The Interaction of German Tenancy Law and Subsidies for Energy Efficiency

Abstract Germany allows landlords to gain additional rent revenue after an energy efficiency retrofit depending on the investment, but subsidies must be deducted from the recoverable retrofit costs. Such subsidies are valuable to the landlord only by increasing the market rent of an energy-retrofitted apartment for future tenancy contracts. Our algebraic model demonstrates that the obligation to deduct subsidies from recoverable retrofit costs usually raises the landlord’s optimal investment, but for unlikely conditions it may cause smaller retrofits. Subsidies without the deduction requirement are more effective at bridging profitability gaps but tend to offer windfall profits for landlords who would also invest in their absence without deepening the chosen retrofit.