Commercial Property Operating Budget: A Line-by-Line Guide

The budget package arrives in late fall. Operating expenses are up, and the cover memo blames insurance, taxes and inflation. Taxes are last year’s bill plus a round percentage. Repairs rose by the same percentage as everything else. Recoveries rose too, so NOI looks fine. The owner must approve it before tenants get their new CAM estimates, and nobody can tell which increases are real.

That is a normal commercial property operating budget review. This guide is for owners and asset managers of office, retail, industrial and mixed-use buildings who approve a budget someone else prepares. Budgeting and reforecasting are part of Levaru’s commercial property management service in DC, Northern Virginia and Maryland.

It covers the calendar, revenue, each expense line and its drivers, lease recoveries, capital versus operating, DMV-specific inputs, and variance reporting. It ends with a one-page summary template and an owner’s review checklist.

What is a commercial property operating budget?

A commercial property operating budget is the twelve-month plan for a building’s income and operating expenses, ending in net operating income (NOI). The property manager prepares it and the owner approves it. It then does three jobs: it sets the owner’s NOI expectation, it sets tenants’ estimated expense payments, and it gives the manager spending authority.

The arithmetic:

• Gross potential rent
• plus recoveries and other income
• minus vacancy, free rent and credit loss
• equals effective gross income (EGI)
• minus operating expenses
• equals NOI.

Capital projects, tenant improvements, leasing commissions, reserve deposits and debt service sit below NOI. Keep that line clean. A repair moved below the line flatters NOI. A capital item moved above it can land in a tenant’s CAM bill when the lease does not allow it.

A complete package has a summary page, a line-item budget phased by month, a supporting schedule for every material line, a lease-by-lease revenue and recovery schedule, and a narrative that explains each change against the current-year forecast.

When does the budget process start, and who signs off?

For a calendar-year budget, the work typically happens in the fall. The real dates come from documents, not habit. The management agreement sets when the draft is due and how the owner approves it. The leases set when and how tenants receive the landlord’s expense estimates. Loan documents may add a lender deadline. Pull all three first.

Stage	What happens	Output
1. Data pull	Rent roll, abstracts, actuals, contracts, notices	Assumptions list
2. Owner guidance	Hold plan, leasing strategy, capital priorities	Budget instructions
3. Manager draft	Revenue, expenses and recoveries by lease	Draft package
4. Owner review	Line-by-line questions and decisions	Revised draft
5. Approval	Written approval per the agreement	Approved budget
6. Tenant estimates	Sent in the form and timing each lease requires	Estimate letters
7. Loading	Budget loaded for monthly variance reports	Variance baseline

Stages 5 and 6 cause the most trouble. If approval slips past a lease notice date, the manager either sends estimates from an unapproved budget or misses the deadline. Some leases let the landlord keep billing the prior estimate until a new one arrives. Others do not. That answer belongs in each commercial lease abstract, with the base years, caps and exclusions.

How do you budget revenue line by line?

Build revenue lease by lease from the rent roll and abstracts, never as a building-wide growth rate.

• Base rent. From the rent roll, by month, with each step in the month it occurs.
• Free rent and abatements. A separate negative line. Netting them into rent hides a leasing cost.
• Escalations. Fixed steps from the lease. CPI increases use the index the lease names and a stated assumption.
• Recoveries. Calculated per lease from the expense budget, split into CAM, taxes, insurance, separately billed utilities and any permitted admin fee.
• Percentage rent. For retail, from tenant sales reports and each breakpoint. Budget it conservatively.
• Parking. Monthly, transient and validations. If an operator runs the garage, state whether income is gross or net.
• Other income. Antenna licenses, storage, signage, after-hours HVAC, billed-back tenant work, late fees. Each needs a contract or history.
• Vacancy and credit loss. From the expiration schedule. For each expiring lease, state the renewal assumption, downtime, free rent and market rent. Add a credit-loss allowance for tenants already behind.

