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April 05, 2013

Tesla Motors Develops Creative Financing Mechanism with Wells Fargo and US Bank



Tesla Motors announced on Tuesday that it has partnered up with Wells Fargo (News - Alert) and US Bank to create a 10 percent down, 63-month term financing package for Model S customers. The combination of subsidies, savings from not having to buy gas and other savings tied to electric vehicles could potentially drop the net out-of-pocket cost to $500 per month, according to Tesla CEO Elon Musk.

The financing package is designed to let customers 'have their cake and eat it too' by including the advantages of ownership and leasing in the same deal. After 36 months, owners using the special financing would have the right to sell their Model S for no less than the residual value of a Mercedes S Class premium sedan. This resale value is guaranteed by Tesla.

Currently, Tesla Motors only produces one car, the Model S. The company ceased production of a sports car model, the Roadster in 2012. Production on a new generation Roadster as well as the Model X, a crossover SUV, is expected to begin in 2014.

Several assumptions are made in estimating the cost of owning a Model S. The company provides an online calculator to help shoppers estimate their costs.

The Model S comes in 60 kilowatt-hour (kWh), 85 kWh and 85 kWh Performance versions. For the purposes of estimating savings on the 60 kWh version, Tesla's online calculator assumes a sticker price of about $71,000.

The Model S ranges in price from $65,000 to $125,000, so the 10 percent down payment would range from between $6,500 and $12,500. This value under the right conditions can be offset by a combination of federal and state electric vehicle (EV) incentives. The federal incentive is $7,500, so customers living in states that do not provide additional incentives would at least get this amount. The highest combined federal and state incentives are available in Colorado, totaling $13,500.

How much a customer saves using electricity vs. gasoline will depend on how far the customer drives a year and the cost of electricity per kWh. Tesla's calculator by default assumes a the national average of 11 cents per kWh and 15,000 miles annual driving mileage contrasted against a fuel sedan getting 19 mpg and average gas cost of $5 per gallon.

The calculator also assumes savings based on less time spent commuting and searching for a gas station. How much savings this amounts to depends on the hourly value a customer puts on their time and how much time on average they spend commuting in non-carpool lanes and looking for gas stations.

Deviations from these assumptions could negate estimated savings: a 60 kWh Models with a sticker price over $71,000; electricity costing more than 11 cents per kWh; fuel significantly less than $5 per gallon and annual mileage significantly less than 15,000. Although the calculator includes the ability to figure in tax write-offs from using the car mostly for business, these savings would also be available for a gasoline powered car.


It's also important to note that the financing package is available only in California, Colorado, Florida, Illinois, New Jersey, New York and Oregon. Of these states, only California, Colorado and Illinois offer state incentives beyond the $7,500 federal incentive.

Nonetheless, there were plausible scenarios that place the average car ownership below $500 per month, even if the business deduction was ignored. Tesla deserves some credit for coming up with unconventional ways to make their cars more financially accessible to car buyers. The two most critical questions that need to be answered for Tesla's long term success are whether enough customers can make the numbers work for them, and if the guaranteed resale price doesn't end up being a losing proposition.



Edited by Ashley Caputo
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