Supreme Court Sets Stage for Widespread Challenges to Real Estate Development Impact Fees

The U.S. Supreme Court ruled on April 12, 2024, that the "Takings Clause" enshrined in the Fifth Amendment of the U.S. Constitution applies equally to legislative and administratively imposed land use permitting fees. Since it was previously well-established that California courts would not apply "takings" scrutiny to fees imposed through local legislation, the ruling represents a potential sea change in the types of fees that can be subject to constitutional challenge in California. In three concurring opinions, however, five of the nine justices hastened to add that they do not necessarily agree on what this means for developers and real estate investors going forward.

Case Background

In Sheetz v. County of El Dorado,¹ a couple in a rural area sought permission to build a small, prefabricated home on their residential lot, with plans to raise their grandson there. They were told they could get the necessary permit only if they paid the county a $23,420 "traffic impact fee." Although the fee was assessed according to a rate schedule that took into account the type of development and its location according to a general plan enacted by the county's board of supervisors, it was not based on "the cost specifically attributable to the particular project on which the fee [wa]s imposed." The landowners paid the fee under protest and then sued, claiming it was an unconstitutional taking of their private property rights. The California courts rejected their claim, ruling the Fifth Amendment did not apply to takings imposed by legislative bodies. The U.S. Supreme Court agreed to hear the couple's case to resolve a disagreement among California and other state courts on this narrow point of law.

Per the unanimous Court, "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." Thus, Sheetz instructs that the following two-part "Nollan/Dolan" test applies:

First, permit conditions must have an "essential nexus" to the government's land-use interest, ensuring that the government is acting to further its stated purpose, not leveraging its permitting monopoly to exact private property without paying for it. Second, permit conditions must have "rough proportionality" to the development's impact on the land-use interest and may not require a landowner to give up (or pay) more than is necessary to mitigate harms resulting from new development.²

The unanimous Court further agreed that the two-part test applies regardless of whether the permitting condition requires the landowner to give up property or pay a fee.

But what does this mean for others seeking governmental permits?

According to Justices Sonia Sotomayor and Ketanji Brown Jackson, it depends on whether such a fee would be a compensable taking if imposed outside the permitting context. Without further explanation, these two justices suggest a governmental body might rely on another source of "police power" to require landowners to pay more than is necessary to mitigate foreseeable harm resulting from a new development. On the opposite side, reasoning "government rarely mitigates a constitutional problem by multiplying it," Justice Neil Gorsuch states that it does not matter whether an alleged taking affects a "class of properties" rather than "a particular development." In both cases, he says an "individualized determination" is needed to determine whether a fee amounts to an unconstitutional taking. In apparent disagreement, Justices Brett Kavanaugh and Elena Kagan, along with Jackson, warn that the recent "decision does not address or prohibit the common government practice of imposing permit conditions, such as impact fees, on new developments through reasonable formulas or schedules that assess the impact of classes of development rather than the impact of specific parcels of property." But, practically speaking, it remains to be seen what this means, as a fee based on "reasonable" formulas and schedules suggests one that meets the two-part test.

Lawsuit Potential

One thing is certain: the Court's decision is likely to trigger a flood of lawsuits challenging hefty "impact fees" regularly imposed by local governments to balance their budgets, particularly in California where the state, as opposed to local governments, controls much of the property tax revenue to fund its K-14 educational system, and property taxes are capped by Proposition 13. Local governments typically turn to mitigation under the California Environmental Quality Act (CEQA) to require project applicants to mitigate impacts of their projects, but since the CEQA guidelines incorporate the two-part Nollan/Dolan test to limit agency power to impose environmental mitigation fees,³ it also remains to be seen what effect Sheetz will have in that context. Another key question for project applicants is to consider whether, and to what extent, California's Mitigation Fee Act works alongside or in concert with the newly revived Takings Clause as applied to legislative-imposed permit conditions. For now, though, the ball is back with the California courts to decide whether the couple will get their $23,420 refunded. Indeed, it is for the California courts to decide – at least for now – whether it was a victory given the county's ability to still argue the fee is lawful "outside the permitting context."

For further information about the ruling's effect on your projects, please contact the authors or your Holland & Knight attorney.

Notes

¹ 2024 Lexis 1574.

² Italics added; citations omitted.

³ 14 CCR 15041(a).

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.