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Exactions NOW Include Impact Fees, But What Else?

By Edward J. Sullivan and Carrie A. Richter

In Koontz v. St. Johns River Water Management District, the US Supreme Court held that monetary exactions, like requirements to dedicate real property, are subject to the “nexus” and rough proportionality requirements of its Nollan and Dolan decisions.  In those cases, the court required a connection (“nexus”) and a rough proportionality between the obligation imposed by the government and the impacts resulting from a proposed development.  The Koontz decision addressed how far those requirements go.  Rather than focus on the nature of the exaction involved, whether a real property interest, a monetary obligation, or something else, the Koontz court found that the mere fact that a landowner seeks development approval from the government places limits on the imposition of excessive demands. The court did not provide further guidance on the types of condition-imposed obligations that would be subject to the Nollan and Dolan tests, other than noting that the payment of money is subject to those tests.  Thus, we are left to speculate about the level of scrutiny to apply to obligations such as a requirement to improve an intersection or to offset the loss of a wetland.

In a thoughtful article “Koontz Redux: Where We Are and What’s Left,” Professor David Callies identifies the various types of development fees that would likely fall within the nexus and rough-proportionality ambit.  Those fees likely include:  mitigation fees, fees imposed to offset impacts to identified natural resources, fees charged in-lieu of requiring the dedication of land to accommodate a particular public improvement, impact fees and fees charged to pay for public facilities such a schools or wastewater treatment facilities.  All of these obligations presumably involve the payment of money to recover the cost of public infrastructure, services or resources resulting from the development.

Things get even more complicated in other situations, such as where the government imposes conditions that do not directly require the payment of money or when the regulation at issue is more closely connected with furthering the governmental police power to protect for the health, safety and welfare than in recovering for some direct cost imposed by development.  For example, many states require developments to contain below-market rate housing units or that fees be paid in-lieu of a set-aside for workforce housing.

Recently, in Sterling Park, L.P. v. City of Palo Alto, the California Supreme Court found that the Mitigation Fee Act, a state statute that requires rough proportionality for exactions, includes within its scope obligations to provide below-market rate housing units, options for government purchase or for the developer to pay a fee-in-lieu for such housing elsewhere.  The Sterling Park case dealt with the timing for pursuing such a challenge rather than what obligations are subject to scrutiny, but necessarily implicated the latter.  The question was whether a developer could, in fact, challenge the obligation after the permits were obtained and construction had started.    The Court’s ruling relied on the language of the Act itself, which defined its subject as any “fee, tax, assessment, dedication, reservation, or other exaction.”  That language may well be broader than the 5th Amendment limitation identified in Koontz.   Interestingly, the Sterling Park court distinguished the various conditions based on whether they divest the developer of money or whether they impact the use of the property.  The court explains that use limitations such as limiting the number of units that could be built, how large each unit can be, or the proposed use are obligations that fall outside the scope of a fee or “other exaction” under the Mitigation Act.  Possibly oversimplifying, the court reasons that “obviously” these obligations, such as the number of units or the size of the units, do not lend themselves to being built now and litigated at a later date.  The court expressly declined to consider whether forcing the developer to sell some units below market value, by itself, would constitute an exaction.

Whether a condition lends itself to compliance under protest and a later challenge cannot be the sole distinguishing factor between an exaction and a use regulation.  Consider, for example, legislatively imposed setback standards, where construction could proceed notwithstanding setback requirements and presumably an addition to the building added after a successful challenge.  Although the US Supreme Court has previously held that setbacks do not give rise to a taking, an obligation to set a building back from a property line to allow for the possibility of government acquisition of a portion of the property to accommodate a sidewalk may not be distinguishable from requiring that a developer give the government an option to purchase units at below-market rates.  In both cases, development is limited for a police power purpose of regulating a use that is not necessarily directly tied to the direct impacts resulting from a proposed development.

This same may be true for legislatively-imposed design standards requiring particular number of stories, fenestration patterns or particular exterior finishes.  Some design decisions must be decided early-on in the process.  However, determining whether a particular exterior siding was necessary could, theoretically, occur later depending on outcome of a successful challenge.  Presumably some rough proportionality findings weighing the enhanced livability or increased property values resulting from setbacks or other aesthetic considerations could be made both at the time of approval as well as at the time of imposition of more specific conditions. Whether such findings would be sufficient is still unknown.

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We regularly update clients about changes in real estate law and on industry trends. This includes briefing clients on legislative proposals in the federal tax, housing and other legal areas affecting their businesses. Staying current enables you to anticipate and prevent legal problems as well as capitalize on new developments.
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