On April 12, 2024, the U.S. Supreme Court issued its decision in Sheetz v. County of El Dorado, holding that development impact fees established by local legislation are subject to the Nollan/Dolan standards under the Takings Clause. However, the Court declined to establish a test for evaluating the constitutionality of such development impact fees under those standards, leaving many questions unanswered and creating uncertainty for local governments in the creation of development impact fees.
For purposes of background, when the government, in an exercise of discretion, requires that property owners dedicate land as a condition of receiving a development permit, the condition must satisfy a “two-part” test to not qualify as a compensable “taking.” That test was established by the U.S. Supreme Court decisions in Nollan v. California Coastal Commission and Dolan v. City of Tigard. In summary:
a. Such permit conditions must have an “essential nexus” to the government’s land-use interest. Nollan v. California Coastal Commission, 483 U.S. 825 (1987).
b. Such permit conditions must have “rough proportionality” to the development’s impact on the land-use interest. Dolan v City of Tigard, 512 U.S. 374 (1994).
These requirements have been characterized as a form of heightened scrutiny. San Remo Hotel L.P v. City & County of San Francisco, 27 Cal. 4th 643 (2002). Nollan and Dolan require a factually sustainable proportionality between the effects of a proposed land use and a given exaction. Id. at 666.
In contrast to discretionary permit conditions, the California Supreme Court had held that development impact fees established by statute or ordinance, involving no exercise of discretion by local officials, are subject to a more deferential review and not the heightened scrutiny under Nollan/Dolan. San Remo Hotel L.P v. City & County of San Francisco, 27 Cal. 4th 643 (2002). Such fees are characterized by a legislative mandate to impose the fee condition and a legislatively set formula to calculate its size. Id. at 668-669. Instead of heightened scrutiny, such fees must bear a reasonable relationship, in both intended use and amount, to the deleterious public impact on the development. The California Supreme Court looked to the general standards for such fees established in the Mitigation Fee Act (Government Code § 66001). Id. at 671.
In Sheetz v. County of El Dorado, the U.S. Supreme Court expressly ruled that monetary exactions imposed by legislation are subject to the Nollan/Dolan standards under the Takings Clause. As such, legislative permit conditions are not categorically exempt from the requirements of Nollan and Dolan. Legislatively prescribed development impact fees are to be assessed for “essential nexus” and “rough proportionately” under Nollan and Dolan. However, the U.S. Supreme Court stated that it did not address 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.
The concurring opinion by Justices Kavanaugh, Kagan, and Jackson also stated that “today’s 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.”
The Sheetz decision creates more questions than answers. While acknowledging that legislatively enacted development impact fees are subject to the “essential nexus” and “rough proportionality” tests in Nollan/Dolan, the Court gave no guidance as to how to evaluate such fees under those standards. Are they subject to heightened scrutiny, deferential review, or something in between?
The Court’s decision will certainly generate ongoing litigation concerning development impact fees established by ordinance. The Supreme Court decision in Sheetz does not mean the end of development impact fees. However, it does impose additional burdens on local governments in establishing such fees by local ordinance, pending further decisions and guidance from the courts.
For more information on this decision or other land use matters contact Rubin E. Cruse, Jr.