Supreme Court Narrows Local Governments’ Ability to Impose Impact Fees – A Potential Sea Change for California

On April 12, 2024, the Supreme Court of the United States issued its much-anticipated ruling in Sheetz v. County of El Dorado, U.S. No. 22-1074 (petition for certiorari granted 9/29/23) (Sheetz). The case concerned the legality of a local jurisdiction’s imposition of a traffic impact mitigation (TIM) fee upon a project applicant as a development permit condition. The threshold question in Sheetz was whether a legislatively authorized and broadly applicable permit condition is subject to the same analysis as an administratively imposed, ad-hoc permit condition for the purpose of determining whether it violates the Takings Clause of the Fifth Amendment of the United States Constitution. The Court held that there is no reason to distinguish between permit conditions imposed legislatively or administratively. Consequently, the Court explained that the two-part “Nollan/Dolan” constitutional test indeed applies to legislatively imposed permit conditions:

“First, permit conditions must have an 'essential nexus' to the government’s land-use interest. The nexus requirement ensures 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. A permit condition that requires a landowner to give up more than is necessary to mitigate harms resulting from new development has the same potential for abuse as a condition that is unrelated to that purpose.” (Sheetz, p. 6.)

This ruling is expected to prompt local governments across the country to revisit their laws and regulations for imposing legislatively authorized development impact fees. In California, where local governments routinely use legislatively authorized development impact fees to impose sizeable mitigation fees on new development, this ruling could represent a sea change for developers and local governments alike.

 

Background

In 2016, petitioner George Sheetz applied to the County of El Dorado for a building permit to construct a single-family prefabricated home on his property in Placerville, California. The County issued the building permit with the condition that Sheetz pay a $23,420 TIM fee. In accordance with the County’s TIM program, the fee calculation methodology was based on the property’s location and nature of use (i.e., single-family residential). No individualized analysis of the project’s specific traffic impacts to state and local roadways was undertaken.

 

Sheetz Challenges the County’s Traffic Impact Fee

Sheetz paid the project’s TIM fees under protest and then filed a petition for writ of mandate and a complaint for declaratory and injunctive relief in El Dorado County Superior Court. See Sheetz v. County of El Dorado, Case No. PC20170255 (Cal. Super. Ct., County of El Dorado, Feb. 4, 2021). The trial court sustained the County’s demurrer to the declaratory relief causes of action and denied the petition for writ of mandate. Sheetz appealed, claiming that the TIM fee violated the California Mitigation Fee Act and the Fifth Amendment’s Takings Clause. See Sheetz v. County of El Dorado (2022) 84 Cal.App.5th 394, review denied (Feb. 1, 2023), cert. granted sub nom. Sheetz v. County of El Dorado, California (2023) 144 S.Ct. 477. Sheetz’s federal claim was that the County’s TIM fee violated the “unconstitutional conditions doctrine,” which prohibits the government from requiring a person to give up a constitutional right (here, the right to receive just compensation when property is taken for public use) in exchange for a discretionary benefit (such as a building permit) when the benefit sought has little or no relationship to the property.

 

Sheetz Appeals the Trial Court’s Decision

As discussed in our firm’s previous client alerts here and here, the appellate court ruled against Sheetz, instead following prior state precedent holding that legislatively adopted development impact fees are subject to the Mitigation Fee Act’s “reasonable relationship” test, rather than the more stringent “essential nexus” and “rough proportionality” requirements established by the Court in Nollan v. California Coastal Commission (1987) 483 U.S. 825 and Dolan v. City of Tigard (1994) 512 U.S. 374 (collectively referred to as Nollan/Dolan). Under Nollan/Dolan, if a jurisdiction requests someone’s property in exchange for a land-use permit, it must evidence that there is an essential nexus between the exaction and the government’s interest, and that the exaction is roughly proportional to the impacts of the proposed use of land. “No precise mathematical calculation is required, but the [government] must make some sort of individualized determination that the required dedication is related both in nature and extent to the impact of the proposed development.” The Court’s holding in Koontz v. St. Johns River Water Management Dist. (2013) 570 U.S. 595 (Koontz) further extended the precedent set in Nollan/Dolan to monetary exactions in addition to real property dedications.

The appellate court in Sheetz reasoned that the Nollan/Dolan test only applies to exactions imposed on an individual basis, and not those that are legislatively authorized (such as the County’s TIM fee, which the County Board of Supervisors authorized as part of the legislative act to adopt the County’s General Plan). This holding follows the California Supreme Court’s decision in San Remo Hotel L.P. v. City and County of San Francisco (2002) 27 Cal.4th 643, which held that only individualized development fees should face the heightened scrutiny of Nollan/Dolan, while generally applicable, legislatively mandated impact fees need only pass a “reasonable relationship” test.

 

The Supreme Court of the United States Grants Certiorari

The California Supreme Court denied Sheetz’s petition for review, but the Supreme Court subsequently granted certiorari to resolve the split between state courts across the country as to whether the Takings Clause distinguishes between legislative and administrative conditions on land-use permits. In the unanimous opinion authored by Justice Barrett, the Court held that legislatively authorized, broadly applicable permit conditions are subject to Nollan/Dolan, just like administratively imposed, ad-hoc conditions, and remanded the case back to the California appellate court to be resolved in accordance with this holding.

Notably, Justice Barrett’s opinion did not address the parties’ other arguments regarding the validity of the TIM, including whether the TIM exaction was constitutional under Nollan/Dolan. The Court remanded the case to the California courts to make this determination, stating “[w]e do 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.”

Justice Gorsuch and Justice Kavanaugh sought to address this outstanding issue in separate concurring opinions. Justice Gorsuch wrote that nothing about the Nollan/Dolan “essential nexus” and “rough proportionality” standards “depend on whether the government imposes the challenged condition on a large class of properties or a single tract.” Thus, Justice Gorsuch concluded, “the same Constitutional rules apply” when evaluating an alleged takings claim affecting a “class of properties” or “a particular development.” Justice Kavanaugh, on the other hand, stressed that this was still an open question: “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…no prior decision of this Court has addressed or prohibited that longstanding government practice.”

 

Implications

This decision is expected to rattle local governments across California, where legislatively imposed permit conditions on classes of properties are commonplace. Interested groups on both sides have been opining for months regarding the potential benefits and drawbacks of the Court’s decision. Those in support of Sheetz’s fee challenge maintain that legislatively enacted impact fees place a significant burden on the production of housing and therefore exacerbate California’s already dire housing crisis. Further, they contend that heightened judicial oversight could spur the production of more affordable housing by providing a remedy in situations where a local government imposes disproportionate or unduly high development fees. Conversely, others claim that new development must be required to pay for its resulting impacts to public infrastructure or else the burden of new development will unfairly be shifted to taxpayers. Moreover, they highlight the fact that a clear, predictable requirement for mitigation fees to offset the impacts of new development prevents the government from choosing winners and losers when it comes to shouldering the costs of new public infrastructure.

The Court’s recent decision does not fully resolve these questions, and California cities will now need to begin the process of reexamining and retooling their impact fee conditions to conform with Sheetz.