LEASE-HERE, PAY-HERE

7/31/2023

LHPH Market Offers Tax Advantages, Other Benefits

By Jeffrey Bellant

LAS VEGAS – Mississippi dealer Stan Sumrall and Arkansas dealer Dustin Kerr offered insights into the lease-here, pay-here market during NIADA Accelerate 2023.

The discussion was moderated by Trevor Watson, vice president of business development for LHPH Capital based in San Diego, Calif.

Watson said the session was developed to demystify LHPH as more dealers show interest and ask questions about this emerging market.

Kerr, owner of Car Solutions 4 U in Rogers, Ark., has been in buy-here, payhere (BHPH) since the early 2000s. They got into LHPH about six or seven years ago.

“We have about 700 accounts,” he said.

Sumrall, owner of Nuway Auto and Southeast Autoplex, has been in the car business for about 36 years. He’s been in franchise stores, independent dealerships, transport companies and tire stores. He first got into BHPH years ago but started shifting into LHPH after hearing about the tax advantages.

“We’re just shy of 6,000 contracts on the books between the stores,” Sumrall said.

Watson presented some LHPH benchmarks going back to 2019.

In 2019, the average benchmark LHPH dealer had an ACV of $7,143 and leasing out that car with a gross capitalized cost of $12,058 (sales price plus adds).

“Sounds like a familiar structure,” Watson said.

The down payment was $1,116 in 2019 and the term was 35.1 months.

“When it comes to subprime lending of any sort, the shorter you can keep your term, the more likely that the customer will be successful,” Watson said.

The residual value on that example was $3,130, which left the customer with a payment of $93 per week.

The pandemic started to change those benchmarks, with 2022 creating a huge spike in used car values, Watson said.

In 2022, the average ACV for an LHPH benchmark dealer was $10,153, a $3,000 jump from 2019. It made the gross cap cost $16,050 – a 33% increase from 2019. With a residual value of $4,177, the dealer

The reason is, as the market experiences disruptions, traditional lenders start to bail, as they have started to do recently, he said.

But being able to control your destiny is a big competitive advantage, states are as high as 9%

In a lease, the customer is only paying the tax as they go, not all up front.

“You are actually able to put customers in a car with less exposure on the street, because of the lesser down payment,” Sumrall said.

He’s watched BHPH dealers leave the market because they can’t afford to put so much money on the street.

Sumrall said the bigger advantage is income tax.

“Income tax is a huge deal when you can accelerate the depreciation on the lease,” Sumrall said. “We went from paying anywhere from $250,000 to $400,000 a year in income tax to zero. Credit rolling forward every single year.

“Now, eventually we’re going to have to pay the piper, so we’ve got to continue to grow the actual business to stay ahead of that curve.” had to stretch out the deal to 38.3 months, with a payment of $107 per week, Watson said.

It’s a big difference between the LHPH deal and a typical retail installment contract on that same $16,000 car.

“You’re going to have probably a $650 a month payment,” Watson said.

On a BHPH version of this deal, you’d have to stretch out the term to 60 months to get a similar payment.

On a LHPH deal, the huge jump in ACV only affects the customer by an extra $14 per week. That’s a 15 % increase when the car price increases by 33%, Watson said.

Leasing also allows the dealer to adjust the residual to affect the payment.

“There’s a lot of flexibility in the lease structure,” Watson said. Bumping the residual value could lower the payment, for example.

It’s similar to leasing a new car –getting a more expensive car, for a lower payment on a shorter term, Watson said.

One question posed to the panel was whether a leasing program has added resilience to the business.

“The short answer is yes,” Sumrall told the crowd.

Sumrall said, especially with the ability to adjust everything in the contract.

That’s not the case with BHPH.

Sumrall said he’s gone through the bad turns as a franchise dealer and “it’ll take everything you own.”

Now he is able to grow through the downturns as he gets the customers that the traditional lenders have abandoned.

Kerr agreed and explained that it helped especially during the supply shortage coming out of the pandemic.

“One of the things that we couldn’t have predicted is that we’re getting a lot of cars back off-lease that we could not go buy at the auction,” Kerr said.

He added that the leasing program enabled him to stretch his ACV and get the quality of car he needed for the customer.

Kerr said another benefit in Arkansas is that since the consumer in the state is responsible for the sales tax, Kerr includes the sales tax with the lease.

Sumrall said the tax advantages are the biggest bonus in LHPH. For example, if you sell a $10,000 car in Mississippi, with a 5% sales tax, that’s $500 out of pocket and some

Sumrall also explained that if he didn’t have repossessions and leases coming back in, he would not have been able to grow the business during the pandemic.

Sumrall pointed out that his competitors were pulling back from buying anything at that time, while he was buying a “huge amount” of vehicles from the Hertz and Enterprise companies, straight off lease.

“Nobody else was buying,” he said. “We were buying them by the hundreds and just stacking them, getting ready for when they went back to work. We knew we could handle it.”

One attendee asked how dealers treat service in LHPH. Does the customer pay for the repairs or the dealer?

Kerr said he treats it in the same way he did in a BHPH deal.

“If the customer was trying to take care of the car and there was a breakdown they couldn’t afford,” he said, “we would help and try to keep them in the car.”

Sumrall said if it breaks down the customer won’t pay, and he will have to repo it and repair it anyway.

The pair both have annual mileage limits on their cars but admitted there’s no way to control it.