Development impact fees: Frequently asked questions
The Supreme Court’s unanimous decision in Sheetz v. County of El Dorado could change how local and state governments extract development impact fees from property owners in exchange for building permits. In the April ruling, the Court held that development fee schedules are subject to judicial scrutiny under the doctrine of unconstitutional conditions.
Below are answers to some of the most pressing questions about the Court’s opinion and what it may mean moving forward.
Background
If you want a building permit, permit officers often require you to give up something for it. They might demand a property interest, like a public right of way to cross your land. Or they might require you to pay a fee to cover some costs that your proposed development might create, like the cost of extending sewer service to a set of new townhomes.
These building permit conditions or “exactions” can violate the Fifth Amendment’s Takings Clause if they are excessive or unrelated to the impact of the proposed development. The test for whether a permit condition goes too far comes from two landmark Supreme Court decisions, Nollan v. California Coastal Commission (1987) and Dolan v. City of Tigard (1994). Together, those cases require that permit conditions be related to an impact caused by the proposed development. The permit condition must satisfy a two-part “essential nexus” and “rough proportionality” test, often called the Nollan/Dolan test or exactions test. A permit condition that does not satisfy either prong of this test violates the Takings Clause of the Fifth Amendment.
In Nollan, for instance, a beachfront homeowner wanted to expand his home, so he applied for a permit. The California Coastal Commission would grant the permit only if Mr. Nollan gave the public a right of way across his land to reach the beach. The Supreme Court held that this was a taking of Mr. Nollan’s property because the Commission was abusing the permit process to extort a property right from Mr. Nollan that it would otherwise have to compensate him for. Because the demand for a public easement was not fixing some problem caused by Mr. Nollan’s proposed construction, the exaction was unconstitutional.
Dolan clarified that, even where there is a nexus, the government must still show that the permit condition is roughly proportionate to the development’s actual impact, and no more. At issue was a demand that the owner of a hardware store dedicate about 10 percent of her land as a stream buffer and for a bicycle path as a condition for her to obtain a permit to expand her store. The Supreme Court held that although the City established a nexus between both conditions and Ms. Dolan’s proposed expansion, the conditions nevertheless were unconstitutional because the City had not demonstrated that the conditions were roughly proportional to the impact of Dolan’s change in land use; thus, the permit conditions unconstitutionally took Dolan’s property without just compensation.
The Supreme Court confirmed that this “exactions” test also applies to certain demands for money in the permitting context in the case Koontz v. St. Johns River Water Management District (2013). In Koontz, a permit officer agreed to grant a building permit only if the property owner paid for improvements on government property miles away. The Court held that such fees should be treated the same way as the Coastal Commission’s demand for an easement across Mr. Nollan’s beachfront property.
Yet for nearly as long as the Nollan/Dolan test has been in place, state and lower federal courts were divided on the question of whether the doctrine applies to exactions mandated by acts of generally applicable legislation. In many states, a permit condition imposed by a legislatively adopted fee schedule, for example, was held to be exempt from the constitutional scrutiny demanded by Nollan and Dolan. In those states, the government could demand exorbitant fees without having to justify them, if those fees were adopted by a legislative body rather than a permit officer.
What is Sheetz v. County of El Dorado about?
George Sheetz wanted to build a small home in rural California where he and his wife could raise their grandson. Under the County of El Dorado’s General Plan, George could get a permit to build on the condition that he pay a large “traffic impact fee” of $23,420. George sued, arguing that the fee was an unlawful exaction.
George lost in the state courts. Like many other states, the California courts had adopted a rule that barred property owners from challenging legislative exactions under the nexus and proportionality tests. This meant that George’s complaint alleging a violation of Nollan and Dolan was dismissed by the trial court without the court ever addressing whether the fee was justified.
The Supreme Court granted George’s petition to resolve the long dispute over whether the exactions test applies to fees adopted by legislation.
What did the Supreme Court rule in Sheetz?
“The Takings Clause does not distinguish between legislative and administrative permit conditions,” Justice Amy Coney Barrett wrote in the Court’s 9-0 ruling. The “nexus” and “proportionality” tests apply to any exaction, whether imposed by legislation or by a permit officer.
In other words, legislative exactions are subject to Nollan/Dolan. The Court held that
there is no basis for affording property rights less protection in the hands of legislators than administrators. The Takings Clause applies equally to both—which means that it prohibits legislatures and agencies alike from imposing unconstitutional conditions on land-use permits.
