Questions about Model S lease

[ozweepay]

I just got my lease approved, a day before delivery. I'm somewhat surprised by several items in the lease terms and was hoping someone here who has leased high-end cars before could help me understand the justifications.

1. There is a $5000 cap cost reduction. My understanding is that this is a downpayment against the cost of the car that reduces the lease payment (because the gap between the cap cost and the residual is now lower). I absolutely do not want to make this kind of downpayment on the car, but I think it's mandatory?! They also charge sales tax on this.
2. The $7500 Federal Tax Credit does not appear on my lease document. I was told by two different Tesla folks that it would be retained by the lessor, but that it would decrease my lease payment. I don't see any indication that this has been done: it's not deducted from the cap cost, nor listed as a payment by me. It appears the bank is just keeping the $7500.
3. The lease principal (ie, the cap cost minus the residual) is about $29,500 for me (excluding tax). The rent charge (ie, cost of the lease) is $8,160. This works out to an interest rate on the lease of 16.5%. My bank deposit earns 0.2%. My home loan is 4.25%. My friend's car loan is 2.9%. Tesla leases at 16.5%?
4. The website wants a final payment before delivery and only takes wire transfer or check. I used a credit card for my downpayment, but apparently cannot do likewise for the final payment. Does anyone know why?

Still excited about getting the MS tomorrow, but am aghast that the final payment amount ($7,159) is almost double what the website told me when I paid my downpayment. Hoping there aren't more nasty surprises in store.

 

[brkaus]

I'm not quite sure what your math is, but you can't calculate interest based on the "lease principle". You have the entire value of the car, less down payment, in your driveway the complete term if the lease.

 

[alin3]

The Federal tax credit goes to the lender and raises the residual value.

 

[ozweepay]

I'm not quite sure what your math is, but you can't calculate interest based on the "lease principle". You have the entire value of the car, less down payment, in your driveway the complete term if the lease.

I'm new to all of this, so please forgive me if I'm doing it wrong, but...

My understanding of a lease is that you're paying the amount of depreciation the car undergoes while in your care: the lease principal. Plus you pay interest on that amount. The lessor (US Bank in this case) takes a risk on what the residual value of the car will be at the end of three years, but they make money on the principal by charging interest over that period. If the car ends up worth what they predict ($56,000 in my case) they can resell it and bank the interest they made on the loan.

My car is valued at $90,700 (after the $1000 referral discount) and its predicted residual value is $56,100. The bank is paying $90,700 to Tesla, and getting back only $56,100 three years from now, so they are losing $34,500 on the deal. Of course they are going to charge me for this loss, plus interest. They do it like this:

$5,000 up front (cap cost reduction), leaving a $29,500 loss. Then they let me pay that $29,500 over three years. But of course they want interest. My payment (excluding tax) is $1049. Using a calculator like Determine a loan rate and entering $29,500 principal, $1049 monthly payment, 36 months, the interest is 16.8%

Is that right?

 

[Clprenz]

This is very interesting... I'd like to see a break down from Tesla- Their "cheap" lease deal has never seemed cheap to me at all!

 

[shokunin]

You're not paying interest on the 29,500 you're paying interest on the capitalized cost of the car $90,700. The "principal" part of the loan that you have to repay is 29,500, but you're paying interest on cost of the car.

 

[Stirthepot]

If you do the math on your total out of pocket for the lease over the 36 months vs the cash you will lay out in 36 months if you finance the car and include the fed tax rebate you will find them comparable. (Tesla is lowering your lease payment by applying the 7500 to your monthly payments over the term of the lease)

The variable will be the resale value in 36 months. With the lease its calculated today. With the finance option you are guaranteed a residual if you use tesla financing but if the car is worth more you could sell it for more privately.

Ive done the math on both, several times and had my finance guy review it as well.

On #4. I assume they take a cc on down payment as a convenience for the buyer, but want to avoid the cc fee on the final payment upon delivery. Not surprising or uncommon.

 

[ozweepay]

You're not paying interest on the 29,500 you're paying interest on the capitalized cost of the car $90,700. The "principal" part of the loan that you have to repay is 29,500, but you're paying interest on cost of the car.

Ok this makes sense. After all, as you (and brkaus) say, the bank is out the entire $90,700 for the car, not just the difference. They won't recover the residual for 3 years, so they need to charge interest on the full amount.

Makes sense. +Rep to you both.

If I use a balloon-payment amorization calculator (eg, Balloon Payment Calculator) with $90,700 principal, $56,100 balloon, $1049/mon payment, 36 month term, then the interest rate is 0.98%. Very very low.

Did I do it right THIS time?

