BMW i3: Tax Credits and Leases and Residuals, Oh My!

Will BMW's financing options put the i3 out of reach for many of its enthusiasts?

There have been many discussions on various websites since an internal BMW document surfaced that led to people to believe the BMW i3 lease terms in the US would be very high. One potential i3 buyer even has his local dealer (Stevens Creek BMW) work up a lease quote using the information on the document. The i3 he built had a total price of $55,978.52. With very little money down the lease payment came out to be $930 per month. There were a couple things that led to this very high lease estimation and I thought it would be worth while to discuss them here.

The proposed i3 lease was posted by insideevs.com

First, the residual values on the document were very low, around 40%. Unfortunately this is basically in line with residual values of other electric cars and there are basically two reasons for it. First, electric cars are new to most people and there is a lot of uncertainty regarding what the secondary market will be. What will a 3 years old i3 with 40,000 miles be worth? How much will the battery have degraded? What will its practical range be at at that point? Until we have years of EV use behind us with tens of thousands of examples to draw data from, finance companies will likely err on the side of caution and offer low residuals on EV's. Then there are the tax credits and rebates. California is the largest market for EV's in the country and basically paves the way for everywhere else. EV's buyers in California not only get the $7,500 federal tax credit, but they also get up to a $2,500 State rebate. Therefore a used EV is instantly worth $10,000 less than a new one as soon as it rolls out of the lot.  So to be fair, you really should include the tax incentives and rebates in the equation when you discuss electric vehicle residual values, because that is the actual effective cost of the car to the buyer.. If you do that, the i3 residuals jump up to nearly 50%. That is still a bit low, but not really far off of what a typical car would be worth after a three year lease. 

The tax credit is now a center of debate

The document also showed that BMW is only going to apply $4,875 of the expected $7,500 federal tax credit as a capitol cost reduction to leases. This led some people to assume BMW is simply pocketing the $2,625. I raised this question to Timm Bock, Product Development & Pricing Manager for BMW Financial Services and he told me that BMW will only realize $4,875 for the federal tax credit and that they will pass every cent of what they get along to the customer. I still don't know exactly why they don't get the full $7,500 because it seems the other EV manufacturers do since they pass it along to the customer as a capitol cost reduction in their lease offerings. So either they get more than BMW does which would be surprising, or they are eating the $2,625 in an effort to push their electric vehicle offerings. This to me would be equally surprising, so I really don't know what the truth is at this point, but I will continue to investigate this. 

Timm was kind enough to also include an overview of the financing options BMW Financial Services will be offering for the i3, and this is what he sent me:

Tom,

Please see my response below regarding the Lease and OwnerChoice products you had asked about, as well as how each product relates to the Federal EV Tax Credit when purchasing a BMW i3.

Traditional Lease - Our tax team has advised us that each leased BMW i3 qualifies us for a Federal EV Tax Credit of $4,875 - all of which is passed on to the consumer.  This $4,875 Lease Credit can be directly applied as a Capitalized Cost Reduction, or to other costs, at the time of lease-signing.  Regardless of your tax situation, by choosing a BMW FS lease with the $4,875 Lease Credit, you'll know exactly how much you will benefit, it’s applied at the time of purchase and there is no subsequent filing, administration or personal tax implications.
(As a reminder, only EVs purchased for personal use are eligible for the maximum $7,500 tax credit.  However, the benefit is reduced to $4,875 for 100% business use.  Regarding Nissan and Chevy, we can’t speak to why they are choosing to offer $7,500 or more; this may be part of the their incentive or discount strategy.)

But for customers who want to claim the maximum tax credits, we have made attractive alternatives to leasing available:  OwnersChoice and OwnersChoice with Flex.

· OwnersChoice – OwnersChoice provides:  low lease-like monthly payments, the lease-like option to return the car at the end of the term AND the eligibility for you to claim the maximum income tax credits.  

· OwnersChoice with Flex - In addition to the OwnersChoice benefits above, OwnersChoice with Flex allows you to increase your final balloon payment due at the end of the contract term by up to $7,500. Increasing the final balloon payment due further reduces your monthly payments, and in this way provides you with the opportunity to benefit from the $7,500 immediately.  OwnersChoice with Flex bridges the time-gap between the vehicle’s purchase date and your tax filing date.  We are proud to say that BMW FS is the first in the industry to develop an enhanced balloon finance solution like this for EVs. 

BMW Financial Services will also offer our traditional loan product.  Like both of the OwnersChoice products above, a BMW FS loan provides you the eligibility to claim the maximum $7,500 Federal EV Income Tax Credit.  

In general, due to the uncertainty and complexity of tax credit rules, we encourage anyone considering an EV to consult with a tax professional.

