Understanding “The Bump” is crucial to projecting your real estate expenses correctly. Most often this will be found in leases with longer than a 5-year term. Now the bump is a fixed dollar amount that is negotiated to increase the base rent at some point thru the term of your lease. For tenants with fixed annual increases, the bump is a profit center for the landlord given building expenses don’t increase at the same rate of the fixed annual increases. For tenants with direct operating expenses, the bump enables the landlord to adjust the rents higher over time, which given inflation is justifiable, as direct operating only addresses the buildings increases in expenses.
As an example, a 10,000 square foot lease might have a base rent of $70 per square foot for the first 5 years and $75 for years 6–10. But it would be INCORRECT to say that your rent in year 6 is $750,000 ($75 x 10,000 SF) up from $700,000.
Because “the bump” of $5.00 per square foot is added on top of the then escalated rent in year 6.
Let’s say your rent has fixed escalations of 2% annually. So your rent expenses (excluding taxes and electricity) would be:
Year 1- $70
Year 2- $70+(2% of $70)= $71.40
Year 3- $71.40+(2% of $71.40)= $72.83
Year 4- $72.83+(2% of $72.83)= $74.28
Year 5- $74.28+(2% of $74.28)= $75.77
Year 6- $75.77+(2% of $75.77)=$77.29 + The $5.00 Bump= $82.29
That’s $7.29 ($82.29-$75) per square foot OR $72,900 more per year. ALOT different than what on the surface looks like a $5 per square foot increase in rent after 5 years.
As a dear friend of mine has said to me, it’s important to be armed with as much information as possible when making a decision. I hope this helps you.