FWIW-
Structuring a Non-Optimal Single Payment Lease
In practice, the single pay amount is calculated using a discounted cost of money (e.g., MF) to compute the base monthly payment. For example…
Base Monthly Payment = P = MFd x (ACC + RV) + (ACC – RV)/ N
= .00151 x (42860.10 + 32045.00) + (42860.10 - 32045.00)/ 48
= 338.42
The base single payment is…
Base Single Payment = N x P
= 48 x 338.42
= 16244.16
N = Term
MFd = Discounted Money Factor
ACC = Adjusted Capitalized Cost
RV = Residual Value
The single payment is virgin territory and, as such, no amount should ever be added or subtracted from it as this would distort and invalidate ALB calculations using any of the three methods described above. As such, never add taxes or subtract trade credit from the base single payment. In fact, tax is never considered except when calculating tax separately at lease inception or if the purchase option is exercised. Base Single Payment = NP nothing more, nothing less… To illustrate, consider the following lease inception fees. I’ll assume that taxes are levied on payments rather than the sell price (TX) or on the depreciation (GA)…
Observe that the 1299.53 single pay tax is calculated separately and has its own line entry as does the 3000.00 trade equity credit as well as the base single payment. Although there is 1500.00 due at signing and despite the rebate/cash and trade equity credits, the base single pay of 16244.16 remains unaffected. It is what it is.
The above is a poor way to structure a single pay lease. In practice, one would use all rebates and any trade equity as a capitalized cost reduction (CCR) provided the adjusted capitalized cost (ACC) remains at or above the residual value (RV). The goal is to minimize the difference between the (ACC) and the (RV) with the caveat that ACC ≥ RV to avoid negative depreciation. This would result in a minimum cost single pay lease.
Structuring an Optimal Minimum Cost Lease
Let’s structure a minimum cost single pay lease and see if we can reduce the 1500.00 DAS. Taking inventory of the relevant data at the top of this thread provides us with the following…
Term = 48
Selling Price = 42860.10
Adj. Cap Cost (ACC) = 42860.10
Residual Value (RV) = 32045.00
Discounted Money Factor (MF) = .00151
Sales Tax Rate = 8.00%
Trade Equity Credit = 3000.00
Rebate = 14500.00
Minimum cost occurs when ACC = RV. Right now, ACC – RV = 10815.10. The idea is to reduce this difference to zero, if possible. Assuming the 3000-trade equity is non-taxable, we’ll use the entire credit as a CCR. This means we still need to lose 10815.10 – 3000.00 = 7815.10 so that the ACC = RV. Accordingly, 7815.10 of the 14500.00 rebate will be used as a CCR. As such, ACC = 32045.00 and 14500.00 – 7815.10 = 6684.90 remains which will be used to cover all or some portion of the lease inception charges tabled below…
By optimally allocating credits we’ve managed to save 1500.00 – 413.80 = 1086.20. And, if we terminate the lease after 7 months using any one of the above methods, we arrive at an ALB = 28032.73, which is 686.42 more than the ALB previously calculated. Even after calculating the additional tax of 54.91, we’re still ahead by 344.87. BTW, the CYR = 3.92156663%
Although ACC = RV is optimal, some fund providers require that ACC > RV + L where L is the threshold limit. This ensures that ACC > RV which also serves as protection against negative amortization. However, absent any threshold criteria, if, after applying CCR rebates/credits, ACC < RV, then welcome to the world of negative depreciation. You’ll need to perform a rebate allocation where a portion of it is used as a CCR, and the balance is used to cover some or all of the lease inception fees similar to what was done above. In a single pay lease, it is unlikely that all lease inception fees will be covered, including the single payment, with a rebate apportionment to the extent that DAS = 0. Even if DAS = 0, the single pay does not go away as rebates were used to pay it which is no different than if you paid it out of pocket. In other words, someone or something had to pay for it.
This may be stating the obvious, but the reason for the discounted cost of money (MF) is to incentivize customers to accept the single pay option in lieu of traditional monthly payments. What is less obvious is that the discounted MF attempts to capture the time value of money (TVM). In other words, the application of a discounted MF can be viewed as a conscious or unconscious effort to estimate the present value of the base monthly payments using an appropriate discounted interest rate.
Structuring a lease properly means everything and, please, don’t trust the dealer to do this for you as most are clueless and don’t even care or even think of such things. That’s unfortunate because it could be a good selling point. This is just one more reason why lessees must control the deal.
??? Let me know.
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