While this doesn't really clear up the tax credit questions, it does give some clarity on the OwnersChoice with Flex product that they developed specifically for the i3. This will allow a buyer to get the full $7,500 tax credit, yet still return the car like a lease at the end of a predetermined period. It's a purchase, but allows the buyer to have a capitol cost reduction up to $7,500 (the customer decides how much they want BMW FS to deduct as a cap cost reduction) to lower their monthly payments. That money is then owed to BMW FS and the owner can pay it off anytime they want. The owner will then have the option of making a balloon payment equal to the residual value plus the additional $7,500 and buying the car outright, refinancing the balance and keeping the car, or simply paying back the $7,500 and returning the car as if it were leased. 

There is interest charged on the $7,500 cap cost reduction they applied that is baked into your monthly payment, but BMW will allow you to pay it back early and save on the interest expense. The best way to utilize the OwersChoice with Flex may be to pay the $7,500 up front when you take delivery of the car, therefore you'll never have paid a penny of interest on it. Of course you'll need to have the finances to do this, but since you'll be recovering the $7,500 a few months later when you do your taxes, you will only be a short time without the funds. (provided you qualify for the full tax credit)

I hope that provides a little insight into the OwnersChoice with Flex. However, admittedly it doesn't get us any closer to really knowing what leasing deals BMW will be offering. Until we get the official residual values, interest rates and terms, we're all just guessing. I just hope people don't expect the i3 to have leasing deals that are comparable to some other much less expensive EV's like the LEAF or Volt, let alone the great deals on some of the other manufacturers compliance EV's. These cars are subsidized by tens of thousands of dollars per vehicle just so the manufacturer can lease the minimum required be California, in order to continue to sell their gas cars there. BMW has been consistent with saying the i3 is going to be profitable from day 1, and BMW will not subsidize it. This will likely make the i3 more expensive to lease in California than a Honda Fit EV, a Fiat 500e or a Toyota RAV4 EV. However for the rest of the country this comparison really doesn't matter because those cars aren't available nationally like the i3 will be.

Personally I expect to BMW to announce the financing details pretty soon, like within the next couple weeks and I will certainly post them here. There is hope that BMW may surprise up with a good leasing deal after all though. This week at the NADA convention in New Orleans BMW's North American CEO Ludwig Willisch said "It will be an attractive lease offer" and "It will be in the ballpark of a normally equipped 3 Series". A friend of mine recently leased a pretty well equipped 328i and with $3,000 down and he's paying $415/month. I find it hard to believe the i3 will lease for that low, but I suppose it's possible on a base BEV i3 without any options. I'll pick this back up here once the details are revealed. 

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BMW CEO Reithofer Shows Strong Support For Electric Vehicles

Dr. Norbert Reithofer, CEO of BMW AG stands beside the concept i3

It's common today for people to question the legitimacy of the commitment major OEM's have today in regards to their electric vehicle programs. Most are in one way or the other developing or have already brought to market a car that plugs in. Some are pure EV's like the Nissan LEAF and others are plug in hybrids like the Chevy Volt.

While both Nissan and Chevy are clearly committed to plug in vehicles by offering volume production cars and will make as many as they can sell, some other manufacturers haven't been so supportive of them. These manufacturers have begrudgingly made a few thousand copies with the sole purpose of complying with the California Air Resource Boards mandate which requires the top six auto manufacturers to lease or sell a minimal amount of zero emission cars. These low volume "compliance cars" generally get very little support from the manufacturer and even less support from the dealerships, many of which don't even stock them in regular inventory.

Over the past couple years many people and even a few journalists have commented on blogs and EV websites that they believe BMW is also just developing the i3 for CARB compliance and they have questioned BMW's commitment to plug in vehicles. Being in the MINI-E and now ActiveE programs and having the opportunity to talk to program managers and engineers working in the electric vehicle team I have never doubted that BMW was serious about electric vehicles but I understand why others may. Many people wanted an electric BMW they could buy and the trial lease programs of the MINI-E and ActiveE didn't offer that. However their wait will soon be over as the i3 will be available for sale before the end of the year. It will be a full scale production car, available all over the world and BMW will make as many of them as there is demand for. It's not a limited run compliance car and BMW is going to do what they can to support their dealership network and assist them in selling them.

Even though everything I've seen points to BMW taking electric vehicles very seriously, it's still great to see the CEO comes out as supportive of their plug in vehicle program as Dr. Reithofer did this week at BMW's Annual General Meeting. Other than Nissan's Carlos Ghosn, I haven't seen a CEO of any other major automobile company come out as strongly in support of their companies venture into making electric vehicles. He even calls for Germans to get over their "angst" with electric cars. Well done Dr. Reithofer!

The following is an excerpt from the Statement by Dr. Norbert Reithofer, Chairman of the Board of Management of BMW AG, 93rd Annual General Meeting of BMW AG in Munich on 14th May 2013:

"But  2013 is also about revolution for us, as we launch series production of our electric vehicles.