The Court reiterated that the government may place conditions on a permit that are necessary to mitigate impacts that the proposed development will have on the public. For example, “if a proposed development will ‘substantially increase traffic congestion,’ the government may condition the building permit on the owner’s willingness ‘to deed over the land needed to widen a public road.’” But the government’s authority to exact property ends “when the government withholds or conditions a building permit for reasons unrelated to its land-use interests.” The nexus and proportionality tests “address this potential abuse of the permitting process” by enforcing the line between lawful permit conditions and those “that require[ ] a landowner to give up more than is necessary to mitigate harms resulting from new development.”
The Supreme Court was asked only whether Mr. Sheetz’s complaint stated a legally recognized cause of action, so the Court did not address the merits of the case. The Court sent the case back to the California courts, where Mr. Sheetz will now present arguments and evidence showing that the impact fee violated the nexus and proportionality standards.
In short, the Supreme Court’s decision opens the courthouse doors for property owners to challenge the constitutionality of impact fees.
Did the Supreme Court declare all development impact fees unconstitutional?
No. The Supreme Court did not reach the question whether the impact fee violated Nollan/Dolan. This question will typically need to be addressed on a case-by-case basis.
Did the Supreme Court leave any “open questions” regarding the doctrine’s application to development impact fees?
Yes and no.
The Supreme Court noted that there may be additional questions that will need to be addressed when Mr. Sheetz’s case returns to the California courts, depending on whether the government preserved the questions in its prior state court pleadings. These questions “include[d] whether a permit condition imposed on a class of properties must be tailored with the same degree of specificity as a permit condition that targets a particular development,” and whether the impact mitigation fee would be a taking if demanded outside the permitting context—which is a threshold question to any unconstitutional conditions claim.
What is an “impact fee”? Does the exactions test apply to charges like application fees, review fees, user fees, and property taxes?
An “impact fee” is a charge imposed on a permit to offset the impacts purportedly caused by new development. Thus, it makes sense that “impact fees” are subject to the nexus and proportionality tests, which are designed to ensure that such fees are imposed for true mitigation purposes, and no more.
The doctrine doesn’t apply to user fees or taxes.
User fees are charges that seek reimbursement for an owner’s use of a public good or service, such as water, sewer, or trash collection. In the permitting context, user fees may include such things as staff costs captured by application fees and technical review fees. While these fees are not subject to the nexus and proportionality tests, they are typically subject to different legal tests, depending on the jurisdiction.
Property taxes are monetary obligations imposed on a broad class of properties for general revenue purposes. Taxes are distinguishable from development fees in that they are not imposed on an individual basis in exchange for a specific benefit, like a building permit. Like user fees, the validity of a property tax is determined under state laws.
What do the nexus and proportionality tests require?
As explained in Sheetz, the nexus and proportionality tests are designed to address the “complicated” relationship between the Takings Clause and the government’s authority to place conditions on a permit that are necessary to mitigate impacts that the proposed development will have on the public.
To enforce the line between lawful and unlawful exactions, the Court devised a two-part test that places the burden on the government to show that the permit condition satisfies “essential nexus” and “rough proportionality.” The nexus test requires the government to show that the proposed development will create or exacerbate an identified public problem and that the proposed condition will tend to solve or alleviate the impact.
And the proportionality test requires the government to show that the condition is roughly proportional to the development’s anticipated impact. While this inquiry does not require mathematic precision, the Supreme Court in Dolan has cautioned that the government cannot rely on generalized conclusions or speculation but must “make some sort of individualized determination that the required dedication is related both in nature and extent to the proposed development’s impact.”
Together, the nexus and proportionality tests ensure that a landowner is not required “to give up more than is necessary to mitigate harms resulting from new development” the Court ruled. “This test applies regardless of whether the condition requires the landowner to relinquish property or requires her to pay a ‘monetary exactio[n]’ instead of relinquishing the property.”
How can I challenge a development impact fee?
The procedures for challenging impact fees will vary by jurisdiction. Some jurisdictions require that owners pay the fees under protest and first challenge them administratively before bringing a constitutional lawsuit. Other jurisdictions allow owners to bring a claim directly in the courts when an unconstitutional condition is imposed on a permit.
If you are facing a potentially unconstitutional impact fee, you should contact a local attorney for guidance on how to navigate any pre-filing requirements. Failure to do so may result in your claim being denied.
If you believe you have a valid claim, submit your case to Pacific Legal Foundation.
Want more information on Sheetz? Watch attorneys break down the decision in this virtual panel discussion.
