It is not unusual for a general contractor/CM firm to assist an owner/developer to obtain an environmental permit for a project or find itself exposed to risks related to the permitting process. This permitting process can be both time consuming and costly. Accordingly, an appreciation of the limits on the public agency’s discretion to require concessions before issuing a permit is essential.
In Koontz v. St. John’s River Water Management District, 570 U.S. ___, 133 S.Ct. 2586 (2013) the U.S. Supreme Court addressed a permit denial by a state agency after a developer refused to pay for off-site remediation of state-owed wetlands. The Court ruled that the situation is subject to the same Fifth Amendment constitutional “taking test” that governs an agency’s demand that a developer relinquish an interest in real estate as a condition for issuing a permit. In practical terms, this means that an agency’s demand for a monetary payment as part of the permitting process must be related to and be roughly comparable to the cost to remediate the impacts that would be caused if the project were permitted.
Mr. Koontz (“Developer” or “Koontz”) sought a permit to construct a building and parking lot on 15 acres of undeveloped property in Florida. Florida had classified the property as wetlands and, as such, the Developer was obliged under state law to offset environmental damage caused to existing wetlands by creating, enhancing, or preserving other wetlands. Koontz submitted a permit application proposing to develop about one-quarter of the property and mitigating impacts to the wetlands by grading the property, providing a dry-bed pond for retaining and then gradually releasing storm water, and granting a conservation easement to Florida that would foreclose future development on the remaining property.
The state agency denied the permit application, but suggested that Koontz reduce the size of the development to just 1 acre, deed a conservation easement to Florida on the remaining 14 acres, install a costly storm water management system and build retaining walls.
The agency also made a second offer. Koontz could undertake the construction project and mitigation measures, as originally proposed, provided that he also paid for enhancements to approximately 50 acres of state-owned wetlands located several miles away. The agency told Koontz that it would “favorably consider” other alternatives, provided that they were “equivalent” to the agency’s proposal.
Unwilling to accept the agency’s demand to pay for offsite remediation, Koontz filed suit in state court to recover damages when an unreasonable state action results in a “taking without just compensation. ” Eventually, the Florida Supreme Court, ruled that no violation of the U.S. Constitution’s Fifth Amendment Takings Clause had occurred and therefore no damages were owed under the Florida law. The Developer appealed that decision to the U.S. Supreme Court.
The Supreme Court’s Ruling
At the Supreme Court, all of the parties agreed that, under established law, a government agency can condition approval of a permit on the applicant’s dedication of property to the public, provided that there is a “nexus” and “rough proportionality” between the property the government demanded from the applicant and the social costs of the project. If this test is not satisfied, however, a taking has occurred.
Two key aspects of Koontz’s case made it different than the typical “taking” analysis. First – the agency did not approve the permit subject to Koontz giving up something, but instead the agency denied the permit because he refused to pay for offsite remediation. Second – the agency had not required Koontz to relinquish a specific real property interest, but instead had demanded payment for offsite remediation.
All nine of the justices agreed that, regardless of whether an agency approves a permit on the condition that the applicant conveys property rights to the government, or instead denies a permit because the applicant refuses to convey property to the government, such agency demands must meet the standards for “nexus” and “rough proportionality” noted above.
The justices also appeared to agree that because the permit had been denied and Mr. Koontz had not paid for the cost of off-site remediation, nothing had actually been “taken” within the meaning of the Fifth Amendment. Yet, writing for the Majority, Justice Alito found that a constitutional violation may have occurred, stating:
Extortionate demands for property in the landuse permitting context run afoul of the Takings Clause not because they take property but because they impermissibly burden the right not to have property taken without just compensation. (Emphasis added).
The key issue about which the justices disagreed was whether the “nexus” and “rough proportionality” requirements could apply to the agency’s denial of the permit unless Koontz paid for off-site remediation on 50 acres of state-owned wetlands. The five justices in the Majority ruled that, although the agency had only demanded money, there was a “direct link” between this demand and Koontz’s property. Because of this direct link, the Majority concluded:
[T]here is a risk 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 at issue, thereby diminishing without justification the value of the property.
The Majority did not reach a conclusion on the ultimate merits but sent the case back to the Florida courts for further proceedings.
In a sharply worded dissent, the four justices argued that the government’s appropriation of property would constitute a taking only if done outside of the permitting process. In other words, the requirements of “nexus” and “rough proportionality” only applied where the condition of a permit effectively coerced a developer to give up a constitutional right, i.e., the right to just compensation when specific property is actually taken. Because Koontz’s right to specific property had not been taken, the dissent asserted that principles cited by the Majority simply did not apply.
The full effect of the Koontz decision will likely be played out as the lower courts apply it within the context of a variety of unique land use laws and local permitting programs. At a minimum, however, the decision signals that a Majority of the Supreme Court believes that when a government agency denies a construction permit because the applicant refuses to make a monetary payment, there must be a “nexus” and “rough proportionality” between the payment the agency has demanded and the social costs of the project that the payment is meant to redress. If that test cannot be met, then the demand for payment impermissibly burdens the permit applicant’s right not to have property taken without just compensation. As general contractors/CM firms are drawn into the state and federal permitting process, particularly when involved in undertakings such as public-private partnerships, this is welcome news.