenance is what - $2000 or something for the Service Center visit? That's an expense worth roughly $170 per month if you finance.

And yeah, I can charge to 100 pct every day. Seems like that wouldn't be allowed but I guess it would be in the paperwork if not. Then drop that car with the broken down battery off after 36 months and get a new one? Wow...

It's $600.

Tesla makes to many cool updates to often to lease.

 

[clean]

regarding a benefit from a write-off of lease payment in small biz....
if i report low earnings it wont help. does anyone know a "low threshold amount" of reported self employment earnings that would allow payments to be written off? (sorry, i'm not a cpa + am slightly math challenged but it seems there would be some formula to figure out exactly how much i could report to get the write off??)