Estimating fair rent increases after building retrofits: A max-min fairness approach

Abstract

Residential building retrofits are one crucial instrument to reduce greenhouse gas emissions. Due to the high proportion of rental dwellings in Germany, one particular focus is on rental building retrofits. To increase the attractiveness of retrofits, landlords can charge a certain percentage of the investment amount in retrofitting on top of the current rent, i.e., a percentage-retrofitting-fee. This study applies a max-min fairness scheme to derive a model from estimating fair percentage-retrofitting-fees, including tenants, landlords, and society's environmental and economic interests. Additionally, this model includes the tenant's risk of uncertain energy bill savings after the retrofit, using expected utility theory. Further, two policy instruments, subsidies and environmental taxes, are included in the analysis and their impact on fair percentage-retrofitting-fees is derived. The results of a case study on the German retrofitting market show how the efficiency standard of the building and the investment amount in energy efficiency influence the fair percentage-retrofitting-fee. This study reveals that current regulations concerning percentage-retrofitting-fees are not fair for either the landlord or the tenant. Above that, we illustrate that the fair percentage-retrofitting-fee increases with either the height of the subsidies or the height of an emission tax rate.