Do not layer a general vacancy percentage on top of a lease-by-lease rollover model. That counts the same risk twice. The opposite error is a budget where every expiring tenant renews at market rent with no downtime.

What drives each operating expense line?

Each line has one or two real drivers. Start the estimate there, not from last year’s total.

Line	Main driver	Best source
Real estate taxes	Value × full rate stack	Notice, rate, appeal status
Insurance	Values, losses, market	Broker renewal indication
Utilities	Usage × tariff	Bills, tariff, supply contract
Janitorial	Area, frequency, spec	Contract and escalator
Repairs and maintenance	Age, condition	History by system
HVAC contract	Equipment, PM tasks	Contract and exclusions
Elevator contract	Units, coverage type	Contract plus inspection fees
Fire and life safety	Systems, inspections	Contract plus deficiencies
Landscaping	Area, scope	Contract plus enhancements
Snow and ice	Contract type, storms	Pricing × planning count
Security	Posts, hours	Post orders × bill rate
Management fee	Fee basis	Formula on budgeted revenue
Administrative	Software, audit, legal	Itemized list
On-site payroll	Staff, burden, allocation	Staffing plan

Taxes are often the largest non-controllable line. Calculate them from the assessed value and every rate and fee on the parcel’s bill. Note any pending appeal and whether the budget assumes it wins.

Insurance comes from the broker’s indication. If the policy renews mid-year, carry two premiums: the current one until renewal and the expected one after.

Utilities split into rate and consumption. Model consumption from a full year of bills, adjusted for occupancy. If a supply contract expires during the year, budget the renewal price.

Repairs and maintenance is where padding hides. Review it by system, remove one-time events, and treat a rising line on one system as a possible capital decision.

Contract services should match the signed contracts, including escalators and expiry dates. Check exclusions. Inspection fees, permits and deficiency repairs often sit outside elevator and fire contracts and need their own lines.

The management fee follows the agreement’s formula, so confirm which revenue lines are in the base. Our guide to commercial property management fees covers fee structures and add-ons. Payroll for shared staff needs an allocation method, and allocations across buildings must total one hundred percent.

To scope service lines before a full budget exists, the FM budget calculator multiplies your square footage by rates you set. It is a planning tool, not a substitute for contracts.

Should each line be zero-based or incremental?

Match the method to how the cost is created. Zero-based starts each line at zero and justifies every dollar. Incremental adds a percentage to the prior year.

Line type	Examples	Method
Contract-based	Janitorial, HVAC, elevator, fee	Zero-based from the contract
Formula-based	Taxes, insurance, utilities	Calculated from drivers
History-based	Repairs, supplies	Incremental from cleaned history

Contract lines are arithmetic: price, escalator, term. If a contract will be rebid, budget the expected result and say so. Formula lines are calculated, not trended. History lines are the only place for incremental budgeting, and the base should be the current-year forecast, not last year’s budget, with one-time items and misfiled capital removed.

Incremental budgeting on contract lines hides scope creep. A practical rule: zero-base contract and formula lines every year, and zero-base a history line when its variance pattern says the base is wrong.

Outside benchmarks are a cross-check, not a source. BOMA International’s Experience Exchange Report and the joint Income/Expense IQ database with IREM and NAA, the usual national benchmarks by metro and asset class, were discontinued in 2025; the 2024 edition is the last. Local BOMA chapter surveys and your own multi-year history now do that job. A benchmark can flag a line far out of range. It cannot tell you what your contracts say.

Which expenses are controllable and which are not?

Controllable expenses are lines the manager’s decisions change: contract services, repairs, payroll and administrative costs. Non-controllable expenses are set mainly by outside parties: taxes, insurance premiums and utility rates. Utility consumption sits in between.

The split matters for accountability and for leases. The manager should answer for controllable variances and explain non-controllable ones. Many office and retail leases cap annual increases in controllable expenses, and the cap only works if each cost is tagged correctly.

The lease defines “controllable,” not the budget template. One lease may exclude only taxes, insurance and utilities from its cap. Another may also carve out snow removal or costs required by new laws. Tag each general ledger account by each lease’s definition. Moving a cost into an uncapped category to escape a cap is exactly what a tenant audit finds.

