This is a guide
to help domainname advertisers/lessees and owners to estimate a
fair lease payment for a domain name.
When negotiating a lease payment, the
following factors should be considered:

The value of the domain name. (Below is a
discussion of the shortcomings of using “similar” leases to
determine your own lease payment. For information on valuing
domain names, click
here.)

The length of the lease and the frequency
of payments.
 Whether the lessee has an option to

Whether the owner has the right of early
termination with or without penalties.

Other specific provisions (such as no
adult content or no popups).

The risk associated with the payments not
being made on time.
A domainname lease is more complex than a lease
on a car or an apartment. Any lease payment is determined primarily
by the price of the asset being leased and, to a lesser extent,
by any incentives from the manufacturer/dealer. The major difficulty
with a domain name is finding “similar” leases to ascribe a fair
price. This limitation for domain names is the result of several
variables:

Markets for such leases are not very active.
Only limited data can be obtained from the major leasing marketplace.
For a car, on the other hand, the basic benchmark price is the
manufacturer’s suggested retail price, commonly known as the
sticker price and widely available.

A considerable portion of the highvalue domain
leases are arranged through private placement, further limiting
public information.

“Similar” domain names are not easy to define.
In the case of a car, there are welldefined characteristics
that determine its price, such as class (subcompact, compact,
luxury, etc.), type (coupe, 4door, SUV, etc.), and so forth.
However, the characteristics of domain names are not so obvious,
except for their extensions (.com, net, etc.). Even the importance
of the number of characters is questionable. Thus, the only
way to identify similar domain names is by using statistical
models similar to those used to price domain names.
A more reliable approach to determining lease payment
is a twostep process:

Determine the value of the domain name.

Calculate the lease payment (LP). The standard
pricing approach is to use Discounted Cash Flow models. However,
to simplify this explanation, I will use the assumption of a
lease with a perpetuity payment. In this case, the pricing model
is reduced to
Price = LP/k,
Ţ LP = Price x k
where k is the appropriate discount rate, which
can be calculated based on the Capital Asset Pricing Model plus
an additional risk premium.
To incorporate any provisions in the pricing model,
one can, in principal, use optionpricing theory to value real options.
However, for more practical considerations, scenario analysis can be easily incorporated into the leasepayment
calculation.
Related Service
Topic tags: leasing
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