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Model S Lease Speculation Thread

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Rifleman

Now owns 2 Model S's!!!
Nov 29, 2011
996
88
Harrison Ohio
I was not able to find a thread for speculating about the leasing options for the Model S, so I figured that I would start a new one.

Personally, If a lease on a 60 kWh Model S could be had for $10,000 down (5k already down, and an additional 5k at signing), $600-$650 a month, with a residual of 30-35k, I would be very interested in going that route as opposed to buying a 40 kWh Model S.

What sort of lease terms do we think will be available for the Model S, and when do we think Tesla will start to talk about them?
 
Does anyone know what happens with the $7500 US Federal tax credit on a lease? Can the leasing company claim that credit? What about various state incentives?
With the Volt lease, the leasing company claims the credit and applies the amount toward the lease rate. In other words, it's $7500 cheaper and it's applied up front rather than having to wait for the tax season to claim your credit on an outright purchase. I don't know if that's how it's done universally, but it seems a reasonable approach.
 
What sort of lease terms do we think will be available for the Model S, and when do we think Tesla will start to talk about them?

I think it was on the conference call that they said that there was no reason to do a lease yet, because they are currently supply constrained with direct purchases. Once they catch up and are interested in creating higher demand, then the lease option will begin to make sense to offer.

I would guess second half of next year at the soonest, but that's totally out of thin air.
 
It goes to the leasing company who generally passes it through to the customer as a cap reduction. Same for the state, but they have to be based and have a tax liability in the state that they are doing business. It kind of forces Tesla to partner with a large bank like B of A or ??? who has branches in every state.
 
I agree that Tesla will most likely go with a larger bank such as B of A. I know that Tesla is supply constrained for now, but I would be willing to bet that many of their current reservation holders (myself included) would be interested in leasing. For me, being able to spread out the capital expenditure between now and 3 years from now when I buy the car at the end of the lease would likely make the difference between a 40 kWh Model S and a 60 kWh. I am sure I am not the only one in this situation, and I am also sure that Tesla would rather sell bigger battery backs to the current reservation holders, if given the option. Making leasing available at the time the 40 kWh pack becomes available might help a little bit with this.
 
I'm sure you know this, but the real value of a lease, compared to a loan, comes from the treatment of the residual value.


  • First, you don't pay usage tax (=sales tax) on the residual value; with a loan, you're charged sales tax on the whole value of the car.
  • Second, the lease payment covers repayment only of the difference between the sales price and the residual value, plus interest costs on the residual value; on the loan, you're paying back the entire capital plus interest.
Leases can be advantageous in certain tax situations, too. But you should also recognize that, with a lease, you are buying a "put option" on the car, allowing (but not requiring) you to resell the car at the end of the lease for the contracted residual value. Put options are never free, especially when the true future value of the underlying asset is uncertain. I'm not interested in leasing because I'm not interested in paying the option premium.
 
I think it was on the conference call that they said that there was no reason to do a lease yet, because they are currently supply constrained with direct purchases. Once they catch up and are interested in creating higher demand, then the lease option will begin to make sense to offer.

I would guess second half of next year at the soonest, but that's totally out of thin air.

Hi Mike,

Yes, here's an excerpt of the relevant portion of the transcript.

I've also included discussions regarding residual value and leasing in general.

Carter Driscoll - Capstone Investments
That kind of leads to my next question. It’s the relationship you have with Wells. And because of what you just stated, you believe the battery pack’s going to last twice what it’s currently warrantied for, I’m assuming that the residual value of that price point, given there just aren’t a whole lot of comparable vehicles to be able to set what the residual value is going to be, and therefore the leasing terms. But you feel comfortable that’s not a sticking point, as you suddenly saw people wanting to lease the vehicle, even though you don’t expect that to be the case for probably 12-18 months at the minimum.

Elon Musk - Chairman, Product Architect, and CEO
Right. We don’t need to lease a single car until maybe the second half of next year at the soonest. We could just be all sales. But we have had many discussions about residual value. The thing that supports residual value is just to make sure that the depreciation of the battery pack essentially matches that of the rest of the car. And if you had a gasoline car, after 10 years, it’s on the order of 10-15% of its original value. So it’s depreciated down to almost nothing.

Carter Driscoll - Capstone Investments
Do you expect that to be comparable? Or do you expect residual value to be higher?

Elon Musk - Chairman, Product Architect, and CEO
I actually think it will be higher. Because the other thing is once you put a new pack into the car, it will actually be better than new from a range standpoint.

Deepak Ahuja - Chief Financial Officer
Because you continue to recognize the savings versus fueling your car with gas for the next 10 years, or whatever. So you get huge benefits of that.

Elon Musk - Chairman, Product Architect, and CEO
Gasoline’s probably not getting cheaper in the long run. I mean, the price of gasoline is an upward sloping sine wave.

Carter Driscoll - Capstone Investments
I agree with that. Have you guys actually booked any warranty expense in anticipation of having to replace any of the batteries?