How do recoverable lines map to the leases?

Every expense line needs a recovery tag for every lease, because recoveries are calculated per lease, not per building.

• Triple net (NNN). The tenant pays its pro-rata share of taxes, insurance and CAM, subject to exclusions and caps. See the NNN lease guide.
• Full-service gross with a base year. The tenant pays its share of the increase over the base-year amount, never less than zero.
• Expense stop. The same, with a fixed dollar amount.
• Modified gross. Some lines are recovered and some are not.

Three provisions change the math. Gross-up adjusts variable expenses to the occupancy level the lease states, so a partly vacant building neither under-recovers nor bills tenants for empty space. Caps limit increases and differ in whether they are cumulative or compounding. Exclusions remove costs tenants never pay, such as leasing costs, owner entity costs and, in many leases, capital.

Recovery tag	Budget effect
Recoverable, all leases	Full pro-rata recovery
Recoverable, some leases	Calculate per lease
Recoverable, capped	Limited by each cap
Amortized capital	Annual amortization only
Non-recoverable	Owner cost

The recovery schedule is a common place for NOI to be overstated. A building-wide recovery ratio ignores caps, base years, exclusions and vacancy. Ask for the per-lease calculation and its reconciliation to last year’s actual year-end true-up. The CAM reconciliation guide and CAM reconciliation worksheet show the method. For the tenant’s view, see CAM charges explained.

Where is the line between capital and operating?

Three rulebooks set the line: the owner’s book capitalization policy, federal tax rules, and each lease’s definition of operating expenses. They do not always agree. This is general information, not tax or legal advice; your CPA and lease counsel decide.

Under the IRS tangible property regulations, a cost is a capital improvement if it results in a betterment, a restoration, or an adaptation to a new or different use. Two safe harbors matter:

• Routine maintenance. Recurring work that keeps a building structure or system in ordinarily efficient operating condition, which you reasonably expect to perform more than once during the 10-year period after it is placed in service.
• De minimis. If elected, amounts up to $2,500 per invoice or item without an applicable financial statement, or $5,000 with one.

Leases often draw their own line. Some exclude all capital. Others allow amortized recovery of certain items, such as those that cut operating costs or are required by law.

Reserves sit below NOI. Size the reserve deposit from a facility condition assessment and a multi-year capital plan, not a rule of thumb. The capital planning and reserve study guide shows how. When one system’s repair line keeps climbing, move the question into the capital plan.

What DC, Virginia and Maryland inputs belong in the budget?

Four local inputs change a DMV budget: tax calendars and rate stacks, benchmarking and BEPS costs, snow rules, and utility rates. As of October 2026:

Jurisdiction	Value set	Tax due	Watch
District of Columbia	Annually	Mar 31, Sep 15	Class 2 tiers
Fairfax County	Annually, Jan 1	Jul 28, Dec 5	Commercial levies
Arlington County	Annually, Jan 1	Jun 15, Oct 5	Review by Mar 1
City of Alexandria	Annually, Jan 1	Jun 15, Nov 15	Stormwater fee
Montgomery County	Every 3 years	Sep 30	Phase-in

District of Columbia. The tax year runs October 1 to September 30, so a calendar-year budget spans two DC tax years. The Office of Tax and Revenue lists Class 2 commercial rates of $1.65 per $100 up to $5 million of assessed value, $1.77 above $5 million up to $10 million, and $1.89 above $10 million. The tier rate applies to the whole value: OTR’s own example taxes a $5.5 million property at $1.77 on every dollar. Appeals are due on or before April 1. Under D.C. Code § 47-821, if an owner does not submit requested income and expense information on time, without reasonable cause, the next year’s tax is increased by 10 percent.

Fairfax County. Value is set as of January 1. The county’s tax rate table shows a 2026 base rate of $1.12 per $100 plus a $0.125 Commercial Transportation Tax District rate on commercial and industrial property. By tax district, Route 28, Dulles Rail, Tysons and Stormwater Service District levies can apply too. Budget from the full stack on the parcel’s notice.

