The extent to which governmental authorities may condition land use permits on exactions and concessions from land use permit applicants has received extraordinary attention from the United States Supreme Court in recent years. Yesterday, the Court handed down another decision applying the U.S. Constitution’s Fifth Amendment to constrain the power of the government to impose such conditions. In Koontz v. St. Johns River Water Management District, (Docket No. 11-1447) 570 U.S. __ (June 25, 2013), the Court, in a 5-4 decision, held that the government's demand for property from a land-use permit applicant must have an “essential nexus” to and “rough proportionality” with the proposed project’s impacts even when it denies the permit and even when its demand is for money. Until now, it was not clear that these standards, established by the Court in the landmark cases Nollan v. California Coastal Commission, 483 U.S. 825 (1987) and Dolan v. City of Tigard, 512 U.S. 374 (1994), applied when a permit application is denied, or when the condition of approval did not entail a dedication of or restriction on the use of a real property right. These rules are founded on the "unconstitutional conditions" doctrine, which holds that the government cannot condition benefits on the recipient forfeiting a constitutional right. This doctrine has special application in the area of land use regulation, protecting the Fifth Amendment right to “just compensation” for property taken by the government when the owner applies for land-use permits.

Implications

This holding will have wide-ranging impacts on the conditions the government may impose when exercising its power to regulate land use. This is especially true in California which has long made a distinction between demands for land dedication versus a demand for impact fees or other similar monetary exactions. Following the California Supreme Court's decision in Ehrlich v. Culver City (1996) 12 Cal. 4th 854 and reiterated in San Remo Hotel v. City and County of San Francisco (2002) 27 Cal. 4th 643, it has been the law in California that a legal challenge to the imposition, on a development project, of a legislatively enacted impact fee for general application was subject to the very deferential "reasonable relationship" standard rather than the "heightened scrutiny" of "essential nexus" and "rough proportionality" established by Nollanand Dolan.

The decision in Koontz now places in question the continued applicability of both Ehrlich and San Remo. As a result, there will be much closer scrutiny given to the application of government imposed impact fees and in lieu fees, and more challenges to such fee programs. In addition, this ruling could put into question the legality of California's AB 1600 development impact fee process, which uses a "reasonable relationship" standard. It could also call into question the recent California Appellate court decision in CBIA v. City of San Jose (June 6, 2013), Ct. of App. 6th Dist. (H038563), applying the "reasonable relationship" standard to an inclusionary housing ordinance, and could serve as the basis of an appeal to the California Supreme Court.

Background And Analysis

Coy Koontz owned 14.9 acres of undeveloped Florida land, and sought permits to develop 3.7 of those acres. To mitigate the environmental effects of the proposed development and obtain a needed permit, Koontz offered to deed to respondent District a conservation easement on the remaining 11 acres. The District rejected the proposal as inadequate, and proposed two alternatives: (1) reduce the project to 1 acre and deed a conservation easement to the District on the remainder; or (2) build the 3.7 acre project, deed a conservation easement on the remainder, and hire contractors to make improvements on District-owned land several miles away. Believing the District's demands to be excessive, Koontz filed suit, arguing he was entitled to monetary damages.

Requiring landowners to mitigate impacts caused by proposed development has long been part of the permitting process. But under the Court's decisions in Nollan and Dolan, any mitigation a government may choose to impose must have an "essential nexus" and be "roughly proportional" to those impacts. Under the Court's decision, these requirements do not change depending on whether the permit is approved on the condition that the proposed mitigation is undertaken, or the permit is denied because the mitigation was refused. Even though no property is technically taken in the latter case, an extortionate demand, even though rejected, impermissibly burdens the right not to have property taken without just compensation. And it doesn't matter if the government could deny the permit application outright without attaching conditions; it cannot condition permit approval on the landowner's forfeiture of constitutional rights. The Court also noted that although the Fifth Amendment provides a remedy only for takings, whether money damages are available for denial of a permit depends on the particular claim, here brought under Florida state law, a question the Court refused to consider.

The Court also held that the fact that the government asked the landowner to spend money for offsite mitigation rather than require a dedication of property does not matter. Such in lieu fees are the functional equivalent of other types of land use exactions and must satisfy the "heightened scrutiny" requirements of "essential nexus" and "rough proportionality" established by Nollan and Dolan. Because of the direct link between the government's monetary demand and the specific property, the condition was a taking and did not cross over into the realm of the government's taxing power. In her dissent, Justice Kagan argued that the Court's scrutiny into monetary payments created uncertain boundaries between takings and ordinary financial obligations that the government has the power to impose, and that a vast array of land use regulations, applied daily throughout the country, would now be subject to heightened scrutiny.

The Uncertain Future

As noted above, the implications of this decision are particularly significant in California because of the distinction the California courts have long made between real property versus monetary exactions and because of the use of the "reasonable relationship" standard by the courts in reviewing challenges to legislatively adopted monetary exaction programs and by the state in its AB 1600 impact fee legislation. This decision puts both of these into question and will likely lead to many more challenges to the significant impact fee programs that have been and will continue to be adopted in California. It may well be, that in adopting or defending these programs, the implementing government entities will have to try and develop much more concrete support for these programs in order to meet the heightened scrutiny of the "essential nexus" and "rough proportionality" requirements.