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Domain Leasing, Joint Venture or Co-Development
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PostPosted: Mon Mar 11, 2013 12:09 pm 
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One of the real conundrums when talking about leasing a domain is of course how much the lease should cost. Now I should say from the outset that this article is not a definitive answer with a set equation for working out exactly what each domain is worth, rather it is a general discussion to point out some of the points for both sides to consider when coming to a mutually agreed figure. (This is just a general overvue and I hope others will substantially contribute to this important discussion.)

Obviously the first consideration is the actual value of the domain name itself, and to say the least this can produce such a broad spectrum of values that it really should be dealt with first by the parties, after all if you do not agree on the ‘sale value’ of a domain how can you expect to agree a lease value? (There are so many aspects to valuing domains that on many forums the arguments still rage on after years of debate, and looking at the aftermarket sales does not really assist either, for very similar domains can sell for staggeringly different prices or be sold at the same price. In the end it is what a seller and buyer agree upon that sets the sale price and so it should be for the parties in the lease of a domain.)

Now there are many types of lease, and of course each type brings with it its own quirky aspects as to rental value. The shortest leases are usually referred to as rentals and may involve the development of the site temporarily or may just be that the end-user wants to re-direct the type-in traffic from the domain to another site. (Please note ‘rentals’ although given a different name should still be treated as leases in the fact that there should still be a written agreement clearly outlining the rights and responsibilities of both parties.)

Now rentals where type-in traffic is just redirected can be for a set period or for a set amount of traffic (of course such rentals can be renewable if both parties agree). Here it is the perceived value of the traffic that will be the deciding factor on the cost of the rental, obviously there are such benchmarks as what could be obtained from parking the domain (a process where a third party tries to elicit the best revenue by providing a basic page of adverts from an online advertising medium such as Google, the third party takes a cut of the revenue paid), or indeed from a main advertising outlet such as Google directly paid to the domain owner. Obviously the domain owner when renting a domain wishes to make a premium on what he could achieve on those mentioned above. Conversely the renter wishes to try and save money on what he would pay directly to an advertising medium as mentioned above. This would seem to be a simple guide for both parties in a rental agreement – both parties win.

Where a rental occurs with the development of the site (here perhaps a domain name representing a specific event in time may fall into this category) there are other considerations to be taken into account. A domains value may both be increased and decreased by a development taking place. First consider the use of the site, is such a development likely to affect future buyers/leasers of the domain. For example is the domain/website going to be used for what is generally called ‘spamming’, is the site going to be considered as carrying out fraudulent activity, is the domain or website going to get blacklisted by search engines, etc.? All of these would have a detrimental effect on the value of the domain name after the rental had ceased. Also to be considered is if it transpired that the domain name was already blacklisted, or has lower than expected type-in number of visitors than was claimed by the owner at the time of the rental agreement, these are factors that should be considered and covered by the rental agreement as well to protect the renter. Also, though of course the value of the rent should take into account any residual traffic acquired by the owner following the end of the rental due to the development of the website (though this is likely to not sway owners much as to actual rent payable but may increase the likelihood of a rental being agreed).

Short rental leases are likely also to come at a high annual price than long term multiple year leases, so if a multiple year lease is based on 20% of agreed valuation of the domain you are likely to pay much more than this for a 1 - 12 month rental, after all it deprives the domain owner during the rental period to actually get a long term rental or sell the domain elsewhere.