Elon Musk - Chairman, Product Architect, and CEO
Yeah, with each car there’s a warranty reserve.

Deepak Ahuja - Chief Financial Officer
We’re booking a warranty reserve for each of the cars, and that’s related to the entire vehicle, not just to the battery. And just to clarify your other point, with Wells Fargo, we’re not offering lease financing. It’s traditional retail financing. So residual values or leasing is not really an issue in our present offering with Wells Fargo.

Elon Musk - Chairman, Product Architect, and CEO
With Athlon it is.

Deepak Ahuja - Chief Financial Officer
Athlon is offering their own lease program in Europe for corporate clients.

Elon Musk - Chairman, Product Architect, and CEO
Yeah, we did sign our first Model S leasing deal in Europe.

Carter Driscoll - Capstone Investments
Have you seen the mix of reservations change as 2012 has unfolded? Are you still seeing a similar rate of the signature series versus the other range models? Or has that stayed fairly consistent? Can you talk about your expectations about how that may change over time as well?

Elon Musk - Chairman, Product Architect, and CEO
I think it’s fortunate that the signature series has been sold out for several months now. Not only is the signature series is sold out, we have a long waiting list for people to get on [unintelligible], and arguments about what place they are on the wait list.

Carter Driscoll - Capstone Investments
[You were sold out in year two.]

Elon Musk - Chairman, Product Architect, and CEO
And we’re sold out in the EU on the signature series as well.

Larry
 
Just to confirm, the $7500 tax credit still applies for leases of EVs. All of us Volt lessees took happy advantage of that. It was quite hairy for the first couple days of deliveries (in December 2010) as most of the lease details had not been released yet and we couldn't do what-if calculations on the leases. Leases are quite a bit more complicated than straight sales.

Note also that different states have different laws regarding what exactly is subject to sales tax. If I remember correctly, there are five states (Virginia among them) that tax ... differently. I don't recall the details but it really made my lease confusing back then, as I am a Georgia resident (and thus subject to Georgia sales tax) but was buying my Volt from a Virginia dealer.
 
I'm sure you know this, but the real value of a lease, compared to a loan, comes from the treatment of the residual value.


  • First, you don't pay usage tax (=sales tax) on the residual value; with a loan, you're charged sales tax on the whole value of the car.
  • Second, the lease payment covers repayment only of the difference between the sales price and the residual value, plus interest costs on the residual value; on the loan, you're paying back the entire capital plus interest.
Leases can be advantageous in certain tax situations, too. But you should also recognize that, with a lease, you are buying a "put option" on the car, allowing (but not requiring) you to resell the car at the end of the lease for the contracted residual value. Put options are never free, especially when the true future value of the underlying asset is uncertain. I'm not interested in leasing because I'm not interested in paying the option premium.

This is a good analysis, but as someone who is financially "stretching" to get into a Model S, the opportunity to spread out major expenditures between the initial payment and the coverage of the residual puts a few more features (like battery size) in reach.

While during the investor call, the Tesla team was quick to point out that Tesla purchasers are savvy enough to understand the total cost of owning the car gets lower as it gets deeper into the life-cycle, it doesn't mean that all of those interested in making the purchase have the cash flow to support a fairly steep initial investment. At least for me.
 
This is a good analysis, but as someone who is financially "stretching" to get into a Model S, the opportunity to spread out major expenditures between the initial payment and the coverage of the residual puts a few more features (like battery size) in reach.

While during the investor call, the Tesla team was quick to point out that Tesla purchasers are savvy enough to understand the total cost of owning the car gets lower as it gets deeper into the life-cycle, it doesn't mean that all of those interested in making the purchase have the cash flow to support a fairly steep initial investment. At least for me.

I think we are in the exact same situation. I will be able to afford the 40 kWh (a stretch but I can it) but to afford the 60, I would need to find a way to spread the lump sum payment around so that I can keep my monthly payments at a manageable level.
 
I just got off the phone with PenFed. I talked with them about their "payment saver loan" Essentially this loan is like a lease, but you own the car, and at the end of the term (up to 60 months) you simply pay the residual (either buy paying outright, refinancing, or selling the car). For those of us who would like to buy, but are looking at leasing to spread the capital expenditure out, this might be a good option (especially since the rate for this loan is 1.74%). Even more surprisingly, the rep that I talked to on the phone had actually heard of the Model S, and said "that thing is faster than gas powered cars!" in an excited voice.

The bad news is that right now, they will not do this loan on a Model S, as there is not a NADA listed residual value for it. They told me that if NADA list a residual for the Model S, they would be happy to do this type of loan on it. Hopefully NADA will list the Model S soon so that this loan is an option to us. In the absence on a Lease option from Tesla, this loan might be the best choice for some of us.
 
I think it was on the conference call that they said that there was no reason to do a lease yet, because they are currently supply constrained with direct purchases. Once they catch up and are interested in creating higher demand, then the lease option will begin to make sense to offer.

Hi Mike,

I found some more in depth remarks from Elon on the earning call supporting your recollections.

