In a recent US Supreme Court ruling, the Court unanimously ruled in favor of George Sheetz, a Northern California plaintiff who challenged a $23,420 El Dorado County “development impact fee” imposed as a “traffic mitigation fee.” The County stated the fee would pay for new roads impacted by the plaintiff’s proposed placement of a manufactured home on a small lot off a rural road.
Sheetz paid the development impact fee but refused to back down, believing the fee was unconstitutional and an unfair burden on the cost of public projects. Despite his lawsuit being denied at every level, he persisted, and the US Supreme Court agreed to hear his case. The ruling in his favor states that homeowners and developers have the right to challenge these fees as an unconstitutional taking of their private property.
The 5th Amendment prohibits taking private property without just compensation
Conservative Justice Amy Coney Barrett wrote, “There is no basis for affording property rights less protection in the hands of legislators than administrators. The Takings Clause applies equally to both — which means that it prohibits legislatures and agencies alike from imposing unconstitutional conditions on land-use permits.”
To help us understand the US Supreme Court’s decision, we sought the expert opinion of Richard McDonald, a Pasadena attorney of counsel at Stoner Carlson LLP. With 38 years of experience in land use, real estate, environmental and administrative law, McDonald has represented property owners, developers and neighborhood associations in the entitlement of projects throughout California. Locally, McDonald has worked on the restoration of the Constance Hotel and the YWCA Julia Morgan Building, the Colorado at Hill Hotel, the Marriott Residence Inn, the Paseo Colorado, the Crown City Medical Building and the former Pasadena Athletic Club site.
While the ruling is favorable to developers, McDonald cautions, “It is important to understand that the El Dorado 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.”
“The decision expressly leaves the question open, and no prior decision of the Court has addressed or prohibited that longstanding government practice,” says McDonald. “Both Nollan and Dolan considered permit conditions tailored to specific parcels of property. The Nollan/Dolan doctrine ensures that any property dedication has a reasonable nexus to the public impact of the proposed project and is roughly proportional to the size of that impact. If these two prongs are not satisfied, the dedication can be found to be a taking of private property requiring payment of just compensation under the Fifth Amendment.”
“The next chapter will be that issue, much like Justice Gorsuch notes in his concurring opinion,” said McDonald.
More affordable new housing
We asked if the limitation of California’s high development impact fees potentially leads to the construction of more affordable new housing, a prospect that Pasadena developers have considered.
“Yes, I and many of my clients have pointed out that the large number of mandatory fees and costs imposed by cities, counties, and the State have increased the cost of construction and project development that, in turn, have forced prices up, making all types of housing less affordable,” said McDonald. “Construction taxes, residential impact fees, transportation impact fees, mandatory state building codes with their multitude of mandates, and so many other well-intentioned legislatively imposed fees and costs add millions of dollars to the cost of a project that can only be recouped through higher prices. On top of this are the inclusionary requirements that limit revenues for 15 percent or more of the units being constructed, resulting in even higher prices to recoup that lost revenue.”
McDonald replied to our question as to whether some cities use sky-high fees to block housing development by saying, “I would not be surprised if some did, but for the most part, it seems like they act with benign neglect, not thinking through the consequences of their budgetary decisions with that type of intent.”
A consequence of Prop 13?
Developers continually maintain that local governments rely too heavily on development impact fees, rather than property taxes, to fund new projects, such as financing parks, streets, schools and other infrastructure and services. They argue that it’s more equitable to impose these fees on all lots in an area rather than on a case-by-case basis.
“Yes,” said McDonald, “but that has been a problem since the passage of Proposition 13 and the limits it imposed on property taxes. That is not going to change, so at some point, there needs to be an honest conversation about what we want from our various levels of government, how much it costs, and the best way to fund it.”
Connecting to specific project impacts
So we asked McDonald if Pasadena homeowners and developers have challenged these fees.
“Yes, in specific cases, as applied,” he said, “but I am not aware of any lawsuits that were filed when they were enacted. Up until the recent El Dorado decision by the United States Supreme Court, cities and counties enacted them legislatively. Now, they will have to connect them to specific project impacts, which should force them to re-think what they are adopting and how it can be applied on a case-by-case basis.”
“The more Sacramento gets involved, the more cities resist.”
Richard McDonald
We asked McDonald if he agreed with the ruling that the fee is unconstitutional and an unfair burden on the cost of housing projects. “Yes, although this is solely about private development projects rather than public projects,” he said.
Searching for further solutions, we asked whether the California Legislature should establish an actual structure for impact fees.
“I think it is best left to the cities and counties based upon their particular needs,” McDonald answered. “The more Sacramento gets involved, the more cities resist.”
You can read the entire US Supreme Court decision here.
