Nissan Motor Acceptance Corporation (NMAC), which is an independent subsidiary of Nissan Motor Corporation (NMC), is responsible for customer leasing programs and in effect buys new cars from the parent company and then leases them to retail and fleet customers. As with any organization that buys and leases assets, part of the process is that at the end of the lease period they must liquidate that asset. In order to liquidate the asset, in this case a LEAF coming off of lease, they must decide on what the value, or residual, of the asset will be at that point in time.

Setting residuals on vehicles is fuzzy science, but the leasing companies have actuary guys that do that sort of stuff all day long and have the methods down pat.

But even within a calculated residual, a manufacturer’s marketing department will often contribute dollars to a lease program to artificially set a higher residual to make a lease monthly payment lower and more attractive so as to move more of a particular model of vehicle. In the first few years of the LEAF being on the market, this is what Nissan Motor’s LEAF marketing group did. They did not want a high lease price to be a barrier to purchase.

Now fast forward to today, and those LEAFS that were leased back in 2011 and 2012 are now coming off of lease, and the residual value of these first generation cars is now being determined by the market. What NMAC is finding is that the wholesale market for these early cars is saturated, and the wholesale value of the cars is depressed accordingly. Ideally, a leasing company would like to have a percentage of lease customers convert their leases into purchases (and to finance those purchases). What has happened is that the lease residual price is much higher than the “street” price of that 2011-12 LEAF, so customers are just turning them in rather than purchasing them.

To address this NMAC is simply discounting the residual so that it lines up closer with the “street” retail price of that used LEAF. So instead of asking $15-18K for the lease return, they are discounting the car’s residual or “buyout” to be in line with the street price of $10-12K. In addition they are offering attractive financing terms for financing the customer buyout. That financing offer is designed to offset the residual discount.

This program is aimed at converting enough lease returns to buyouts to rebalance the off-lease inventory going into wholesale auction, and firm up the wholesale price.

Now keep in mind that these lease returns are owned by NMAC and not NMC, and that NMAC is like a bank, they are a financial organization, not a repair and upgrade shop. Their only effort in that area is for basic reconditioning of a car to sell it at a wholesale auction. So what that means is they simply are not in the business to upgrade a car with the most current stuff like a new battery, they are just going to do the minimum to get that car sold at auction and out the door.

There is simply not a business case to support all the fuzzy warm blanket unquantifiable benefits of offering the lease buyout with an upgraded battery, spending real dollars to do that plus all the costs of warranting and maintaining this upgrade down the road.

NAMC just wants to get these lease return LEAFs off their balance sheet, and from a financial point of view the best way to do that is to discount the price, and try to make it up with another product (i.e. make some of the $5K back by financing the $10-$12K of the buyout).

What is happening right now with the $5K incentive program is simply a way to try to manage the large number lease returns coming into the market. The traditional used market cannot fully absorb them, so it makes sense to try to get the lease customer to buy the car for essentially what it would cost on the retail used market.

There is no crisis; this sort of tactic is used all the time as a method for managing a vehicle oversupply.

This article is a counterpoint to Nissan Can Avert LEAF Pending Crisis If It Makes This Single Change