By Stephanie Sweat, Senior Counsel
Real estate developers across the United States are accustomed to paying fees to municipalities to offset the impacts of a development on the surrounding communities. Developers often take issue with the high cost of these development impact fees. In fact, these impact fees are part of the reason that housing and other real estate projects are so expensive to build, particularly in states that more freely wield their development impact fee assessment powers. A case before the United States Supreme Court may upend the legal landscape for such fees in some jurisdictions.
In Sheetz v. County of El Dorado, George Sheetz, a resident of El Dorado County, California was shocked to discover that, in order to construct a manufactured house on his property, he would be required to pay the County of El Dorado $23,420 as a fee to offset the impact of his development on traffic. Mr. Sheetz paid the fee under protest and then sued to recover money, arguing that its imposition violated the Takings Clause of the United States Constitution.
The Takings Clause prohibits the government from taking private property for public use without just compensation. The Takings Clause has been extended to govern whether a municipality may condition the issuance of a permit on the payment of monetary exactions and how much can be assessed by the municipality. The Supreme Court previously set forth the following test to determine whether an exaction (of real property or money) is constitutional: the question is whether "an 'essential nexus' and 'rough proportionality' exist between the exaction and the impacts of the owner's project" (Nollan v. Cal. Coastal Comm'n and Dolan v. City of Tigard; Koontz v. St. Johns River Water Mngmt.).
However, in California and other states, courts created an exception to the Supreme Court's "essential nexus" and "rough proportionality" test if development impact fees are set by legislation. In turn, some municipalities enacted legislation that dictates the specific amount an owner must pay in impact fees without a review of the actual or anticipated impact from the development in question. In the Sheetz case, El Dorado County had done just that. The County's Traffic Impact Mitigation Fee Program set forth a formula to determine what the required traffic impact fee would be based on the location of the property in the County and what kind of construction was contemplated. Under this formula, the County imposed the $23,420 fee on Mr. Sheetz's proposed manufactured house – without ever considering the actual impact of the single manufactured home.
The Supreme Court accepted review of Mr. Sheetz case to determine whether legislatively enacted impact fees are exempt from the "essential nexus" and "rough proportionality" test. If the Court says no, then El Dorado County, as well as other counties and cities throughout the country, will have to redefine how they calculate impact fees.
The stakes in the Sheetz case are especially high in California, where development impact fees add significant costs to new developments. The California Building Industry Association emphasized these high stakes in its amicus brief, stating that "unconstrained exactions on new development, further [add] to the crushing costs of housing in California and other jurisdictions that refuse to require governments to show any proportionality between the amount of fees demanded and the alleged impacts of new development."
Based on the oral arguments heard on January 9, 2024, the Court is expected to side with Mr. Sheetz and require local jurisdictions to better justify the development impact fees assessed on new projects. However, the potential scope of the Court's ruling further limiting the government's assessment authority remains a mystery. The Court's ruling could be a victory for developers, but depending on how it is tailored, the ruling could also result in permitting delays if local jurisdictions are required to study in detail the impacts of each project and the cost of such impacts.