The U.S. Supreme Court’s Latest Attempt to Differentiate a Fair Quid Pro Quo in the Developer’s Permitting Process From an Unconstitutional Taking

Introduction

The U.S. Supreme Court has issued an important decision in an attempt to add clarity and help government land use planners understand the difference between reasonable requests and unreasonable demands rising to the level of unconstitutional takings in the permitting process.  Koontz v. St. Johns River Water Management District, 2013 WL 3184628 (June 25, 2013).

When does a fair quid pro quo, a legitimate exercise of police power in the permitting process, go too far and lapse into an unconstitutional taking without just compensation through the government’s unconstitutional conditions in the permitting process?  In Koontz, the Supreme Court ruled that the seminal cases of Nollan v. California Coastal Comm’n, 483 U.S. 825 (1987) and Dolan v. City of Tigard, 512 U.S. 374 (1994), requiring both an “essential nexus” and “rough proportionality” between the governmental permitting authority’s demands and the effects of the developer’s proposed land use, must be satisfied to avoid an unconstitutional taking even when (1) the governmental permitting authority denies the permit and (2) the governmental demand is for money rather than real property.  

Key Realities Inherent in the Permitting Process

Two key realities of the permitting process have been cemented in the case law and are useful for context.  “The first is that land-use permit applicants are especially vulnerable to the type of coercion that the unconstitutional conditions doctrine prohibits because the government often has broad discretion to deny a permit that is worth far more than property it would like to take.  By conditioning a building 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 for which the Fifth Amendment would otherwise require just compensation.”  Koontz, 2013 WL 3184628 *7.  “A second reality of the permitting process is that many proposed land uses threaten to impose costs on the public that dedications of property can offset….Insisting that landowners internalize the negative externalities of their conduct is a hallmark of responsible land-use policy, and [the Court has] long sustained such regulations against constitutional attack.”  Id.

Nollan’s “Essential Nexus” Test

In Nollan, the property owners wanted to raze their one-story 521-square-foot beach home and replace it with a two-story 1,674-square-foot residence with a two-car garage.  The California Coastal Commission was concerned about impairing the public’s visual access to the beach from the road, a psychological barrier impairing physical access, and, as a result, the Commission conditioned its grant of a coastal development permit on the Nollans’ dedication of land for a public easement providing “lateral access” along the coastline on the beach side of the home.  The U.S. Supreme Court held that “requiring [an] uncompensated conveyance of the easement” would be a taking yet would be constitutional in the permitting process if there were an “essential nexus” between a legitimate state interest and the condition imposed by the governmental.  Id., 483 U.S. at 834-35 and 837.  However, the Court ultimately ruled that there was no nexus between the asserted interest in protecting visual access to the ocean from the road and the demand for an easement requiring public access along a private beachfront.  Id.  Noting that California remains free to pursue its public purpose of ensuring access, the U.S. Supreme Court told California that it would need to use its power of eminent domain to pursue the easement and “pay for it.”

Dolan’s “Rough Proportionality” Test

Seven years later, in Dolan, the U.S. Supreme Court imposed the “rough proportionality” test, adding to the “essential nexus” test of Nollan.  The City of Trigard, on the edge of Portland, Oregon, reviewed petitioner Dolan’s permit application, seeking to nearly double her plumbing and supply store to 17,600 square feet and convert a gravel parking lot to a 39-space paved parking lot on her 1.67-acre parcel.  Acknowledging the statutory requirement of “15% open space and landscaping,” the City’s adopted plan for a pedestrian/bicycle pathway, and the City’s established drainage plan to reduce flood risks, the U.S. Supreme Court ruled that the City Planning Commission went too far in granting the permit application while requiring that petitioner dedicate, collectively, 7,000 square feet (approximately 10%) of the property for storm drainage improvement and a 15-foot wide pedestrian/bicycle pathway.  While ruling that there was indeed an “essential nexus” between legitimate state interests and the permit conditions imposed by the City,  Id., 512 U.S. at 387, the Court then analyzed “whether the degree of exactions demanded by the city’s permit conditions bears the required relationship to the projected impact of petitioner’s proposed development,” coined the “rough proportionality” test by the Court.  Id. at 388 and 391.  Recognizing that “no precise, mathematical calculation is required…[the Court held that] the city must make some sort of individualized determination that the required dedication is related in nature and extent to the impact of the proposed development.” Id. at 391; see also 396 (“city must…quantify its findings”).  Applying the “rough proportionality” test, the Court concluded that the City failed to meet its burden to show why it could preclude building in the floodplain and also take property for its greenway system, never explained why a public greenway, as opposed to a private one, was required in the interest of flood control, and never made any finding that the pedestrian/bicycle pathway would offset additional traffic and congestion, only that it “could offset” it.   Id. at 393-95 and 391 n. 8 (permitting authority bears burden of justifying ad hoc adjudicative exactions tied to individual parcels).

