An exaction requires a developer to pay or provide for a public facility or amenity as a condition of receiving permit approval. Exactions are widespread and an important supplement to property and other local taxes. They are a vital financial resource for local governments, especially when statutory and constitutional tax provisions limit property taxes. Exactions can add thousands of dollars to the price of a new house.
Exactions are either administrative or legislative. An administrative exaction is a condition required to approve a building permit based on an individualized assessment. A law applies a legislative exaction to some or all new residential developments without an individualized assessment. Sheetz v. County of El Dorado, 144 S. Ct. 893 (2024), in an opinion by Justice Barrett, held that the takings clause applies to legislative exactions. Courts divided on this issue before Sheetz, as discussed in my Land Use Update on exactions (37 Prob. & Prop. 58 (March/April 2023)).
In Sheetz, a legislative traffic impact fee required as a building permit condition funded road and transit improvements. The county did not do an individualized assessment but based the fee on countywide estimations.
The California appellate court held that the county correctly applied a statutory test for impact fees, Sheetz v. County of El Dorado, 300 Cal. Rptr. 3d 308 (Ct. App. 2022), vacated and remanded, 144 S. Ct. 893 (2024), but Sheetz claimed that the fee was an unlawful “exaction” of money that had to comply with the US Supreme Court’s takings clause decisions on exactions, Nollan v. California Coastal Comm’n, 483 U. S. 825 (1987), and Dolan v. City of Tigard, 512 U.S. 374 (1994). Justice Barrett agreed and held that the takings clause “does not distinguish between the legislative and administrative permit conditions.”
Justice Barrett distinguished building permit conditions, such as impact fees, from land use restrictions. Land use restrictions are not a taking if they are “reasonably necessary to effectuate a substantial government purpose,” but they are a taking if they sap too much property value or frustrate investment-backed expectations. Permit conditions are more complicated. If denying a permit would advance a “legitimate police-power purpose,” the government may impose a condition to serve the same purpose instead. This permit condition is “a hallmark of responsible land-use policy.” The landowner must accept the bargain or abandon the proposed development. The bargain has a “different character” when the reasons for withholding or conditioning a building permit are unrelated to the government’s land-use interests. It then amounts to “an out-and-out plan of extortion.”
Justice Barrett held that Nollan and Dolan addressed possible abuse of the permitting process with tests modeled on the unconstitutional conditions doctrine. She discussed Dolan, which requires a “rough proportionality” for permit conditions based on the impact of a development on the governmental land-use interest. A permit condition that requires more than is necessary to mitigate harm from new development has the same potential for abuse as a condition unrelated to that purpose. She did not discuss Nollan.
Justice Barrett next provided a detailed discussion of the takings clause, concluding that “Nothing in constitutional text, history, or precedent supports exempting legislatures from ordinary takings rules” and adding that the county “no longer contends otherwise.”
Justice Gorsuch agreed in his concurrence. He argued that nothing about the Nollan/Dolan test depended on whether the challenged condition was imposed on a large class of properties, a single tract, or something in between. “The logic of today’s decision” was consistent with these cases.
Justice Barrett’s decision answers the limited question presented to the Court. She did not go beyond the question, explaining that “We do not address the parties’ other disputes over the validity of the traffic impact fee, including 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 Sotomayor’s concurrence, Justice Jackson joining, added that the question presented did not include the antecedent question of whether the traffic impact fee could trigger Nollan/Dolan scrutiny as a compensable taking imposed outside the permitting context.
Justice Kavanaugh’s concurrence, Justices Kagan and Jackson joining, argued that the Court’s decision did 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.”
In the oral argument in Sheetz, Justice Kagan directed a question to counsel for the county, expressing the view that Nollan and Dolan do not apply to legislative impact fees. She argued that “Nollan and Dolan were focused on individual parcels, individual property owners, and this is a general scheme, and it would be very difficult to apply Nollan and Dolan analysis literally to a general scheme.” Counsel agreed, but Justice Kagan omitted her argument in a concurrence.
It is not clear whether impact fees satisfy the Nollan/Dolan tests. Impact fees should meet the Nollan nexus test. In Nollan, the California Coastal Commission required an easement across a beach to provide a view of the ocean as a condition for a permit for a beachfront house. The Court held that the required nexus was lacking because an ocean view does not require beach access. Meeting the nexus test for exactions since Nollan has not been a problem, and the impact fee in Sheetz should meet this test because it furthers the county’s road and transit improvements program.
