REPRINTED WITH PERMISSION FROM THE PORTLAND METROPOLITAN HOME BUILDERS ASSOCIATION. FIRST PUBLISHED IN THE HBA BUILDING NEWS, FEBRUARY-MARCH 2024 ISSUE.
On January 9, 2023, the U.S. Supreme Court heard oral argument in a case that may force local governments to dramatically revise the myriad impact fees that they charge homebuilders. It could also pave the way for further challenges to exactions such as inclusionary housing requirements, construction excise taxes, and punitive tree removal regulations and fees.
In Sheetz v. County of El Dorado, California, George Sheetz applied for a building permit for an 1,854 square-foot house. The County of El Dorado charged him over $23,000 in traffic impact fees. As is the case in dozens of states, including California, Oregon, and Washington, the county did not engage in any individualized analysis of the project when assessing the fee, and instead merely relied on its traffic impact mitigation fee master plan that was previously adopted by the El Dorado County Board of Supervisors.
Sheetz paid the traffic fee under protest, and then sued arguing that the fee is an unconstitutional condition that violates the Nollan/Dollan standard, whereby the government can only conditionally approve a land use permit if the government can prove that there is both an “essential nexus” between the underlying project and the exaction, and that the taking is “roughly proportional” to the impact it purports to mitigate.
A California trial court upheld the exaction, holding that, because it was legislatively authorized, the exaction was immune from Nollan/Dolan review. The California Court of Appeal affirmed, and the California Supreme Court denied review. The US Supreme Court granted review to consider whether such a “legislatively approved” exemption from Nollan and Dolan exists.
Oregon courts have followed the same logic as California. In Rogers Machinery v. City of Tigard, a project applicant challenged the Washington County traffic impact fee (TIF). The Oregon Court of Appeals decided that the TIF was constitutional because it included sufficient justification and analysis, specifically traffic estimates and a rate schedule for over 100 different land uses. It found that similarly detailed and uniformly applied legislative assessments are sufficiently rigorous, and therefore not subject to case-by-case taking claims.
During the Sheetz oral argument, several Supreme Court justices frowned on California’s refusal to allow challenges to the constitutionality of impact fees. After all, they noted, it is clear that elected leaders have an incentive to shift the burden of infrastructure costs from their constituents to a select few unknown future residents. In fact, failing to do so could jeopardize their prospects for reelection. Other justices expressed concern with opening up all impact fees to constitutional challenges and questioned whether impact fees are more akin to taxes, which are not subject to Nollan/Dolan review. A decision is expected by late June.
If the Supreme Court finds that legislatively enacted impact fees are subject to Nollan/Dolan review, we anticipate two impacts on Oregon land use projects, one small and one potentially explosive.
First, most local governments already engage in thorough proportionality analysis when they develop impact fees and attach conditions of approval to projects. They generally commission engineering and financial studies that examine likely impacts in a fairly particularized manner (housing v. commercial, single family v. multifamily, etc.) and assign fees based on those impacts. Thus, even if Sheetz wins at the U.S. Supreme Court, that victory is unlikely to affect the Washington County TIF, because it is supported by reams of traffic and financial data. Washington County may be compelled to readopt the TIF with new findings to demonstrate the TIF is roughly proportional to the traffic impacts of the listed land uses. The County did a very thorough job in adopting the TIF. While the need to write up findings may become a new procedural hurdle, it can be surmounted. The same is true of most local government system development charges for streets, water and sewer, because those charges are typically backed up with detailed engineering and financial data. While those charges and fees may have a new procedural hurdle to overcome, substantively they rest on firm constitutional ground.
However, other local government system development charges are not as firmly rooted. For example a local government can decide it wants deluxe parks, and charge pricey fees accordingly. Those “stretch” type of fees will be at greater risk if challenged. Take for example the recently adopted Tualatin Parks Master Plan, which called for a 65,000 square foot community recreation center that would provide a wide array of recreation, health, wellness, and social engagement opportunities for the entire City and cost upwards of $85 million (in 2018 dollars!).
It is exactly this sort of gold-platted master plan and the pricey impact fees that it “justifies” that would likely fail Nollan/Dolan scrutiny. After all, a city would be hard-pressed to explain why the small number of new residents create the need for a large new recreation center to serve the entire city.
Second, and even less likely to survive in a post-Sheetz world, are those exactions which lack a direct relationship to the underlying project. Take for example, the City of Portland’s inclusionary housing regulations that force multifamily builders to construct and set aside affordable housing units for sale or rental prices far below the cost of construction, simply because their project includes twenty or more units. After all, it is highly unlikely that the city could demonstrate a reasonable link between the impacts associated from new housing and the requirement to build affordable housing.
The U.S. Supreme Court rarely takes up land use cases. However, when it does, their decisions are oftentimes transformative, as was the case with Nollan and Dolan. We expect that Sheetz could similarly upend the status quo and further limit local governments’ ability to demand that developers and new residents pay for civic improvements that benefit the entire community.
Tags: Construction, Real Estate and Land Use, Construction and Development
