The Price Must Be Right: U.S. Supreme Court Extends “Nexus” and “Rough Proportionality” Requirements to Monetary Exactions Linked to Development Proposals

It has long been the law that regulators may not condition the grant of a land-use permit on the owner’s relinquishment of an interest in the property unless there is both a “nexus” and “rough proportionality” between the government’s demand and the effects of the proposed land use. In a case that may have been overlooked amidst several landmark decisions handed down in the same week, the U.S. Supreme Court ruled that these requirements also apply to monetary exactions.

The Court’s decision in Koontz v. St. Johns River Water Management District involved the applicability of the “doctrine of unconstitutional conditions,” which prohibits the government from denying a benefit to a person because he or she is exercising a constitutional right. In land-use cases, the doctrine operates to protect the landowner’s Fifth Amendment right to just compensation for property that is taken by the government when the landowner applies for a permit. In that context, the doctrine is related to, but separate from, well-established rules that require the government to compensate a landowner when development restrictions go (in the words of an often-cited opinion) “too far” and effect a “regulatory taking” of property. Koontz is thus properly understood as an exactions case, rather than a takings case. Two Supreme Court decisions, Nollan v. California Coastal Commission and Dolan v. City of Tigard, established the basic “nexus” and “rough proportionality requirements for conditions the government imposes on land-use permits.

Koontz concerned a Florida landowner’s efforts to obtain a permit to develop a portion of his parcel under the state’s Wetlands Protection Act. The government rejected his application, which included an offer to deed a conservation easement to the government for the rest of the parcel, and offered two alternative paths to a permit: the landowner could reduce the scope of the development and grant an even larger conservation easement, or he could pursue his original proposal and hire contractors to make improvements to government-owned land several miles away. Finding the conditions excessive, the landowner filed suit in state court under a Florida statute that authorizes monetary damages when a state agency’s unreasonable exercise of its police powers results in a taking of property without just compensation. The Florida Supreme Court ultimately ruled for the government, distinguishing Nollan and Dolan. Those cases did not apply, the state Supreme Court held, because the case before it involved a permit denial as opposed to a conditional approval, and because it involved a demand for money rather than a demand for an interest in the applicant’s real property.

The U.S. Supreme Court reversed, finding that the “nexus” and “rough proportionality” requirements were applicable, and remanded the case so that the Florida courts could determine whether the government’s demand ran afoul of Nollan and Dolan and whether the applicant was entitled to damages under the state statute. All nine Justices agreed that Nollan and Dolan apply not only when the government approves a permit conditioned on the conveyance of a property interest, but also when the government denies a permit until the applicant agrees to the condition. But the Court was sharply divided on the question whether Nollan and Dolan apply when the government demands a monetary payment as opposed to an interest in real property. A bare 5-4 majority held that the “nexus” and “rough proportionality” tests do apply to a demand for a monetary payment when there is a “direct link between the government’s demand and a specific parcel of real property.”

As Justice Alito’s majority opinion acknowledged, the key is the last portion of that phrase — the “direct link between the government’s demand and a specific parcel of real property.” That link, said Justice Alito, distinguishes Koontz from cases like Eastern Enterprises v. Apfel, which held that a federal statute’s imposition of retroactive financial liability did not implicate the Takings Clause because the obligations “did not operate upon or alter an identified property interest.” Justice Alito was also careful to distinguish taxes and user fees, noting that the Koontz decision “does not affect the ability of governments to impose property taxes, user fees, and similar laws and regulations that may impose financial obligations upon property owners.”

So if they don’t apply to taxes and user fees, then to what sorts of monetary demands linked to specific parcels do the “nexus” and “rough proportionality” requirements of Nollan and Dolan apply? The majority opinion sheds little light on this crucial question, noting only that the power to tax is carefully circumscribed and that the Court has had little trouble in the past distinguishing permissible taxation from impermissible confiscation. In her dissent, Justice Kagan was less optimistic, claiming that the Court’s failure to provide more definitive guidance “casts a cloud on every decision by every local government to require a person seeking a permit to pay or spend money.”

The majority and the dissent also disagreed about the likely effects of the Court’s decision. Justice Kagan accused the majority of “threaten[ing] the heartland of local land-use regulation and service delivery,” while Justice Alito pointed out that a number of states already apply the Nollan/Dolan test or similar tests to monetary exactions and have not experienced the negative effects predicted by the dissent. Indeed, both the majority and the dissent acknowledge that state law generally provides an independent check on land-use permitting fees.

The practical effect of Koontz, as is the case with many real estate issues, may be a matter of location. In New Jersey, for example, the Municipal Land Use Law limits a municipality’s ability to require payments for off-tract improvements to the developer’s pro-rata share of “reasonable and necessary” street, water, sewer, and drainage improvements. Under cases like Township of Marlboro v. Planning Board of Township of Holmdel, agreed-upon payments for improvements that go beyond these statutorily authorized purposes may be approved if they bear a “reasonable relationship” to the burdens created by the development. Koontz gives such requirements a federal constitutional underpinning, and, more importantly, extends the Nollan/Dolan “nexus” and “rough proportionality” requirements to land-use decisions by any level of government, under any statutory regime. As such, it provides developers with an extra level of protection against regulators who may be tempted to use their leverage to squeeze a better deal out of applicants in the name of impact mitigation.