Arlington County. Notices go out each January. Department review requests are due March 1, and taxes are due June 15 and October 5.

City of Alexandria. The 2026 assessment calendar shows notices mailed February 25, the rate set April 29 and income and expense surveys due May 1. The stormwater utility fee is a separate line on the tax bill. In all three Virginia jurisdictions, the new assessment arrives in January or February, after most calendar-year budgets are approved. Plan a spring reforecast of the tax line once the new value and rate are known.

Montgomery County. Maryland’s State Department of Assessments and Taxation reassesses each property every three years. Increases phase in equally over three years, and decreases take effect at once, so future values are visible in advance. The appeal deadline is 45 days from the notice date. The county tax year runs July 1 to June 30, and the annual bill is due September 30.

Benchmarking and BEPS. DC requires private buildings over 10,000 square feet to report benchmarking to DOEE by May 1. DC’s first BEPS cycle ends December 31, 2026, with end-of-cycle reporting due May 3, 2027. Montgomery County covered buildings, 25,000 square feet and up, benchmark by June 1 each year, with data verification in the first year and every three years after. Maryland’s statewide BEPS covers commercial and multifamily buildings of 35,000 square feet or more. Budget reporting and verification as operating lines; measures to meet a standard are often capital. See our BEPS deadlines guide.

Snow. D.C. Code § 9-601 requires commercial owners to clear abutting sidewalks within the first 8 hours of daylight after snow or sleet stops, full width up to 36 inches. The commercial fine is $150 under § 9-606. Virginia and Maryland localities set their own rules. Seasonal pricing fixes the cost; per-event pricing ties it to the winter. State the planning storm count from your own history. The snow removal contracts guide covers the trade-offs.

Utility rates. The Virginia State Corporation Commission’s final order in Dominion Energy Virginia’s 2025 biennial review approved base-rate increases for 2026 and a further increase for 2027. For a 2027 budget, use the 2027 tariff, not this year’s average cost per kilowatt-hour. In DC and Maryland, check open rate cases at each Public Service Commission.

How should variance reports and reforecasts work?

Each month, the manager compares actuals to budget for the month and year to date, and explains in writing every line that crosses the owner’s thresholds. Set thresholds in both percent and dollars. Percent alone floods the report with small lines. Dollars alone let a large line drift. The owner picks the numbers and writes them into the budget instructions or management agreement.

Good commentary does four things:

1. Classifies the variance as timing (it reverses) or permanent.
2. Names the cause: a specific invoice, event, rate or contract.
3. States the recovery effect. On a capped or non-recoverable line, it is an owner cost.
4. Updates the forecast when the variance is permanent.

Phase each line the way the cost falls: tax installments in due months, insurance at renewal, snow in winter, escalators when they start. Even twelfths create false variances every month.

Repair commentary is only as good as the record behind it. In Levaru’s in-house CMMS, repairs are logged as photo-documented work orders, and owners see the work-order history in the client portal, so a repairs variance traces to actual jobs.

Reforecast at least once at mid-year, and again after a trigger: a lease signed or terminated, a new assessment or rate, an insurance renewal, a utility rate change, a contract rebid, or a large unbudgeted repair. If leases allow mid-year estimate changes, adjust tenant estimates when the forecast moves materially.

Watch patterns. Repeated favorable variances on one line suggest padding. Repeated unfavorable variances on one system suggest a capital problem.

What should a one-page budget summary look like?

One page, with every number traceable to a supporting schedule.

Line	Prior actual	Forecast	Budget	Change	Driver note
Base rent, net of free rent
Recoveries
Parking and other income
Vacancy and credit loss
Effective gross income
Real estate taxes
Insurance
Utilities
Contract services
Repairs and maintenance
Payroll and management fee
Administrative
Net operating income
Capital, TI and commissions
Reserve deposit
Cash flow before debt service

Compare the budget to the current-year forecast, not last year’s budget. Below the table, list key assumptions in one block: occupancy and rollover, tax basis, insurance basis, utility rate basis, planning storm count and fee basis. Add two ratios: recoveries as a share of recoverable expenses, and expenses per rentable square foot by line.

