so if the site makes a million a year and you can no longer use it as an adult site then it won't get a million dollars a year
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Exactly.
That is one reason the guy is a goofball. He is restricting the use. If you can't put the domain to the "highest and best" use (which almost always means: most economically valueable use) it means you can't use it for adult even if adult is the most profitable use.
Thus, restrictions diminish the value of the domain, BIG TIME. He is capping the upside, perhaps even making the domain worthless, or in the worst case scenario --a liability-- because of possible TM issues.
With such a covenant, the domain ain't worth squat. Or, it could be worth a negative number.
So, you pay $X millions for the domain, which produces only $XXX,000 per year. Your return is pitiful.
Or, in the worst case, you pay $X millions and Whitehouse Foods sues your ass and you have to pay your lawyers $250,000 to defend a TM claim in US District Court (Federal Court) --and-- you lose the domain.
What a dope!