Ben Kallo - Robert W. Baird
[laughter] Can you give us an update on the leasing program here in the United States?

Deepak Ahuja - Chief Financial Officer
I think as Elon alluded to, that’s something we’ll look into next year. We’re continuing to evaluate that, and I think at this point our focus is on the key priorities of production.

Elon Musk - Chairman, Product Architect, and CEO
But I can maybe just give my views on leasing long term, which is I’m a huge proponent of leasing, particularly for electric vehicles. As is the case with solar, with SolarCity, leasing has proven to be extremely effective as a way to encourage solar adoption. And it sort of seems like it shouldn’t be that effective, because if you told someone, hey, this system is going to pay you back in five years, and they said, oh, five years, that sounds like a long time. Like, do you know how long your savings account’s going to take to pay you back? You’ll be dead. [laughter]

And so people seem able to do the math on that. It’s like, excluding compounding, a 20% return if it pays back in five years, and with certainty. Where do you get something like that? And yet amazingly, SolarCity had trouble getting people to act. So we’re basically going to go to people that understand, people who are sophisticated in finance, and are looking for yield, and say, okay, let’s go talk to people who really understand yield and take that problem away from the consumers so they don’t have to think about it, and they can just look at it like their electricity cost went down.

Why is that relevant to Tesla? Because the cost of operation on the Model S is much less than the cost of operation of any other premium sedan, by far. It’s going to feel like you have a car for free. And particularly in places like Europe. It’s, like, $9-10 a gallon in Europe. You can spend a couple hundred dollars filling up your gas tank. Or you can spend some negligible amount recharging your car.

So it really amounts to a huge effective discount on the cost of operation of the car relative to other premium sedans. But the best way to make that apparent is through a lease. So we’re going to be very big on leasing in the future. We just haven’t needed to do that because there’s enough demand for the car where we just tell people you’ve got to buy the whole thing. You can’t have leasing. [laughter] If we have sufficient demand to do that, then we should turn our attention to the key thing, which is production, and then next year we’ll get to leasing.

And we do have data from the Roadster that I think is helpful to leasing companies. And by the way, the Roadster’s got really good residual value. I think it’s significantly better than a Porsche, actually. Maybe it depends on which Porsche you consider, but it’s certainly got much better residual value than the Porsche I bought about five years ago. [laughter] Thing’s worth like a peanut.

Larry
 
Hi Mike,

I found some more in depth remarks from Elon on the earning call supporting your recollections.

Larry

Thanks, Larry. This is what I recalled as well.

Just thinking out loud, it starts to define some options for me:
1) I can go ahead and get the 40 now (with the options that I want) with certainty, but am potentially locked out of a battery upgrade later;
2) Strip out all my options until I bring the 65 in line with what is affordable without a lease option;
3) Defer to save money reducing the amount financed or until the leasing program comes online and get the car that I want;
4) Find a shorter term fix - Toyota ERAV or the BMW ActiveE that have leasing options ready to go now.

My biggest outstanding question will be whether I can upgrade from the 40 to a 65 or higher somewhere down the line. That might make the 40 a nice interim step. Alas, that's the subject of another thread.
 
My biggest outstanding question will be whether I can upgrade from the 40 to a 65 or higher somewhere down the line. That might make the 40 a nice interim step. Alas, that's the subject of another thread.

It's been said that you could, but you won't be able to add the supercharger hardware. (post #35). This may change over time.
 
I was told that if you elect to lease with Toyota, that you loose the Federal Tax Credit, and state Tax Credit for California. Toyota does not give you credit for it and you can't claim it as you are not the owner.

Toyota is still doing everything it can to stop electric cars.
 
I think Tesla would love to be able to offer competitive lease terms, but cannot currently do so.

Here's why:

1. Their cost of capital is way too high to carry the lease internally.
2. A third party financing source would never get comfortable with a residual value assumption that consumers would be happy with, because: (i) there is no history of resale value for this car, so there is too much uncertainty-- bank's don't like uncertainty and (ii) there is a significant viability risk with Tesla that could cause a step-function decline in residual value.
3. Car makers try to offset #1 and #2 by offering residual support to the bank, sharing the risk. Tesla does not have the balance sheet to be a good counterparty for such arrangements in any volume.

The Volt is available at unbelievable (and likely unprofitable) lease terms, because (i) Ally Financial who writes the leases is majority owned by Uncle Sam and (ii) GM provides residual support.

The above won't change until Tesla is clearly "through the woods" and can prove out its ability to deliver defect-free cars at sustained high volumes and the capital markets conclude that the risk of "going poof" has declined a bunch....
 
I was told that if you elect to lease with Toyota, that you loose the Federal Tax Credit, and state Tax Credit for California. Toyota does not give you credit for it and you can't claim it as you are not the owner.

Strange. One of the major factors in my leasing the Volt was that the leasing company got the Tax Credit for themselves upfront so I didn't have to worry about filing for it later. (My experience with most credits/deduction is that it is decimated by the fine print so was happy to get it locked in!)
Maybe the ability to assign the credit has been shut down?