What should an owner check before approving the budget?

Ask questions that force the manager to show sources.

Padding

1. Which lines are prior year plus a percentage? Ask for the contract, quote or calculation.
2. Is contingency in its own line, or also hidden inside other lines?
3. Is repairs and maintenance above the trailing actual without a named reason?
4. Do shared payroll allocations total one hundred percent across buildings?
5. Does the snow budget assume more storms than your history supports?

Omissions

6. Are contract escalators and expirations in the right months?
7. Is the tax line built from the full rate stack, including district levies and fees?
8. Are inspection fees, permits and deficiency repairs budgeted outside the contracts?
9. Are benchmarking, BEPS reporting and verification costs in the years they fall?
10. Is insurance based on a broker indication, with the right renewal month?

Recoveries and capital

11. Are recoveries calculated lease by lease, with caps, base years, gross-up and exclusions?
12. Does the recovery budget reconcile to last year’s actual reconciliation?
13. Are capital, leasing or owner-entity costs sitting in recoverable accounts?
14. Does the capital list tie to the condition assessment and capital plan?

If each answer is a document, the budget is probably sound. If the answers are adjectives, it needs another pass.

Frequently asked questions

What is the difference between an operating budget and a capital budget?

The operating budget covers recurring income and expenses that produce NOI: rent, recoveries, taxes, insurance, utilities, services, repairs and fees. The capital budget covers projects that improve, restore or extend the life of the building, plus tenant improvements and leasing commissions. Capital sits below NOI. The split affects valuation, tax treatment and tenant billing, because many leases exclude capital or allow only amortized recovery of specific items.

When should a property manager start the annual budget?

For a calendar-year budget, the work typically happens in the fall. The real deadline comes from the management agreement, which sets when the draft is due, and from the leases, which set when tenants must receive expense estimates. Work backward from the earliest lease notice date, leave time for owner review and revisions, and check whether loan documents also require a budget to go to the lender.

What variance threshold should an owner set?

There is no standard number. The owner sets it in both percent and dollars, based on building size and reporting needs. Percent-only thresholds create noise on small lines, and dollar-only thresholds can miss drift on large ones. Write the thresholds into the budget instructions or management agreement, and require a written cause, a timing or permanent classification, and a forecast update for every line that crosses them.

How are tenant CAM estimates set from the budget?

The manager applies each lease’s terms to the approved expense budget: pro-rata share, base year or expense stop, gross-up, caps, exclusions and any permitted admin fee. The annual estimate is usually billed monthly and trued up after year-end. A padded budget produces padded estimates and later refunds. An optimistic one produces a large catch-up bill that strains tenant relationships at renewal time.

How often should a commercial property budget be reforecast?

At least once at mid-year, and again whenever a material event changes the full-year outcome: a lease signing or termination, a new assessment or tax rate, an insurance renewal, a utility rate change, a contract rebid, or a large unbudgeted repair. The reforecast resets the owner’s NOI expectation and, where leases allow, is the moment to adjust tenant estimates so the year-end reconciliation stays small.

Are real estate taxes controllable?

Mostly not. The assessor sets the value and the local government sets the rate, so leases usually treat taxes as non-controllable. The owner still has levers: review every assessment notice, appeal when the value is wrong, and file required income and expense reports on time. In DC, failing to file requested income information can add 10 percent to the next year’s tax. Budget taxes as a calculation with an appeal plan.

Should the operating budget include a contingency line?

That is the owner’s decision. If there is one, keep it visible as a single line rather than spread through other lines, where it distorts variances and tenant estimates. Decide in advance who can release it and for what. Contingency inside recoverable lines raises tenant estimates and creates refunds at reconciliation, so a separate owner-level contingency outside the recovery pool is usually cleaner.