Does the U.S. Supreme Court Decision in Koontz v. St. John’s River Water Management District Spell the End of Unjustifiable Concessions by Land-use Regulators?
During the last several years, the United States Supreme Court has issued a flurry of important decisions, several of which involve revolutionary shifts in the relationships between people (Defense of Marriage Act) and between people and government (Affordable Care Act). One very important decision for real estate developers and communities has garnered little attention yet contains the framework for a seismic shift in another vitally important relationship: that between developers and land-use decision makers. The Supreme Court’s decision in Koontz v. St. Johns River Management District, issued on June 25, 2013, is not only a significant victory for property owners but a condemnation of land-use regulators.
The substantive legal issue in the Koontz case concerns the right of local governments to exact concessions (such as monetary fees, services, labor, dedication of land for public parks and certain infrastructure improvements) from a developer as a quid pro quo for issuing permits for the project. In legal parlance, these concessions are known as “exactions” and take the form of land use permit conditions imposed by local, regional or state agencies to compensate the community for the impact of development. Put simply, exactions are designed to protect the public from the negative effects of growth by providing a revenue source to pay for infrastructure improvements required by the development in the form of public facilities, such as roads, sidewalks and sewer and water connections, and the like.
Too often, developers have argued, land use regulators require concessions that are disproportionate to and disconnected from the actual impact of proposed projects, implicating the Takings Clause of the Fifth Amendment. Developers have increasingly shouldered not just the cost of enhancements internal to their development but external improvements as well in the form of new or improved public facilities on the premise that developments “pay their own way.” The minimum standard that has emerged from years of battle over the right of government to exact concessions requires that no land-use restriction or exaction deny property owners a reasonable economic use of their property and that enhancements external to the development (such as off-site sidewalks as a condition of subdivision approval) bear a reasonable relation to its impact on the public health, safety and welfare.
The dedication of private property to the public is one form of a broad spectrum of developer “exactions” requiring the contribution to public facilities related to their developments, such as streets and interchanges or improvements to storm water management systems. Often, these contributions have included dedication of land for public use, such as parks, or for wetlands or other conservation objectives. The exaction of such developer “title” concessions must be filtered through two Supreme Court decisions on the subject: Nollan v. California Coastal Commission (1987) and Dolan v. City of Tigard (1994).
In Nollan, the Supreme Court established that title exactions must bear an “essential nexus” to the harm prevented by such exactions. In ruling that the California Coastal Commission had not established an appropriate connection between a requirement for an exaction and the cited public objective for the exaction, the Supreme Court held in Nollan that land-use authorities cannot require exactions which are unrelated to the negative impacts created by a proposed development. In Dolan, the Supreme Court found that title exactions imposed must be “roughly proportional” to the adverse impact of the project on the community. In ruling in favor of the developer, the Supreme Court held in Dolan that the government carries the burden of justifying permit conditions requiring land dedication for which the property owner is not compensated.
In short, the Nollan and Dolan decisions set limits on a municipality’s right to impair real property interests with land-use regulations, requiring that government prove a “nexus” and “rough proportionality” between the government’s demand and the effects of the proposed land use. The Nollan/Dolan two-prong test has historically applied when, for example, the government approves a land-use permit conditioned on the property owner’s relinquishment of some real property interest in favor of the public, such as the dedication of park land or the grant of an easement. The Koontz decision extends those standards to include not just title exactions, but also permit denials and monetary exactions by land-use regulators.
The Koontz Decision
The St. John’s River Management District (“St. John’s District”) is one of five state government agencies responsible for the preservation and management of Florida’s water resources. The St. John’s District is responsible for groundwater and surface-water resources in all or part of 18 counties in northeast and east-central Florida. The St. John’s River itself is the longest river in Florida and is the state’s most significant resource for commercial and recreational use as it winds through 12 counties.
Coy Koontz sought to develop a portion of 15 acres of property near Orlando that contained several acres of wetlands. He proposed to develop four acres of the property and offer the remaining 11 acres to the government as a permanent wetlands-conservation area. The St. John’s District rejected his proposal, informing him that his permit would be denied unless he agreed to do one of two things:
- scale back his planned development to one acre and give the government an even larger conservation easement across the balance of his 15 acres; or
- maintain the original proposal and instead hire and pay contractors to make improvements (by replacing culverts or plugging ditches and by building a new road) on separate land already owned and managed by the government elsewhere within the management district.
Here, Koontz was faced with choosing between an overwhelming extraction (dedication of 87% of his property for the right to develop just 13% of it) or pay a large “fee-in-lieu” of dedication for unrelated public improvements on the government’s land. Koontz thought these conditions excessive, so he sued St. John’s District under a Florida law permitting him to seek damages, relying on the requirements of Nollan and in Dolan. In his view, the St. John’s District denied him the right to use and develop his property because he refused to capitulate to the government’s demand that he surrender personal assets to improve public property.
The Florida Supreme Court ruled in favor of the St. John’s District, holding that Koontz did not have a claim because, in their view,
- the Nollan/Dolan standard limiting land-use authority did not apply to the denial of a permit (as opposed to the approval of one), and
- the standard does not apply to a demand for the payment of money, as opposed to a specific burden on a property interest, such as the conveyance of land to the government for dedication of a park or the granting of an easement.
