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From a June 7, 1994, report prepared at the American Embassy - Bonn.

SUBJECT: BUNDESTAG APPROVES DRAFT BILL ON PROPERTY COMPENSATION

1. Following two years of controversial debate within the ruling coalition, between the government and the opposition, and among the western and eastern German states, the Bundestag (lower house of German parliament) finally has approved a property compensation law establishing a so-called "expropriation compensation fund." The fund would be instituted to compensate former owners of real estate, business and other assets in eastern Germany that were expropriated during the nazi regime, under the soviet occupation from 1945- 1949, or by the GDR government. The bill needs the explicit approval of the Bundesrat (upper house of parliament), where the majority spd opposition has announced it will block the legislation as currently drafted, meaning that a conference committee will have to forge a compromise.

2. Once completed, this legislation will directly affect those U.S. citizens who opted to pursue their claims in Germany under a 1992 U.S.-German agreement which gave them the choice of either accepting an award from the U.S. foreign claims settlement commission or pursuing the claims in Germany (reftel). The amount of compensation for and method of disbursement to victims of nazi persecution will differ from that for other claimants.

3. The dispute regarding the expropriation compensation fund has centered around the unequal treatment accorded different categories of former owners, as well as low proposed compensation, as compared to the actual market value, for houses and real estate. The opposition fears that a number of legal challenges would result, arguing that the "equality before the law" principle stipulated by the German constitution will have been violated. For example, former property owners expropriated under the gdr government would have the right to declare whether they wish to have their property restituted or would prefer to receive financial compensation.

4. In contrast, former owners of agricultural and forestry property which was expropriated under the Soviet occupation from 1945-1949 would have to repurchase their property at a price equal to around 40 percent of the current market value if they choose restitution rather than compensation. In addition, they would face a prohibition on resale of the property for 20 years in the event the purchase option is exercised. Current tenants of agricultural land would also be eligible to purchase the property on which they live, and would be given priority over owners. However, most tenants likely would lack the necessary resources with the consequence that former owners would prevail.

5. In addition, some critics believe that cooperatives which have succeeded the former collective farms face discrimination under the proposed law as they will only have the right to purchase at full market value. The coops, whose farms constitute two-thirds of total east German agricultural land, fear that former owners buying up the land they currently lease will threaten their economic viability, the more so as land leased on a long-term basis frequently serves as collateral for the bulk of coops' investment credits.

6. According to the draft bill, the expropriation compensation fund would have a volume of dm 20 billion. As much as dm 12 billion of the total would come from a federal transfer and the remainder would derive from privatization profits, interest income and repayments from the post-war western German burden equalization fund (lastenausgleichsfonds).

7. Compensation payments would vary by type of asset. For houses and real estate, the basis would be the asset's "1935 standard value" multiplied by a factor of between 1.5 to 20 according to the type of asset (note: the 1935 standard value is a specific historical valuation of property assets under German tax law and is generally far below the market value). The compensation itself would be in the form of government notes which would mature in 2004 and be redeemable in five equal annual installments by 2010; according to the draft law, the notes will be tradeable, i.e. at a discount. -- holbrooke

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