Can land-use regulators exact cash from developers to pay for offsite environmental mitigation as a precondition to issuing building permits without triggering the just-compensation requirement of the Takings Clause? Today, the U.S. Supreme Court answered this question in Koontz v. St. Johns River Water Management District, Case No. 11-1447. In a 5-4 decision, the Court held that the government's demand for property, including cash from developers as a precondition for land use permits, must bear an essential nexus and a rough proportionality with the prospective burden imposed by the development. This holding expands the scope of the Takings Clause, restricts the power of regulators to require the satisfaction of preconditions before permits will be issued and provides important protections to developers.
Factual Background: The Parties, the Land and the Denial of the Permit at Issue
Coy Koontz purchased a 14.9-acre lot in 1972 east of Orlando, Florida that is now adjacent to a major highway in a highly developed area. No environmental laws in 1972 prevented Koontz from developing his lot. Over time, however, Florida enacted numerous statutes to remedy the drastic loss of wetlands, an important public resource for their ability to reduce flooding, improve water quality and support commercial fishing.
Florida's Water Resources Act of 1972 divided the state into five management districts, including St. Johns River Water Management District (District), and authorized each district to issue permits that set "reasonable conditions ... necessary to assure [that new construction would] not be harmful to the water resources...." In 1984, Florida added a Wetlands Protection Act, prohibiting dredging land or filling in surface water without first obtaining a permit. As a consequence of these two laws, Florida experienced an 81 percent decline in the annual loss of wetlands within the state.
These laws put all but 1.4 acres of Koontz's lot within a protected zone and established a legal presumption that any land use within the zone would be harmful. In 1994, Koontz applied for permits to develop a portion of his land. Of his more than 14-acre lot, Koontz sought to develop 3.7 acres; 3.4 acres of wetlands and 0.3 acres of uplands (treated like wetlands under Florida law). He included a request for permission to dredge 3.25 acres of wetlands.
The District initially suggested a long list of environmental mitigation options to Koontz. These included reducing his proposed development to only one acre, employing an on-site sub-surface stormwater management system, or expending his own money to improve 50 acres of wetlands outside his property. Koontz agreed to dedicate the remainder of his land for conservation, but disputed the quality (and later the existence) of the wetlands on his lot, and refused to reduce his development or pay for offsite mitigation - even though one of the offsite options cost only $10,000. The District countered that Koontz's proposed mitigation - dedicating 11 acres of land for conservation - would have resulted in a net loss in wetlands. Ultimately, the District denied Koontz's application solely because he refused to pay for offsite mitigation.
The State Court Litigation and Appeals
Koontz filed an inverse condemnation action in Florida state court, arguing that the District's denial of his permit applications constituted a taking without compensation. Koontz chiefly relied on Agins v. City of Tiburon, 447 U.S. 255 (1980), which held, in part, that land use regulations effect a taking if a legitimate state interest was not substantially advanced thereby (Agins has since been reversed in Lingle v. Chevron USA, 544 U.S. 528 (2005)), and upon Dolan v. City of Tigard, 512 U.S. 375 (1994), which Koontz argued placed the burden of proof on the government to demonstrate that its permit decision advanced legitimate state interests.
After ripeness issues were resolved on appeal in Koontz's favor and the case remanded, the trial court applied Nollan and Dolan, which together provide that the government may impose a condition on development that constitutes a per se taking (i.e., either physical occupation or complete diminution of value), without having to pay compensation, only if the condition serves the same purpose as the regulation (i.e., the "nexus test") and is roughly equal (i.e., the "proportionality test") to the harms caused by the development. The trial court held in Koontz's favor, ruling that the District failed to prove the requisite nexus and proportionality between the offsite mitigation measures and the harm done by Koontz's proposed development. In response to the trial court's ruling, the District issued the permits to Koontz, subject to a sole requirement that Koontz dedicate 11 acres of his land to conservation. Koontz later won more than $327,000 in statutory damages as compensation for the temporary taking effected by the District's initial, wrongful denial of his permit applications.