The Koontz Decision Extends Nollan and Dolan to Both Permit Denials and Demands for Money Instead of Real Property

Last month in Koontz, the Supreme Court reaffirmed its commitment to the “essential nexus” and “rough proportionality” tests in Nollan and Dolan and held those tests applicable even when money, not real property, is demanded by permitting authorities and even when a permit is not granted but denied, reversing the Florida Supreme Court.  Koontz, 2013 WL 3184628 *16.  Petitioner Dolan applied for a permit to develop 3.7 acres of his 14.9-acre parcel of land consistent with Florida’s state laws aimed at protecting its water resources and wetlands, offering to foreclose any future development of the other roughly 11.2 acres by a conservation easement to the permitting authority, the St. Johns River Water Management District (“District”).  The District told Koontz it would grant the permit only if he either (1) developed only one acre and granted the District a conservation easement on the other 13.9 acres (among other conditions); or (2) agreed to hire contractors to replace culverts on one parcel or fill in ditches on another parcel to enhance some 50 acres of District-owned wetlands several miles away. 

On the issue of whether denial of the permit is a viable distinction, the U.S. Supreme Court ruled that the “principles that undergird our decisions in Nollan and Dolan do not change depending on whether the government approves a permit on the condition that the applicant turn over the property or denies a permit because the applicant refuses to do so.”  Id. at 8 (emphasis in original).  Denials of government benefits may also be impermissible under the unconstitutional conditions doctrine which “forbids burdening the Constitution’s enumerated rights by coercively withholding benefits from those who exercise them.”  Id.  The Court noted that “[a] contrary rule would…enable the government to evade the limitations of Nollan and Dolan simply by phrasing its demands for property as conditions precedent to permit approval” – rejecting any distinction between unconstitutionally impermissible conditions, whether framed as a condition precedent (“denied until” the property is relinquished) or subsequent (“approved if” the property is relinquished).  Id.

On the issue of whether demanding money, rather than real property, is a viable distinction, the U.S. Supreme Court answered in the negative, ruling that the monetary demand “burdened petitioner’s ownership of a specific parcel of land,” and held that “the direct link between the government’s demand and a specific parcel of real property…implicates the central concern of Nollan and Dolan…that the government may use its substantial power and discretion in land-use permitting to pursue governmental ends that lack an essential nexus and rough proportionality to the effects of the proposed new use of the specific property….”  Id. at *12. 

 Relevant Arizona Decisions

The Arizona decisions to date which address Nollan or Dolan in any material way have all rejected their applicability.  See Home Builders Ass’n of Central Arizona v. City of Scottsdale, 183 Ariz. 243, 248, 902 P.2d 1347, 1352 (1997) (Dolan held distinguishable as it involved the City of Trigard’s adjudicative decision to impose a condition tailored to the particular circumstances of an individual case as opposed to the generally applicable legislative decision by the City of Scottsdale); Dos Picos Land Limited Partnership v. Pima County, 255 Ariz. 458, 462-63, 240 P.3d 853, 857-58 (App. 2010) (permit to build road on property denied; court held Nollan inapplicable given the absence of any taking whatsoever or any governmental demand or condition that the private property be opened for public use); GST Tucson Lightwave, Inc. v. City of Tucson, 190 Ariz. 478, 949 P.2d 971 (App. 1997) (Nollan and Dolan held inapplicable to Tucson City Code provisions precluding conditional responses to RFP’s and requiring surrender of certain long distance provider licenses when applying for alternative licenses since the case involved the use of public property for private profit, not dedication of private property for public use as in Nollan and Dolan, did not involve revocation or suspension of Lightwave’s license, and no party presented any authority “addressing whether and/or how the Takings Clause applies when the protected property right at issue is a franchise or license issued by a municipality to use public rights-of-way”).

Conclusion

After many years of decision-making, there is still substantial controversy about when these tests apply, what they mean, and how they should be applied.  The outcome of each case will turn on a careful review of (1) the legitimate governmental interests identified; (2) the fact-specific conditions of the permitting authorities; and (3) the application of the “essential nexus” and “rough proportionality” tests by governmental permitting authorities and/or the courts.  Take no comfort in the U.S. Supreme Court’s own acknowledgement that its “cases have not elaborated on the standards for determining what constitutes a ‘legitimate state interest,’” Nollan, 483 U.S. at 834, expect uncertainty to triumph over certainty in future administrative and judicial decisions, and know that the creativity of the key players, their attention to detail in the administrative and judicial review process, and their willingness to engage in good faith discussions and compromise, will drive the process, the cost control efforts, and the results. 

While we would all like to see more certainty and predictability in the process and results, governmental permitting authorities are now laboring under more of the Court-allocated burdens, and, here in Arizona, under A.R.S. §12-348, there is also a risk of an award of attorneys’ fees and costs (including expert witness fees) to developers who prevail on the merits in the litigation of these cases.