At last year’s Annual General Meeting, we showed you the BMW i8 concept car: a plug-in hybrid; a genuine sports car with the fuel consumption of a small car. Today, you can view the pure-electric BMW i3 concept car. We believe in electro-mobility – and are putting it on the road. Germany is respected and admired the world over for its engineering expertise and powers of innovation. But “German Angst” is also a concept the rest of the world is familiar with. “German Angst” refers to how, when it comes to making radical changes, we in this country like to engage in long and fearful discussions: because we Germans tend to see more problems than opportunities. And it is no different with electro-mobility.

Being the spearhead of change means taking a calculated risk.
There is no guarantee of success – not even on the road to sustainable mobility.
Progress has to be imagined, earned and paid for.

Ladies and Gentlemen,

The future belongs to those who dare to take bold actions. We cannot ignore the need for new approaches – especially when circumstances are changing. Because the market certainly punishes latecomers.

Shaping change also means overcoming resistance.

As Machiavelli wrote, 500 years ago: “…the innovator has for enemies all those who derived advantages from the old order of things, whilst those who expect to be benefited by the new institutions will be but lukewarm defenders”.

Or, quite simply: The innovator stands alone.

Customers are waiting for attractive options – options which we can deliver.
We will succeed in this. And I can give you seven reasons why:

First:

Our BMW i models have strong emotional appeal. Customers will buy an electric car if it appeals to them just as much as a conventional vehicle. I myself have test-driven both the BMW i3 and i8 several times. I can assure you that these cars’ step-less acceleration to top speed guarantees real “sheer driving pleasure”. The i3 and the i8 fit the brand perfectly. They are genuine BMWs.

Reason number two:

We take a holistic approach to future mobility. More than that, in fact: As an engineer I can promise you that we are revolutionising automotive construction.

The vehicle architecture of the BMW i3 is unique: with a Life module and a Drive module.

• The materials we use are unique: a passenger compartment built of carbon fiber and a Drive module made of aluminum.
• The production processes are unique: High-tech adhesives are now used for procedures that used to require welding, bolting and soldering.
• Our production times are unique: We use fewer parts, and modules are produced in parallel. As a result, production of the BMW i3 takes only half as long as that of a similar-sized vehicle from our regular portfolio.

 There are also benefits for our associates, whose work has been made easier.

• Workstations are more ergonomic.
• Assembly is quieter.
• Production halls use natural light.

None of this has been done before.

The third reason:

We monitor customer needs around the globe. Drivers in Shanghai and California are not particularly interested in how we get from Flensburg to Garmisch. They have different everyday mobility issues.
And they need different solutions. Companies who focus only on the German market as a measure of the success of electro-mobility will fall short. After all, megacities are already limiting conventional individual transportation.

In Beijing and Shanghai, for example, number plates are awarded by lottery, with considerably more applicants than plates. But electric vehicles are exempt from the lottery process and the associated fee. These local, and even national, decisions will boost demand for electric vehicles and other drive trains.

Customers around the world have tested our electric MINI E and BMW ActiveE cars, clocking up more than 20 million kilometres. Their experience has shown that:

A range of 150 km is perfectly adequate for the vast majority of drivers. Also, with a range extender, that distance can be increased to up to 300 km.

• Worldwide, the average distance driven daily is no more than 64 km. Most cars are not actually in use for more than 22 hours of the day – so the battery can easily be charged during that time.

Fourth reason:

Many customers have already told us they are interested in buying a BMW i3 – a car they have not yet seen as a series model, with a technology they are not familiar with. Customers trust in our expertise and powers of innovation. They trust that we can deliver “sheer driving pleasure” in our electric cars, too.

The fifth reason:

We have received a lot of encouraging feedback from media and analysts.

Even before 2013 had started, SPIEGEL magazine declared: “The BMW i3 is the car of the year.” Auto-BILD wrote – I quote: “This car is a revolution. The i3 does everything differently and many things better.” End of quote. Try it for yourselves, Ladies and Gentlemen: Google BMW i, and see which company people believe is capable of shaping the mobility of tomorrow.

The sixth reason:

Our mobility services are in step with the times.

Around 110,000 customers in Germany and the US are already using our DriveNow car sharing service – with more joining every day. Our ParkNow mobility service in San Francisco is also gaining momentum.  As well, more and more people are taking advantage of our practical apps such as “Park at my House” and “My City Way” for easier mobility in cities. In this way, we are also reaching out to younger target groups.

And the seventh reason why we will succeed:

When it comes to the future of mobility, BMW has very good instincts.
We lead the way.

• We focus on sustainability. Others follow.
• We focus on carbon fibre. Others follow.
• We focus on three-cylinder engines in the premium segment. Others follow.

Boldness and a pioneering spirit have made the BMW Group what it is today: the world’s leading manufacturer of premium automobiles.

BMW i will not decide our future success alone. But the fact of the matter is:
We need both: evolution and revolution; continuing development and radical change.

In Leipzig, the pre-series BMW i3 models are already rolling off the production line.

In case anyone is still in any doubt – this is a clear signal that the i3 is definitely coming to market. And we will earn money with it, too."

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