In fiction, it was Jay Gatsby’s 1922 Rolls-Royce Silver Ghost. In real life, it’s Jerry Seinfeld’s 1986 Porsche 959 Coupe, or Mark Zuckerberg’s brand new Pagani Huayra. For the sheer pleasure of driving them, for camaraderie with fellow motorcar enthusiasts, or as an alternative investment asset class, exotic and vintage cars have long been a passion and an enduring aspect of the lifestyle for many people of wealth.
While considerable scrutiny is always paid to selection of the particular high-end marque or model that will eventually sit in the owner’s garage—a Ferrari, Lamborghini, Aston Martin, McLaren or Bentley—far less attention is typically devoted to examining the most prudent way to acquire those vehicles, either by owners or their wealth advisors.
It’s understandable why people of means are predisposed to simply write a check for a very expensive vehicle. In addition to having the resources to purchase those cars outright, there’s an emotional bias—even among individuals comfortable with margin accounts, and accustomed to complex debt investment strategies—that any form of car financing is strictly for the “aspirational” wealthy, not for those who’ve already arrived. Unfortunately, that point of view is often fueled by ego, rather than objective financial analysis.
Attitude notwithstanding, there are valid reasons why many wealthy individuals and their advisors don’t conduct proper due diligence when acquiring exotic and vintage cars. Notably, there’s considerable misunderstanding regarding financing alternatives for those vehicles. And the financing providers themselves, particularly leasing companies that specialize in this particular market segment, have historically done a poor job of educating prospective owners and private wealth advisors.
Exotic And Vintage Car Financing 101
The financing options for high-end cars are limited to either a collateralized loan, or a leasing arrangement. Traditional “pay to own” auto loans, through a bank or other type of private lender, are universally understood, with payment terms based on fundamental factors, including the amount financed, interest rate, duration of loan, etc. Most often, the challenge in using a traditional lender for exotic marques is based on lack of experience; their reluctance, for example, to finance a vehicle that may have been built 50 years before their bank was established.
The primary advantage of traditional loans, similar to any type of leasing, is that the borrower has access to capital that could be put to better use. Is some portion of the $12 million necessary to acquire a 1954 Jaguar D-Type at a Pebble Beach auction, for example, more effectively allocated by shorting an over-valued technology stock? Asset allocation of any type is always worthy of close examination by wealth advisors.
Understanding the leasing option for financing of exotic and vintage cars begins with this fundamental truth: that these specialized arrangements are unlike any and all pre-packaged, closed-end leases that are offered through GMAC, BMW Financial Services, VW Credit, or other auto leasing providers serving the needs of the mainstream market.
Leases for new and previously owned high-end vehicles—those priced well over $100,000 and often into the millions—are tailored to meet the personal needs and lifestyles of well-heeled, sophisticated owners, and are provided by a very limited number of specialty leasing companies dedicated to serving that market. With this knowledge in hand, here’s what else you need to know:
Specialty leasing accommodates the wealthy. Perhaps not surprisingly, the majority of wealthy exotic and vintage car owners prefer to change vehicles every 2 or 3 years. To satisfy their endless appetite for fine cars, and to avoid saddling those owners with heavy penalties and fees for early lease termination, or for switching cars, specialty lease providers provide options that allow a lessee to:
• Pay the balance of the lease and own the car.
• Sell the car privately, pay the balance, and keep any difference.
• Trade the car in, have the dealer pay the balance, and keep any difference.
• Switch cars within their lease without penalty, by paying any difference in value between the two cars.
• Refinance through a new lease without large cash outlay, and continue to own the car.
Unlike traditional, rigidly structured leasing arrangements promoted heavily to the general public, specialty leasing enables wealthy car enthusiasts to benefit from a high degree of flexibility designed to accommodate their short- and longer-term cash flow requirements, as well as their changing automotive preferences.
Speed and convenience are service hallmarks. Specialty leasing providers understand three key realities on how to work with wealthy individuals (and their advisors):
1. They’re extremely busy.
2. Their financial situations are complex, and often opaque.
3. They have little patience for those who don’t understand their personal needs.
To succeed in this market, a lease provider first must have a comprehensive understanding of current and projected market values for a very broad range of exotic and vintage cars. (This capability alone distinguishes them from traditional lenders and leasing companies.)