Dolan’s rough proportionality test raises more problems. The Court in Dolan rejected a greenway easement that the city required for an enlarged store within the existing 100-year floodplain and on all property 15 feet above the floodplain boundary as a condition to a permit. The city code required 15 percent of the site to be maintained as open space, and the Court held that the undeveloped area of the floodplain required by the city code would nearly have satisfied the easement requirement. This restriction suggests that a court could reject an impact fee if there is an adequate alternative, such as public funding.
The Dolan Court also rejected the required dedication of a pedestrian/bicycle pathway adjacent to the floodplain as a condition of receiving the permit. The city did not meet its burden that the development generated an additional number of vehicle and bicycle trips that were reasonably related to the project. Legislative impact fees cannot meet this burden because they are based on assumptions for classes of development, not on individualized assessments for specific projects.
In Sheetz, the California appellate court analyzed the El Dorado County traffic impact mitigation fee under the California Mitigation Fee Act, which provides rules for impact fees. Cal. Gov. Code §§ 66000 to 66008. As the county explained in its brief to the California appellate court, the General Plan identified and funded projects needed to address increased traffic levels caused by new development. County Department of Transportation experts projected growth attributable to new development across a “20-year time horizon” using “land use growth” forecasts based on existing development, housing, and building permit data.
Traffic-modeling experts applying “industry standard” methods identified “basic road system improvement needs resulting from the growth forecasted” and identified specific road-improvement projects necessary to accommodate projected traffic increases from new development. After estimating the total costs of roadway projects attributable to new development, the county department allocated these costs across the various categories of anticipated development.
The allocation process relied on an “eight-zone structure” that divided the county along geographic lines based on the “different land use characteristics of various areas of the County,” and department experts calculated the percent of new traffic growth attributable to each zone tied to specific road segments. Fee rates for categories of development projects were calculated by dividing the “total costs [of all traffic improvement projects] for each zone” by the “projected growth” of each category of development and the “applicable trip generation rates for each use.”
In Sheetz, the California appellate court held that one of the tests for impact fees in the Mitigation Fee Act applied to quasi-legislative impact fees for a class of development projects, like the county’s impact fee. That test requires an agency to determine how there is “a reasonable relationship” between both “the fee’s use and the type of development project on which the fee is imposed” and “the need for the public facility and the type of development project on which the fee is imposed.” The court held that the county established a reasonable relationship between the fee charged and the burden posed by Sheetz’s development.
The court held that an alternative statutory test applies to adjudicatory, case-by-case decisions to impose a development impact fee on a development project. It requires a “reasonable relationship” between the amount of the fee and all or part of the cost of a public facility that is “attributable to the development on which the fee is imposed.” In addition to California, several states have impact fee statutes, but statutory tests vary.
In another California appellate court case, Home Builders Association of Tulare/Kings Counties, Inc. v. City of Lemoore, 112 Cal. Rptr. 3d 7 (Ct. App. 2010), the impact fee funded community and recreation facilities that would be needed to maintain the current level of service as the city grew. The city assumed that population size determines facility need and based the impact fee on the existing community and recreation facility asset value ratio to population. It divided the facility asset value of existing community recreational facilities by the current population to determine per capita cost. It then multiplied per capita cost by the population per unit of development type to determine the fee per unit.
This formula is the standard-based method for calculating impact fees, and the court held that it did not prevent there being a reasonable relationship between the fee and the burden created by development. There was “no question” that the increased population from new development placed additional burdens on city-wide community and recreation facilities.
It is not clear whether the US Supreme Court would approve a reasonable relationship test based on classes of development or a standard-based method of calculation based on population because these tests do not consider whether an impact fee is attributable to development. The Court could hold that the statutory test requiring a reasonable relationship “attributable to the development” achieves rough proportionality because it is an individualized assessment. Still, Dolan rejected a “reasonableness” test for exactions that many state courts had adopted.
Postscript: Sheetz cited Knight v. Metropolitan Government of Nashville & Davidson County, 67 F.4th 816 (6th Cir. 2023), which reversed the District Court decision discussed in my Exactions Update. Knight rejected the legislative vs. administrative distinction. Nashville did not argue that the exaction satisfied the unconstitutional conditions doctrine. The Sixth Circuit decision discusses when an exaction amounts to “extortion.” n