The District appealed the damages award, arguing that Lingle overruled Agins, but the District never claimed that the offsite mitigation requirement, which it attempted to impose on Koontz, satisfied the Nollan and Dolan tests. A Florida appellate court affirmed, relying solely on Nollan and Dolan. The dissent, in contrast, concluded that since Koontz never paid for the offsite mitigation that the District demanded as a condition for issuing the permits, he was not entitled to compensation because "nothing was ever taken."
The Florida Supreme Court unanimously reversed, holding that Nollan and Dolan apply only where the exaction involves real property in exchange for permit approval (as opposed to cash), and then only when the government "actually issues the permit sought, thereby rendering the owner's interest in the real property subject to the dedication imposed." Thus, the Court held that Nollan and Dolan do not apply to Koontz's case because the District neither issued the permit (at least not before Koontz sued the District) nor exacted real property from him. The Court also noted that since Koontz never expended any funds for offsite mitigation, nothing was ever taken from him.
Arguments to the U.S. Supreme Court
Koontz primarily relied upon the unconstitutional conditions doctrine and the related Nollan and Dolan doctrines. The unconstitutional conditions doctrine prohibits the government from conferring a benefit on the condition that the person benefitted surrender a constitutional right, even though the government may otherwise rightfully withhold the benefit. For example, although the government may prohibit yelling "fire" in a crowded theater without violating the First Amendment, the government cannot issue $100 permits allowing one to yell "fire" in a crowded theater because the permit undermines the law's purpose and rationale.
Koontz claimed that the District forced him to choose between two rights: the right to use his property and the right to compensation for offsite wetlands improvements. Nollan and Dolan, although grounded on the Takings Clause, rely on the unconstitutional conditions doctrine to prevent regulators from circumventing the requirement that compensation be paid for property exactions. That is, under Nollan and Dolan, the government may regulate land use by permit exactions that constitute per se takings (i.e., regulations effecting physical occupations or diminishing all economically beneficial use) only if the exaction has an "essential nexus" and "rough proportionality" to development's effects. In Nollan, the Court struck down a permit exaction requiring the Nollans to grant a public access easement across their beachfront property, and parallel to the waterline for more direct access to a nearby park, in return for a permit needed to replace their bungalow with a larger, single family house. The government attempted to justify its exaction on the basis that the new, larger home would block the public's view of the ocean, but the Court held that the exaction had no essential nexus to the effect of the new house. In Dolan, the Court struck down a permit exaction requiring Mrs. Dolan to dedicate a portion of her land for flood and traffic control in return for a permit needed to expand her store; the Court held that while an essential nexus existed between the exaction and the effects of the expanded store, missing was a "rough proportionality" - i.e., an "individualized determination that the required dedication is related both in nature and extent to the impact of the proposed development."
Koontz stressed that the District never disputed the trial court's factual findings that no essential nexus or rough proportionality exists between the District's exaction (i.e., offsite mitigation) and Koontz's development. He emphasized that but for his refusal to pay for offsite mitigation, the District was otherwise willing to issue the permits necessary for his 3.7-acre development. Koontz also urged that the District ignored evidence that his land contains no wetlands, relying instead on a mere presumption that because his land is within a protected zone, any development would be environmentally detrimental. Koontz claimed that whether the government exacts real or personal property is not important under Nollan and Dolan, because the Takings Clause protects both. Neither is the timing of the exaction relevant - i.e., either as a condition precedent or subsequent to a permit's issuance - since in both instances, no permit is effective until the applicant waives his right to compensation for the property exaction.
In short, Koontz argued for a reading of the Takings Clause that limits regulators' power to exact cash from developers for offsite environmental mitigation as a precondition for land use permits, because such exactions might unfairly impose burdens on individual developers that ought to be borne by the public. Moreover, Koontz claimed that the power to exact cash creates a loophole in the Taking Clause by making it possible for the government to demand money from developers, which could then be used to condemn their land and pay the just compensation required.