Secondly, these lease providers must be capable of making financing decisions very quickly, in minutes and hours, rather than days or weeks. And most importantly, they need to make convenience and client service a priority; beginning with a fast and highly secure online lease application process featuring electronic signatures, and personalized attention that ensures flawless execution of every detail in the car acquisition process.
There are tangible tax advantages. Even for wealthy individuals who can comfortably write a check for an exotic or vintage car, the sales tax on that purchase in most states can be onerous. In California, for example, a $3 million Ferrari will generate an addition tax payment to the Golden State of nearly $300,000—with no subsequent sales tax credit to offset that hefty upfront expense. With a lease arrangement, however, in most states those state tax payments are calculated on a pro rata basis, paid according to the monthly lease schedule. This provides the car owner with use of that unpaid tax money over the term of the lease.
The other potentially significant tax-related benefit involves the ability to lease an exotic or vintage car in a business name, (and not necessarily a corporate entity), allowing the lessee to use pre-tax dollars to make lease payments. If justified, in terms of how the car is used to gain or maintain business prospects or customers, this can represent a substantial financial benefit.
Leasing can benefit serious car investors. There are no guarantees that exotic and vintage cars will appreciate in value, but they can and frequently do. A wealthy enthusiast or serious collector who purchased a 1960s-era Ferrari 250 GT SWB for $3 – $5 million six or seven years ago saw the value of that car appreciate to $8 – $12 million recently. Conversely, there are sad stories of exotic cars that have lost value on a similar pace and scale.
Among the wealthy, there are some individuals who are extremely knowledgeable regarding current and anticipated market values of particular marques; who know what to look for and what to avoid in a specific car; and who have the financial means to buy and hold cars for the long term, regardless of market fluctuations. These sophisticated collectors should not overlook the advantages of leasing, versus outright purchase, either to finance an individual car, or to own a portfolio of “investment” vehicles. Rather than spending $3 million to purchase a single vehicle, for example, a collector can apply those funds to create a portfolio of 3 or 4 high-potential vintage vehicles. This strategy serves to retain the use of capital, maintain ownership of multiple cars, and thereby increase the payoff if their market price projections are correct.
Confidentiality is the top priority. As most wealth advisors know, and as specialty-leasing providers understand, privacy and confidentiality are top priorities for their wealthy clients. In many cases, for example, owners of exotic or vintage cars will value discretion and trust even more highly than interest rates in selecting a lease provider.
There are several reasons for the importance of discretion. Specialty lease providers know that market intelligence regarding who is buying or selling an expensive vehicle can drive the price either up or down, to the detriment of their client. They also are sensitive to the data privacy concerns of their wealthy clients, who do not want their financial or contact information shared with others; nor do they wish to have their credit rating affected by multiple credit agency reviews in an application process. Some clients simply don’t want to have others know that they are financing a vehicle.
Time To Re-Think The Path Of 'Lease' Resistance?
For far too long, and often for many valid reasons, leasing has been discounted by wealthy individuals and their advisors as a viable means to acquire the world’s finest automobiles.
However, for those who are willing to put aside outdated emotional baggage associated with any type of automobile financing, and equipped with a well-informed understanding of how specialty leasing for exotic and vintage cars really works, there are new opportunities to apply leasing as a strategic tool to support broader wealth management objectives.
For wealth advisors, this exploration begins with a “level playing field” examination of leasing as a viable option: calculating the use of funds factor in outright purchase versus leasing; measuring the state tax implications of an outright purchase; comparing lease payments with traditional bank financing; and investigating whether the car can qualify for leasing under a business name using pre-tax dollars for payments.
To protect clients, the due diligence process should also include close scrutiny of the specialty lease provider’s market reputation, longevity and standards of client service. To validate the leasing firm’s credibility, contact a few current and former clients, and request references from their lending sources.
If a wealth advisor and client agree to pursue leasing as an option, they should proceed in a diligent manner. For starters: ask for all lease quotes in writing; require complete transparency, including an amortization schedule; and review the firm’s early termination policy. All leasing firms can be helpful in getting people into leases; the best leasing firms are also helpful in getting people out of leases when it’s necessary.
Although leasing may not be the best choice for every situation, or for every client, wealth managers should be prepared to educate and advise clients regarding the viability of specialty leasing as a financing alternative for acquisition of their exotic and vintage cars.
Mitch Katz is founder and CEO of Connecticut-based Premier Financial Services (PFS), a specialty finance company providing leases for exotic, vintage and highline motor cars for more than 20 years.
