Rich car shoppers like to get into a lease for the financial advantages. They like getting out early, too, when something newer and shinier comes along.
"It's no different than an iPhone. The one I was using was perfectly fine, but now there's this brand-new one with all these new gadgets and toys. And as long as they keep coming out, people are going to continue to want them," Mitch Katz, CEO of Premier Financial Services, of Woodbury, Conn., which specializes in the ultraluxury niche, told Automotive News. "The clientele that we're dealing with can afford to do that."
Leasing always has appealed to luxury-vehicle buyers more than to mass-market ones. A look at financing in the luxury segment shows why, as well as how financially astute ultraluxury buyers treat their leases differently than someone who leases, say, a Honda Accord.
The same virtues of leasing apply to mass-market and ultraluxury segments: The consumer pays only for the period of time he or she has the car, while the lender takes on the residual risk.
But in the ultraluxury segment especially, the consumer tends to drive the vehicle for less time than the lease was written for.
Nearly 70 percent of Premier Financial leases end after the third year on a five-year term, the company said. That's not unique to Premier Financial.
Putnam Leasing, of Greenwich, Conn., pumps out a "tremendous amount" of four- and five-year leases, CEO Steven Posner said, but the two-year mark is the "sweet spot" for when clients tend to end their leases.
"What we lease people are toys, and just like children get tired of toys, grown-ups get tired of their toys, also," said Posner.
Early exit
For clients looking for a faster exit, Premier Financial provides an early-termination program, said Katz, whereby clients can terminate a lease early by paying just one month's fee, rather than the heftier penalties that are normally imposed.
In addition, "We give them an amortization schedule along with the lease so they know where they stand at any given time," said Katz. His experience over 20 years in the industry is that "About two years in, something new comes along, and the car of their dreams is no longer the car they want to have forever."
To Katz's knowledge, Premier Financial is the only ultraluxury lender that offers an amortization schedule — a table that maps the process of paying off a loan and includes details for each payment.
Providing an amortization schedule with a lease is "really not kosher," says Posner.
"We don't offer customers amortization schedules because what happens is, if they're ever audited and the IRS looks at an amortization schedule, and someone's been writing off the payments on a lease, they're going to throw out that deduction and treat it as if it's a finance," said Posner.
"We never want to be under any scrutiny because what we offer is a lease, not a loan," he said.
Sales tax advantage
Besides lower monthly payments, another reason ultraluxury shoppers may lean toward taking out a lease rather than financing with a loan is the sales tax advantages.
Instead of paying the sales tax in full upfront, as one would on a traditional finance or cash purchase, consumers pay the sales tax on their monthly lease payment — a move that's legal in most states, Katz explained.
For example, a California buyer of a $200,000 car could face a 9 percent sales tax and would have to pay the tax of $18,000 upfront. If the customer trades the car in toward a newer model in a year or two, he or she is out of pocket for that $18,000.
Wrapping the tax payments into monthly lease payments changes the equation, though, Katz said. "If you made the tax payments on your $2,500-a-month lease payment, you'd be paying somewhere in the range of $220 to $230 a month in sales tax for the time you used the car" — and only that time, he said. "There's a tremendous savings in that."
Tax considerations are one reason why Lamborghini Houston "finished last year with over 70 percent of new-vehicle sales resulting in a lease," said General Manager Zack Lawrence.
Car lessees in Texas have to pay the sales tax upfront, but a customer can claim a prorated credit for the paid tax if he or she wants to trade the car in, Lawrence said. Say a customer leases a car but exits the lease early. If that customer's spouse wants to lease a car, the spouse can apply a prorated portion of the tax payment toward the second lease, Lawrence said.
Captives vs. specialized
Around 85 to 90 percent of Lawrence's new-vehicle clients go through captive finance arm Lamborghini Financial Services. Leasing clients typically keep the cars for 12 to 18 months but sign up for 36- to 60-month terms, he said.
Ultraluxury lessees also gravitate toward specialized leasing companies such as Putnam, which offers a custom-tailored lease program.
One upside to leasing with Putnam is that the company does not report to the credit bureaus, said Posner. That appeals to individuals who, for example, might be borrowing money for real estate projects and don't want to appear overly leveraged.
Automakers' captives also tend to have unbendable rules, said Posner, often limiting financing to a set figure depending on credit scores without considering the individual's circumstances. "The manufacturers outline a very cookie-cutter program. If you want step out of the box a little bit, you really can't," he said.
"People go through horrible divorces, and attorneys could tell them to stop paying their bills. The people stop paying their bills, but the ramifications of them getting credit is difficult later on," he said.
"And when the bank says no, we like to look through" the specific circumstances, said Posner. "Putnam says yes."