The District's Argument
The District denied taking any property from Koontz and, consequently, argued that Nollan and Dolan do not apply to this case. The District explained that the U.S. Supreme Court has applied various analyses in its Takings Clause jurisprudence: (1) per se takings may occur by physical invasion (see, e.g., Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982), involving a mandate to install cable boxes in apartment buildings), or by the elimination of all economically beneficial use of property (see, e.g., Lucas v. S. Carolina Coastal Council, 505 U.S. 1003 (1992), involving a land use regulation prohibiting any development); (2) regulatory takings may occur under the "goes too far" test of Pennsylvania Coal Co. v. Mahon, 260 U.S. 393 (1922) and a related, more specific formula outlined in Penn Central Transp. Co. v. City of New York, 438 U.S. 104 (1978), which provides that the government may regulate land use without taking private property if the regulation does not interfere with "investment-backed expectations" (an "essentially ad hoc, factual inquir[y]"); and (3) impermissible land use exactions may occur under the framework of Nollan/Dolan.
The District claimed that the comparatively strict Nollan/Dolan test does not apply to Koontz's case; instead, the looser Penn Central test applies. The District stresses that Nollan and Dolan apply only when the permit exaction constitutes a per se taking that actually has been imposed (e.g., Nollan's imposition of a beachfront access easement or Dolan's required dedication of land). Here, the District claimed that Koontz was deprived of nothing: he lost no property and provided no money for offsite mitigation, and he never contended that the permit denial constituted a per se taking. Rather, Koontz sought and obtained statutory damages for the temporary taking of his land rather than compensation for the suggested offsite mitigation. Koontz could have sought relief under Penn Central for the condition imposed by the District, but he abandoned that claim in the state courts by not disputing Florida's interest or authority to regulate land use for the purpose of environmental protection. Koontz never challenged the application of the Penn Central holding to his circumstance. The District also asserts that Koontz could have challenged its decision as arbitrary and irrational under the Due Process Clause or as lacking a legitimate governmental objective under the Equal Protection Clause.
The U.S. Supreme Court?s Holding in Favor of Koontz
The Court ruled in Koontz's favor by a 5-4 vote. Writing for the majority, Justice Alito emphasized the importance of the unconstitutional conditions doctrine in the land use context, where "applicants are especially vulnerable to ... [governmental] coercion ... because the government often has broad discretion to deny a permit that is worth far more than property it would like to take ... [and] can pressure an owner into voluntarily giving up property for which the Fifth Amendment would otherwise require just compensation." The Court held that no meaningful distinction exists between pre- and post-conditions in the permit context: "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 property or denies a permit because the applicant refuses to do so. ... A contrary rule would be especially untenable in this case because it 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."
The Court also concluded that the Takings Clause may be violated in the absence of an actual taking: "Extortionate demands for property in the land use 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. As in other unconstitutional conditions cases in which someone refuses to cede a constitutional right in the face of coercive pressure, the impermissible denial of a governmental benefit is a constitutionally cognizable injury." Justice Alito clarified that, here, a per se taking would have occurred, since the District would have required a transfer of an interest in property from Koontz to the government; accordingly, Penn Central analysis was inapplicable.
The Court further held that "'monetary exactions' must satisfy the nexus and rough proportionality requirements of Nollan and Dolan ... [because] they are functionally equivalent to other types of land use exactions ... [and] utterly commonplace. ... [I]f we accepted th[e] [contrary] argument it would be very easy for land use permitting officials to evade the limitations of Nollan and Dolan."
While holding that Nollan and Dolan apply in the preconditions context, the Court clarified that it made no determination about whether the preconditions imposed by the District satisfied the nexus and proportionality requirements. Those issues were remanded for further consideration.
The Consequences of Koontz for Real Estate Developers
Today's holding expands the scope of the Takings Clause of the United States Constitution, restricts the power of regulators to require the satisfaction of preconditions before permits will issue and provides important protections to developers. Because this decision will force land-use permitting authorities across the country to address the constitutionality of a proposed precondition in the earliest stages of permit consideration, it could have the unintended, short-term effect of slowing and increasing the expense of the permitting process by requiring time-consuming, upfront legal analysis by the attorney for the permitting authority. The most likely long-term ramification of the Court's decision, however, will be to narrow significantly the range of property-development preconditions, which is what the majority of the justices apparently intended.