Stealing Your Property Or Paying You for Obeying the Law? Takings Exactions After Koontz

Stealing Your Property or Paying You for Obeying the Law? Takings Exactions after Koontz v. St. Johns River Water Management District

American College of Real Estate Lawyers

Spring Meeting – Kauai, HI – March 2014

Gregory M. Stein, David L. Callies, and Brian Rider[1]

On June 25, 2013, the United States Supreme Court rendered its long-anticipated decision in Koontz v. St. Johns River Water Management District,[2] ending considerable speculation about how the Court would resolve two important unanswered questions. Writing for a five-Justice majority, Justice Alito held (1) that a government’s demand for money or land from a land use permit applicant must satisfy the nexus and proportionality requirements set forth in the Court’s previous Nollan/Dolanopinions even when the landowner does not accept the proposed exaction, and (2) that the government’s demand for property from a land use permit applicant must satisfy these Nollan/Dolan requirements even if the demand is for money – such as impact fees, in-lieu fees, and other monetary exactions – rather than a dedication of an interest in real property, such as an easement.

1. BACKGROUND ON REGULATORY TAKINGS LAW

The law of regulatory takings is one of the most complex topics facing real estate lawyers. Long ago, the Supreme Court recognized this body of law as “the lawyer’s equivalent of the physicist’s hunt for the quark.”[3] A more modern take describes it as “the jurisprudential equivalent of a land war in Asia – a quagmire from which any aggressive initial expedition will eventually have to extricate itself . . . .”[4] Duly warned, we proceed nonetheless, hoping that we will not be “bogged down in the swamps and rice paddies of mushy doctrinal distinctions and sniped at by local government guerrillas too elusive to pin down in open battle.”[5]

Lingle v. Chevron U.S.A. Inc.,[6] a rare unanimous takings opinion from the United States Supreme Court, does offer some clarity and provides a helpful summary of the law as of 2005. The Court reaffirmed in Lingle that the Takings Clause of the Fifth Amendment[7] applies to the states.[8] It confirmed that takings for public use are not prohibited outright, but rather are permitted provided that compensation is paid.[9] It acknowledged that it has long distinguished between straightforward physical appropriations of property and regulatory takings of property, in which “government regulation of private property may . . . be so onerous that its effect is tantamount to a direct appropriation.”[10] It conceded that it has long had difficulty distinguishing between ordinary permissible regulations and those that go too far and thus warrant compensation from the government.[11]

Within the category of regulations that may go too far and cross the takings threshold, the Lingle Court summarized the case law as recognizing two types of per se takings. Government actions that fall into either of these two pigeonholes automatically require compensation. First, permanent physical occupations are always takings for which the government must pay.[12] Second, government regulations that deprive an owner of all economically beneficial use of her property are always takings meriting compensation except in cases in which background principles of nuisance and property law already limited the owner’s use of her property.[13] Any landowner who falls within the scope of these two categorical rules wins without further inquiry, no matter the government’s justification for the land use restriction.

Outside of these two categories – which regulatory bodies have learned to avoid with care whenever possible – things get considerably murkier. The Lingle Court unanimously reaffirmed the central role that Penn Central Transportation Company v. City of New York, will continue to play in most other regulatory takings cases.[14] The Penn Central Court, recognizing its inability to develop rules to govern other types of regulatory takings cases, instead listed a series of significant factors for evaluating these claims. “Primary among these are ‘[t]he economic impact of the regulation on the claimant and, particularly, the extent to which the regulation has interfered with distinct investment-backed expectations.’”[15] Also relevant is the “‘character of the governmental action,’” meaning “whether it amounts to a physical invasion or instead merely affects property interests through ‘some public program adjusting the benefits and burdens of economic life to promoted the common good.’”[16] The Lingle Court continued to be well aware that these formulations are hardly models of clarity, but noted that the Loretto, Lucas, and Penn Central formulations each seek “to identify regulatory actions that are functionally equivalent to the classic taking in which government directly appropriates private property.”[17]

Lingle recognized one last category of claim: the land use exaction[18] arising under Nollan v. California Coastal Commission[19] and Dolan v. City of Tigard.[20] In short, the Lingle Court concluded, there are four categories of regulatory takings claims: “a ‘physical’ taking, a Lucas-type ‘total regulatory taking,’ a Penn Central taking, or a land-use exaction violating the standards set forth in Nollan and Dolan.”[21] Because the Court’s most recent excursion into the law of regulatory takings – the June 2013 decision in Koontz v. St. Johns River Water Management District[22]– raises exaction issues and falls squarely within this fourth and final category of takings cases, we must examine Nollan and Dolan more carefully.

