In the context of commercial real estate, rent bumps refer to periodic adjustments on the rental rates pursuant to a lease, typically stated as a fixed percentage of the rents currently in place.
As an example calculation, a lease may initially be for $10.00/sf with 2.0% annual rent bumps. In this case, rent in year two would be $10.20/sf and year three rent would be $10.40.
In addition to a percentage increase, the rent bump can include a dollar amount. These arrangements are more typical on longer leases. They tend to occur around the halfway point. Tenants can also negotiate the bump amount.
Rent bumps are not unexpected. Tenants always know when they are coming and how much they’ll be. The lease agreement will spell out the conditions of the bump.
For shorter leases, those that are one year or less and common for residential properties, can also have rent bumps. These often occur each year. Landlords may use these rent bumps tactically.
For example, if the tenant is low maintenance, the landlord may increase the rent by a smaller amount than a tenant who causes lots of problems. For the problem tenant, they may see a much higher increase in rent, which may cause the tenant to not renew their lease.
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Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment.
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