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If you do the math on your total out of pocket for the lease over the 36 months vs the cash you will lay out in 36 months if you finance the car and include the fed tax rebate you will find them comparable. (Tesla is lowering your lease payment by applying the 7500 to your monthly payments over the term of the lease)

The variable will be the resale value in 36 months. With the lease its calculated today. With the finance option you are guaranteed a residual if you use tesla financing but if the car is worth more you could sell it for more privately.

Ive done the math on both, several times and had my finance guy review it as well.

Good to know. I am trying to do it as well, but I'm new at this.

On #4. I assume they take a cc on down payment as a convenience for the buyer, but want to avoid the cc fee on the final payment upon delivery. Not surprising or uncommon.

Makes sense.

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The Federal tax credit goes to the lender and raises the residual value.

Seems backwards: they get the tax credit at the front-end of the lease so it should lower the cap cost. Instead, it raises the residual meaning if a customer wants to buy the vehicle at the end of the lease, he has to pay an extra $7500?

How does that make any sense?

I guess that means you should never buy a Tesla at the end of the lease?

 

[brkaus]

Calculation looks ok. I don't understand the tax credit either. Really, it's totally up to the leasing company.

Regarding interest, do remember that the leading company also makes or looses money based on how the car ends up valued compared to the residual. Plus I believe there is some payment when turning the car in?

Anyway, if they can sell the car for $60k they made more in the deal. If they only get $50k they made less. So the residual plays a big part.

Really appreciate your numbers. I'm considering similar car and (still) undecided on lease or buy.

 

[alin3]

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Seems backwards: they get the tax credit at the front-end of the lease so it should lower the cap cost. Instead, it raises the residual meaning if a customer wants to buy the vehicle at the end of the lease, he has to pay an extra $7500?

How does that make any sense?

I guess that means you should never buy a Tesla at the end of the lease?

You are correct that it would be preferable for the lessee to have the Federal tax credit applied to a cap cost reduction. But, that's not how the banks use the Federal tax credit. They add it to the residual value which lowers the lease payment, but artificially raises the residual value so that at the end of the lease the car will probably be over-market in value. This makes it exceedingly unlikely that a lessee will purchase the car at the end of the lease. it makes way more sense to return it to the bank.

If there is any chance you think you'll purchase the car, I would look into straight financing. I'm leasing because I wanted to mitigate my "risk" a bit in getting a car I wasn't too sure on how it would hold up (despite all the positive stories from TMC ) and from a brand new company that may or may not be around (despite all the positive stories from TMC). Even if Tesla somehow goes under and Model S prices tank, the bank has to accept the return of the car at the end of the lease. If the car falls apart in 36 months, the bank has to accept return of the car.

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Leases use something called a money factor to figure out interest.

Money factor can roughly be converted into APR by multiplying the MF by 2400.

 

[ozweepay]

You are correct that it would be preferable for the lessee to have the Federal tax credit applied to a cap cost reduction. But, that's not how the banks use the Federal tax credit. They add it to the residual value which lowers the lease payment, but artificially raises the residual value so that at the end of the lease the car will probably be over-market in value. This makes it exceedingly unlikely that a lessee will purchase the car at the end of the lease. it makes way more sense to return it to the bank.

I am SO grateful for this community and all the positive and knowledgeable feedback I get here. Thanks for the response.

I suppose the higher residual means the bank will always keep the car... and they don't need to sell it for the artificially-inflated residual because that's way over their actual outlay.

If there is any chance you think you'll purchase the car, I would look into straight financing. I'm leasing because I wanted to mitigate my "risk" a bit in getting a car I wasn't too sure on how it would hold up (despite all the positive stories from TMC ) and from a brand new company that may or may not be around (despite all the positive stories from TMC). Even if Tesla somehow goes under and Model S prices tank, the bank has to accept the return of the car at the end of the lease. If the car falls apart in 36 months, the bank has to accept return of the car.

I would be comfortable without this hedge... I think Tesla is going to be going strong in 3 years. I even own TSLA stock to back this belief up a bit!

For me, the fact I can write off 100% of the lease payment (reduced by personal use as appropriate) was irresistible. Add to this the ability to switch to a Model 3 or a new Model S.

 

[brkaus]

For me, the fact I can write off 100% of the lease payment (reduced by personal use as appropriate) was irresistible. Add to this the ability to switch to a Model 3 or a new Model S.

Not counting the "hedge" on future car value, this deduction is the only way I have ever been able to make a lease look good financially. But if I put it in the business in Texas, it becomes property that gets taxed annually.