This Article proceeds as follows. Part II discusses Nollan, Dolan, and the tests they established. These two cases left several important issues unresolved, and Part III notes some of these issues. Part IV discusses the facts of Koontz and the manner in which the Florida courts resolved that case, and Part V focuses on the two constitutional questions the United States Supreme Court agreed to decide. Part VI discusses the Court’s Koontz opinion, Part VII describes the dissent, and Part VIII examines and analyzes both of these opinions. Koontz is likely to have repercussions for property owners, governmental bodies that regulate land use, and lower courts, and Part IX examines some of these effects and some of the issues that remain open even after Koontz. Part X concludes.

1. NOLLAN, DOLAN, “ESSENTIAL NEXUS,” AND “ROUGH PROPORTIONALITY”

The touchstones for the assessment of constitutionality in exaction cases are the principles set out in Nollan v. California Coastal Commission[23] and Dolan v. City of Tigard.[24] Nollanarose from an effort by the Nollans to demolish an old small house along the California coast and replace it with a modern larger house. The part of the property on which the house was located was separated from the beach area by a tall seawall. Redevelopment of the lot required the Nollans to obtain a coastal development permit from the California Coastal Commission. The Commission was willing to grant the permit on the condition that the Nollans grant to the public an easement of passage across the beach area of the lot.[25] The Nollans objected to the condition and sued, claiming that the condition was a taking. While the Commission’s appeal of a lower court decision in the Nollans’ favor was pending, the Nollans demolished the old house and built the new one without satisfying the condition requiring the dedication of the easement along the shore. The California Court of Appeal reversed the trial court and upheld the Commission’s decision.[26]

The United States Supreme Court reversed and held that a condition on a permit requiring the granting of an easement would be constitutional only if the condition substantially advanced a valid governmental purpose and a substantial nexus existed between the condition and the governmental purpose to be served by the condition.[27] Here, the court found that an easement of passage across the beach did not adequately advance the goals asserted by the Commission, including preserving the public’s ability to view the beach and avoiding congestion. Lacking that nexus, the building restriction was not a valid regulation of land use but “‘an out-and-out plan of extortion.’”[28]

The Dolan case arose from a redevelopment plan for a plumbing and electrical supply store in Tigard, Oregon. Dolan wanted to double the size of her store and to pave what had been a gravel parking lot. The City conditioned the granting of the permit on her dedication to the public of a part of the property for greenway and open space so as to reduce the burden on its storm drainage system. The City also required her to dedicate to the public an additional 15-foot strip of land for a pedestrian and bicycle pathway. Dolan objected to the conditions and requested a variance, which the City denied. The Oregon Court of Appeals and the Oregon Supreme Court both affirmed the decision of the Land Use Board of Appeals in the City’s favor.[29]

The Supreme Court held that Nollan required the Court to determine whether the conditions imposed showed the required degree of connection to the projected impact of the proposed development. The Court found that the permit conditions did have the required nexus with the legitimate interests of flood control and avoidance of traffic congestion.[30] In addition, the Court added a second requirement of “rough proportionality.”[31] This new part of the exaction test required the governmental entity to “. . . make some sort of individualized determination that the required dedication is related both in nature and extent to the impact of the proposed development.”[32]

Applying this test to the Dolan redevelopment conditions, the Court found that no justification had been shown for a requirement of a public dedication of the greenway land as opposed to a private restriction against development of the land.[33] The Court also found that the requirement of dedication of the pathway was not supported in the record before the Court because no showing had been made that the pathway would or was likely to offset some of the traffic demand created by the proposed development. No precise calculation was required, but some individual findings were required beyond mere conclusory statements of benefits from the dedications.[34]

1. ISSUES THAT NOLLAN AND DOLAN DID NOT RESOLVE

The United States Supreme Court left several issues unresolved in Nollan and Dolan, and Koontzonly partly resolved them. These issues include the following:

