Leasing an exotic an exotic car is different than leasing a Toyota Camry.
Car leases come in two basic flavors: The standard closed-end lease that most of us are familiar with, and the open-end lease – also called a finance lease or trac lease.
The easiest way to understand the open-end lease is to compare it to the common closed-end lease, and see where differs from the more familiar option. Here are both types of leases in a nutshell:
The primary structural difference between the closed-end and open-end lease is that in the closed-end lease, the customer has no stake in the resale of the vehicle once it goes back to the dealer. In the open-end lease, the customer (you) would participate directly in any profits or losses compared to the agreed-upon residual price of the vehicle.
The other differences between the two types of contracts spring out of this one concept.
Let’s take a closer look at both:
The closed-end lease, also called the “walkaway” lease , is the typical, garden-variety lease contract you’ve probably already seen at car dealerships, or when your brother-in-law pulls in your driveway to brag about having signed a dumb one.
With a closed-end lease the customer has three options:
1. Buy out the vehicle at the end of at the lease,
2. Trade the vehicle in (sidestepping mileage and wear and tear fees but not really. The depreciation is factored into a lower valuation of your trade-in, or 3. or just pay for wear and tear and any excess mileage used, hand over the keys, and walk away. Hence the term “walkaway leases.”
Specifics vary, of course. But a typical closed-end lease would have a down payment of 10% for a term of 36 months and a standard mileage limit of 12,000 per year, though customers can “buy” additional miles in advance. Anything they drive above that mileage limit results in additional costs at the end of the lease.
With higher-end cars, the per-mileage charge would be significant.
The dealer will naturally sell the car at the end of the lease. Maybe they’ll get more than their best guess of the car’s residual value, and maybe they’ll get less.
But this is not the customer’s concern.
The customer has already dropped off the keys and washed their hands of the deal.
This type of lease is less risky for the ordinary consumer. There’s lots of data on resale value for normie cars. The dealer has a pretty good idea of what the resale value of the car is going to be at the end of the lease. The customer normally doesn’t. But the risk for the customer is defined in advance. The customer has no risk in the transaction other potentially than getting surprised by any wear and tear penalties. The mileage fees are voluntary, and the customer knows what they are in advance.
The open-end lease is has much more risk for the driver. But if you take great care of the car, you can also participate in the upside. If the car sells for more than the projected residual value at the end of the lease, you get to keep the difference.
For example: If you pay a $500,000 car down to $350,000, but the dealer sells the car for $375,000, the dealer owes you a check for $25,000.
But the converse is true, too: If you signed a lease listing the residual projected end-of-lease value at $350,000, but the most you or the dealer can sell it for is $310,000, then you’re responsible for the $40,000 difference.
With an open-end lease, you can’t just hand over the keys and some wear-and-tear and mileage fees and walk away.
You can see why dealerships don’t do open-end leases with your run-of-the-mill Dodge mini-van: Lots of buyers in the normie market wouldn’t have the scratch to be able to settle up a difference of a few thousand dollars. In the high-end car market, they figure you’ve got some assets. Well, maybe not some of you noob crypto bros at the moment. But the rest of you should be doing pretty well!
And if you’re buying or leasing a $200,000 to $5 million car (or more!), the dealer and their collection lawyers figure you should know what you’re getting into.
Open-end leases are reserved for the grown-ups’ table.
Since it’s the driver who bears the risk of depreciation, not the dealer, the dealer isn’t worried about mileage restrictions.
While open-ended leases are unusual in the retail individual car market, they’re pretty common in business vehicle leases. If business picks up, and the business has to run way more miles on their fleet vehicles than they expected, an open-end lease means they won’t have to worry about a massive excess mileage charge at the end of the lease.
There’s also a lot of open-end leasing that goes on in the equipment leasing market. Think tractors, combines, aircraft, ships you name it – if it’s expensive, income-generating capital equipment that the operators would rather pay for over time than pay for all at once, there are specialty lease companies writing open-end leases.
Benefits of Leasing
So why lease a car rather than finance it outright?
There are several reasons you might want to do this:
First, if you’re using the vehicle for business, you can write off the full amount of the lease payment as a business expense in the year you make it. If you buy the car outright, you have to amortize your deduction over several years. You tax nerds probably already know that cars are classified as 5-year property under MACRS rules, though Section 179 and accelerated depreciation can shorten that period, depending on the car. (Section 179 is very friendly towards heavier trucks and SUVs).
If you’re putting the vehicle to work earning money for your business, leasing may improve critical cash flow, thanks to your ability to deduct the full lease payment as a straight business expense.
Second, if you finance the car outright or pay cash for it, you get to eat the entire sales tax up front on the full cost of the vehicle.
That’s a big deal if you’re in Los Angeles buying a $1 million car. The California sales tax is 7.5%, and Los Angeles County will slap another 2% on you for a total sales tax of 9.5%, or $95,000.
And if you only own the car for a couple of years, double ouch.
If you know you’re only going to keep the car for two or three years, then leasing rather than buying allows you to avoid having to pay full-boat sales tax on the car. You only pay sales tax on your lease payments – not on the full value of the car when you buy it.
This benefit alone can save tens of thousands of dollars on high-value cars, especially in high sales tax jurisdictions like California, Connecticut, Florida, and Massachusetts.
Insurance and leased cars
From an insurance perspective, you definitely want to work with an agent or broker that specializes in exotic/performance/collectible and non-standard car markets. These agents are “car guys” (and gals) themselves. They also have the knowledge and connections with underwriters to get the contract written up appropriately.
Naturally, you’ll have to carry comprehensive insurance on the car. And I’d load up on the uninsured/underinsured motorist coverage if your state allows it. Lots of drivers only carry the state minimum requirement. And even if they carry ten times that amount, that may not enough to cover your totaled McLaren, Ferrari, or Lamborghini.
With higher-end cars, an “agreed value” insurance contract may be more appropriate than an “actual cash value” policy, because exotics don’t depreciate with time the same way that normie cars do.
If you”ve recently acquired or you’re about to acquire an exotic, collectible, or high-performance car, we’d like to work with you.
Call us today at (855) 438-7353 and ask to speak to an agent!
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