We can now move onto ‘leases’ (taken to be periods of 1 or more years). Leases can obviously be split into two main types; straight rental leases, and joint venture leases. The difference is simple, in the first, ‘Straight Rental’ lease (SRL), the amount of rent is set out in a formulae pre-determined at the time of signing the lease, though any rises in rental payment may be subject to manipulation by external factors (e.g. Consumer Price Index – CPI, etc.) the rent payable is not dependant on the revenue or income earned either directly or indirectly through the developed website (if the developed website turns out to be another eBay then the domain owner still will only receive the agreed rent as stated in the lease). The other type is the ‘Joint Venture’ lease (JVL) the rent payable is at least to some extent on the revenue or income generated by the website either directly or indirectly. This may be of particular interest to domain owners, developers, and end-users, as the cost of the base rental would normally be lower than in an SRL, and therefore potentially make the development more affordable. Of course the downside to this for the website developer and/or end-user is that the revenue or income earned is going to be shared with the domain owner. Again of course this has to be carefully and explicitly detailed in the lease agreement.

Right, so what is involved in calculating the rent in an SRL?

The same principles apply as with a short term rental, the major one being the value of the domain name on the sales aftermarket, and as stated above this should be discussed and agreed before going any further with the rental price, after all it gives a base line from which both parties can work. Not mentioned above but of importance here because this is likely a multi-year contract is the return the domain owner could receive in just interest by investing any money from the sale of the domain, so if banks are paying a high interest rate at the time of the lease agreement it is likely that the rental will be slightly higher than if the bank interest earnable was lower. Again as above the chances are that a domain owner will accept a slightly lower annual return on longer than shorter leases (though these may be subject to either fixed increases or increases dependant on CPI, etc., or indeed both).

The one difference that may arise is where an SRL has a ‘Buying’ clause (although these may also occur in STL’s they are less likely to be included). With such a clause it may be an option for the developer/end-user to at some stage in act a clause that allows them to buy the domain from the domain owner. This clause must be specific and state both when and at what actual price the domain buying clause may be enacted. Obviously if a ‘buying clause’ is included then there may be expectation that the negotiated buying price may take into account some or all of the monies paid in rental up to that point. (Indeed a sub-set of leases may be considered specifically designed where the purchase of the domain occurs over a period of time, these are generally termed ‘Rent to Buy’ leases, though in such the expectation is that the domain ownership may change hands at the end of the leasing period, and can be thought of as a type of hire purchase.)

The most complex of leases is the JVL’s, for these may include just the domain owner and end-user or may include a developer as a third party either directly or indirectly contractually associated with the contract between the domain owner and end-user (the developer of course can be the end-user themselves). Here expectation is given that the developed website shall produce an income which will be divided somehow between the two or three parties involved in the JVL. It is paramount that such contracts are fully understood and agreed by all parties as this is usually a long term commitment and each party must understand their responsibilities carefully. Such JVL will often start with a nominal low rent or indeed a rent free period in which the domain owner receives no actual payment of rent, this is so there is no immediate or little cost to the end-user and/or developer allowing time for the website to be produced and gaining revenue. Obviously the higher the value of the domain name associated with the JVL development the higher the expectation of the domain owner in their share of the revenue/income. The more work put in by the end-user into the development and amount of financial investment (possibly in hiring developers, holding stock, advertising, etc.) then the higher will their expected reward be. If there is a separate developer working as part of the JVL then they also will expect their rewards which obviously will come from the same pot of revenue/income as that for the domain owner and end-user.

I doubt if many SRL would be leased for less than 25% per annum of the domain value, though it may be started off at a lower rental and incremented up to allow the developer time to gain income from the development. Similarly I doubt that a JVL would lease annually upon development for less that 20% per annum of the aftermarket domain value, with of course additional stepped increments based on website revenue/income (remember this is a ‘JOINT’ venture and all parties should benefit from it).

Whatever type of lease is involved perhaps the most important thing is for each party to be frank and honest in the negotiations about the value of the domain, the amount of investment which is involved in development, and what the expectations of all parties of the end result. But the last words should be etched in granite for all to read from the beginning of negotiations right up until the start of the lease:

..................................................................PUT EVERYTHING IN WRITING


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PostPosted: Sun May 26, 2013 8:28 pm 
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Joined: Sun May 26, 2013 8:08 pm
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Great info, Bill. Who do you work with in the compilation and etching of legal details unique to each JVL?


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