1. What precisely does the Court mean by “essential nexus” and “rough proportionality”? Having rightfully eschewed the mechanistic standard applied by some state courts with respect to proportionality, the Court leaves us with only a rough notion of intermediate or heightened scrutiny, without much in the way of concrete guidelines. However, the parameters of these decisions have become somewhat discernible in the decisions around the country applying these cases, together with learned commentary on these cases.
2. What if the landowner refuses the deal outright? Here a unanimous KoontzCourt agrees that such a land use condition precedent (“you can have your permit if . . . .”) falls into the same category as a condition subsequent (“here’s your permit, but . . . .”) and should be addressed under the Nollan/Dolan standards.
3. What if the government seeks to exact something other than real property? This is the nub of the 5-4 decision in Koontz: Monetary exactions are to be treated in the same manner as physical exactions and are subject to the nexus and proportionality requirements of Nollan and Dolan.
4. Does it matter whether the decision to deny a permit is administrative or legislative? One needs to read tea leaves (or a crystal ball, bearing in mind the admonition that those who use the latter approach run the risk of eating ground glass . . . ) to glean much of use from Koontz on this major unresolved issue. Lower courts are divided on this question. Some have held that deference to legislative determinations should reducethe level of scrutiny applied to legislative exactions as compared with administrative or quasijudicial one-off exactions, while others have suggestedthatthere is no defensible difference between the two.[35]
5. What if the government simply denies the permit without reference to any conditions at all? This is a good question, and there is language in Nollan that suggests this is a viable option for the government.[36]
6. If the landowner then comes back with suggestions phrased as concessions in order to procure a permit, does the fact that it is the owner that is making the offer take the matter outside the parameters of Koontz? This appears to be the way the land entitlement process works in Virginia under its “proffer” system.[37]

While we attempt to deal with these issues in the pages that follow, there is sufficient ambiguity remaining to keep property attorneys and their public sector counterparts busy for years to come.

1. KOONTZ v. ST. JOHNS RIVER WATER MANAGEMENT DISTRICT

Coy Koontz, Sr., owned 14.9 acres of land in Orange County, Florida. The property is adjacent to a divided four-lane highway, less than one thousand feet from a major expressway, and bisected by a power line that parallels the highway. The property is mostly wetlands, and nearly all of it is included in a “Riparian Habitat Protection Zone.”[38] In 1994, Koontz applied to the St. Johns River Water Management District (the “District”) for permits to fill and develop about 3.4 acres adjacent to a highway. A staff person for the District agreed to recommend approval if Koontz would deed the rest of his land to the District for use as a conservation area and would also perform off-site mitigation either by replacing culverts on District-owned property four and one-half miles from the Koontz property or by plugging certain canals on other property owned by the District. Alternatively, Koontz could develop one acre of the property and agree to restrictions on his use of the rest of the land. Koontz agreed to some but not all of these restrictions, and the District rejected his application.[39]

Koontz sued the District, alleging several theories, including a regulatory taking. A series of scrimmages and appeals followed. The circuit court ruled on several state law jurisdictional and administrative matters but found the takings claim not ripe for judicial review. The Florida District Court of Appeal affirmed as to the jurisdictional and administrative matters, but reversed the determination of lack of ripeness and remanded for trial.[40]

On remand, the trial court heard testimony from an engineer, an environmental consultant, and an ecologist, all hired by Koontz to study the land. All three experts testified that surrounding development had already impacted the land Koontz wanted to develop such that it had little wildlife value. The court also heard testimony from the regulatory scientist for the District, who testified that development of the 3.7 acres adjacent to the highway would have a significant adverse effect on fish and wildlife. The court found that the actions of the District were an unreasonable exercise of its police power, and the District appealed.[41] After another remand, the trial court made a determination that the District was liable to Koontz for damages. The District again appealed, and its appeal was dismissed on procedural grounds.[42]

The trial court then awarded damages to Koontz because the District’s proposed exactions violated Nollan and Dolan. The District appealed once again to the District Court of Appeal, which affirmed.[43] One judge concurred, focusing more directly on the unconstitutional condition doctrine.[44] Another judge dissented, stating that Koontz is entitled to challenge the permit denial as an unconstitutional condition but is not entitled to damages for a temporary taking of his property.[45] The District Court of Appeal certified the question to the Florida Supreme Court.[46]

The Supreme Court of Florida rephrased the certified question and then reversed the Court of Appeal.[47] After reviewing Nollan, Dolan, and other takings decisions, the Florida Supreme Court held that

under the takings clauses of the United States and Florida Constitutions, the Nollan/Dolan rule with regard to “essential nexus” and “rough proportionality” is applicable only where the condition/exaction sought by the government involves a dedication of or over the owner’s interest in real property in exchange for permit approval; and only when the regulatory agency actually issues the permit sought, thereby rendering the owner’s interest in the real property subject to the dedication imposed.[48]

One Justice concurred in the result only, and two other Justices concurred on the grounds that the landowner had not yet exhausted his administrative remedies and thus the case was not ripe for judicial review.[49]

1. THE UNITED STATES SUPREME COURT’S GRANT OF CERTIORARI IN KOONTZ

As noted above, the Court’s Nollan and Dolan opinions did not have any reason to address several important subsidiary questions that might arise in other exaction cases. Koontz v. St. Johns River Water Management District directly presented two of these unanswered questions. Having lost in the Florida Supreme Court on both of these issues, Koontz petitioned for a writ of certiorari.[50] Koontz’s petition raised these two open issues, and the Supreme Court granted the petition with respect to both.