 

[blanche]

I'm quite used to doing company leases for cars > $100k. Their lease terms are pretty standard and close to what I've experienced in the past. The only difference would be the handling of the $7500 credit which is inflating the residual value. Bit of a bummer as it makes a purchase unattractive in the end, but honestly, with the rapid pace of innovation from Tesla, I'm not even sure I want to buy a 3 year old electric car. In any case, the tax deductible nature of the business lease makes it a no-brainer for me.

 

[yo mama]

I'm quite used to doing company leases for cars > $100k. Their lease terms are pretty standard and close to what I've experienced in the past. The only difference would be the handling of the $7500 credit which is inflating the residual value. Bit of a bummer as it makes a purchase unattractive in the end, but honestly, with the rapid pace of innovation from Tesla, I'm not even sure I want to buy a 3 year old electric car. In any case, the tax deductible nature of the business lease makes it a no-brainer for me.

Same. Plus, the tax credit would be tricky to take on your personal return when the car is a business expense. If you are the sole business owner its no big deal. If you have partners the credit would require special allocations or other "side deal" adjustments between the partners. So I'm fine with the credit merely reducing the monthly payment even though it may not be the most efficient use of that item for me personally. The $2,500 California rebate helps make up for that. :smile:

 

[AuKirk]

This has been a very useful thread.... I have a Model S on order that I am planning to lease. This will be my first lease, and the biggest factor is definitely the "hedge". However, it is not so much a hedge against Tesla not being here in three years or the car falling apart, but rather a "hedge" on buyers remorse. I was stressing a bit over the feeling that some new or great feature was going to come out right after I finalized the order. Also, the reduced monthly payments associated with a lease vs. finance made the decision over whether to add features like auto pilot, upgraded sound system, cold weather package, etc. easier. I was able to get almost fully loaded 85D for the monthly payment I was looking for.

In three years, the landscape for electric vehicles is going to be radically different. I am sure Tesla will have killer new features that I will be dying for, but I also think other major auto makers are going to start catching up. Leasing for three years will also help reassure that an electric vehicle is right for me.

I am not happy about the high "down payment" that I will have to come out of pocket on with the lease (with taxes and the paydown, I am going to be out of pocket at least $10k). However, I have come to terms with it. Looking forward to delivery in a few weeks!

 

[yo mama]

This has been a very useful thread.... I have a Model S on order that I am planning to lease. This will be my first lease, and the biggest factor is definitely the "hedge". However, it is not so much a hedge against Tesla not being here in three years or the car falling apart, but rather a "hedge" on buyers remorse. I was stressing a bit over the feeling that some new or great feature was going to come out right after I finalized the order. Also, the reduced monthly payments associated with a lease vs. finance made the decision over whether to add features like auto pilot, upgraded sound system, cold weather package, etc. easier. I was able to get almost fully loaded 85D for the monthly payment I was looking for.

In three years, the landscape for electric vehicles is going to be radically different. I am sure Tesla will have killer new features that I will be dying for, but I also think other major auto makers are going to start catching up. Leasing for three years will also help reassure that an electric vehicle is right for me.

I am not happy about the high "down payment" that I will have to come out of pocket on with the lease (with taxes and the paydown, I am going to be out of pocket at least $10k). However, I have come to terms with it. Looking forward to delivery in a few weeks!

You mean like Ludicrous mode being announced while your P85D was too far into production to change your order?

For what it's worth, I rationalize the high down payment by saying I'd have nothing tangible to show for that money if I spent $10k on a killer weekend in Vegas. Here, $10k is part of what gets me a high degree of enjoyment literally every time I drive for the next three years, which arguably provides more value with less risk of a divorce.

 

[macd1995]

At the last minute I decided to lease my 2013 X6 50. I loved the car and waited until the 5 seat option in the rear before getting the vehicle. I was set to buy it off the lease and sent BMW finance a check.. until 5 Engine visits during the last two months of the lease. They ended up having to rebuild the Engine(!) I asked for my money back and walked away. I am lucky I did not finance/buy that car.

I have my eye on the Model X, but I need a car now; and the Model S is exciting. I am going to lease.... and see what happens (new tech, Model Kinks get ironed out,etc)

 

[ozweepay]

I'd be happy to post my MS configuration and my lease agreement without my name if folks want to see it?

I need to ensure it doesn't violate any NDA with Tesla or US Bank first, I suppose.

 

[brkaus]

All I would like to know is model and options.

 

[jeffro01]

I'd be happy to post my MS configuration and my lease agreement without my name if folks want to see it?

I need to ensure it doesn't violate any NDA with Tesla or US Bank first, I suppose.

Yeah, that would be great actually.

Jeff