The Florida Supreme Court reached this conclusion even though the state’s lower courts determined that the condition imposed upon Koontz bore no relation to the mitigation of any adverse impact that his proposal would have on the public safety, health or welfare. Koontz, like many developers before him, stood in front of the gauntlet: He was forced to either dedicate personal resources to improve public property or surrender the right to use and develop his own property.
On appeal, the U.S. Supreme Court reversed the state court on both questions. The Supreme Court reasoned that holding that the Nollan/Dolan standard did not apply to either a municipality’s denial of permits or its exaction of fees would create paths to circumvention by land-use authorities. The decision has the potential to significantly expand property owners’ ability to challenge local land-use regulations and fees, though it is not clear that this expansion will result in a significant number of successful challenges. Prior to the Koontz case, courts did not give heightened scrutiny to the denial of land-use permits or the imposition of monetary concessions on developers by land-use authorities. Heightened scrutiny had been limited only to “title exactions,” which are a requirement that an easement or title to some of the property be dedicated to the public, such as a conservation easement to preserve a wetlands area. The Supreme Court seemed motivated to raise the standard because the St. John’s District’s treatment of Coy Koontz was tantamount to “government extortion.”
Writing for the five-justice majority, Justice Samuel Alito reasoned that the fact that Florida did not actually take any property from Koontz was not the only consideration in determining the outcome, stating that “extortionate demands for property in the land-use permitting context” would also violate the Fifth-Amendment protections afforded by the Constitution. While accepting the government’s authority to use wetlands-mitigation requirements in public policy, the majority opinion demands a heightened scrutiny of land-use decisions affecting developers. In short, the majority of justices reasoned that the Nollan/Dolan inquiry applies where the government’s demand is for money, not property, extending the doctrine as a protection of property rights arising from the Takings Clause.
The Supreme Court described Nollan and Dolan as reflecting the two realities of the land-use permitting process. First, the Supreme Court observed, “land-use permit applicants are especially vulnerable to . . . coercion” because “the government often has broad discretion to deny a permit that is worth far more than property it would like to take.” In other words, a property owner seeking a way to enhance the value of his land by obtaining a permit to develop it is often at the arbitrary mercy of land-use regulators hell-bent in extracting more of the enhanced value than is justified by mitigating the actual impacts of the proposed land use. “By conditioning a permit on the owner’s deeding over a public right-of-way, for example, the government can pressure an owner into voluntarily giving up property.” The second reality is that land uses often impose costs on the public that government may rightfully offset by requiring dedications of land. The Supreme Court noted that the Nollan / Dolan two-prong test is designed to align these two realities by allowing exactions, in principle, but requiring that the exactions bear a close reality to the actual impact of the development. This test allows government to force property owners to mitigate the actual impacts of their own activities but restrains government from arbitrary action lacking regulatory merit.
The four dissenting Justices disagreed with respect to the monetary-exaction issue. In their view, money is not property for purposes of Nollan; thus, monetary exactions–unlike land exactions—are not subject to scrutiny under that decision. The dissenters worried that giving heightened scrutiny to monetary exactions is likely to result in a substantial amount of additional litigation that could undermine local efforts to regulate land use. Writing for the dissent, Justice Kagan argues that the majority’s decision to apply Nollan and Dolan to demands for money “threatens to subject a vast array of land-use regulations, applied daily in States and localities throughout the country, to heightened constitutional scrutiny.” The dissent explains that under the Supreme Court’s prior decision in Eastern Enterprises v. Apfel, an order to pay money does not constitute a “taking,” and so the Nollan/Dolan standard should not apply. The dissent also argues that, independent of the legal rule, factual hurdles in the case compel a ruling for the District. Specifically, the dissent argues that because all the government did was give Koontz options for how to develop his land, it never demanded that Koontz give up anything as a condition for receiving a permit. The dissent also argues that because the permit was denied, no actual taking occurred. These points were not contested in the majority opinion, but it decided to remand the case for the Florida courts to decide them in the first instance.
The U.S. Supreme Court ruling in Koontz will certainly impact land-use policy in the 21st century. At face value, the decision appears to be a victory for landowners and developers, who may now be relieved of excessive development-impact fees and unreasonable permit denials. However, some worry that the decision could also lead to some negative impacts for developers and local governments alike, have the unintended consequence of encouraging land-use authorities to avoid any discussion with developers related to permit conditions and shelving all but the most meritorious applications. Even projects that are good for the community and ecologically sound might find a rubber-stamp of denial because of the fear that any effort by the land-use authority to find common ground with the developer may be viewed after Koontz as an unconstitutional exaction.
Clearly, government is nearly always a partner in any real-estate development, whether in the context of a formal public/private partnership or simply in policies affecting what and how development can be rolled out within land-use frameworks. The development process has become increasingly complex, as many components of the process are experiencing an accelerating rate of change in light of shifting immigration, demographics and lifestyle trends, changing what people want in the built environment. In recent years, local governments have shifted in response to limitations on their powers of taxation, and due to the public’s changing attitudes toward development, much of the financial burden of infrastructure improvements has shifted to the private sector. Consequently, real estate developers find themselves spending more time and resources working closely with government officials to ensure that their projects meet public objectives of both a local and, increasingly, regional scope. The Koontz decision should mitigate unjustifiable developer concessions by land-use authorities and thereby will provide an important check on government power over landowners.