Real estate exactions – again

California developers have historically had problems with regulatory entities. A particular point of contention has been with exactions imposed as conditions to land use permits. As two seasoned land use practitioners expressed it a number of years ago, "California has always been notorious for being the first jurisdiction to sustain extreme municipal regulations. Practitioners in other states have joked about why a developer would sue a California community when it would cost a lot less and save much time if he simply slit his throat." Richard F. Babcock & Charles L. Siemon, The Zoning Game Revisited (1985).

Shortly after Babcock and Siemon made that comment, the U.S. Supreme Court dealt harshly (in the space of two weeks) with two California decisions, noting in one ruling that "the California courts have decided the compensation question [under the 5th Amendment's takings clause] inconsistently with the requirements of the Fifth Amendment," First English Evangelical Lutheran Church v. County of Los Angeles, 482 U.S. 304 (1987), and then invalidating a standard dedication condition imposed by the Coastal Commission as an "out and out plan of extortion," out of step with the law in every other state, Nollan v. California Coastal Commn., 483 U.S. 825 (1987).

Which brings us down to the present, where the Nollan decision figured prominently in the recent decision in Sheetz v. County of El Dorado, No. C093682 (10/19/22). Sheetz involved another illustration of a government entity seeking to have developers pay for the construction or improvement of streets. Here, Sheetz wanted to construct a modest (1,854 square foot), single-family, manufactured home on his property in Placerville. As a condition, the county imposed a fee of $23,420 for local road improvements. Sheetz protested, under state law (both constitutional and statutory) and federal constitutional law. He lost in both the trial court and the court of appeal. The key to Sheetz's complaint is that the amount of the fee was not related to the impact that this particular single-family home project would have on the local streets. It was simply imposed by applying a general formula. Sheetz paid the fee under protest and sent numerous letters to the county reiterating his challenge. The county never responded. Thus, the litigation.

As a matter of legal background, in addition to Nollan, the case focused on two other Supreme Court decisions: Dolan v. City of Tigard, 512 U.S. 374 (1994) and Koontz v. St. Johns River Water Management Dist., 570 U.S. 595 (2013). Nollan held that, to be valid, a land use condition must have an "essential nexus" between the exaction imposed and the burden caused by the development. Dolan expanded that by holding that there must be a "rough proportionality" linking the exaction and the expected impact of the project. Those two cases had dealt with the exaction of property. Koontz closed the circle by holding that the same rule applied whether the exaction was of property or money.

Both the plaintiff and the court of appeal were hamstrung by decisions of the California Supreme Court that restricted the application of the U.S. Supreme Court decisions. Whether that is acceptable as a matter of constitutional law is a matter for a later day. But that won't stop us from discussing it here.

First, the federal baseline. Nollan involved a program of the California Coastal Commission to require all applicants for beachfront development permits to "dedicate" (as noted above, the U.S. Supreme Court would later call this a euphemism for "extort") an easement over the dry sand portions of their lots to the public for recreational use. All the sand. All the lots. From Mexico to Oregon. As the Supreme Court described it, the commission's program was to create "a continuous strip of publicly accessible beach along the coast." In order to justify such a program constitutionally, there must be an essential nexus between the development proposed by the permit applicant and the quid pro quo demanded by the government.

Then came Dolan, which involved a program of the city of Tigard, Oregon, to buffer a creek that ran through the city. The city required of all proposed developers along the creek, a three-fold concentric dedication of property: a floodplain easement adjacent to the creek, a greenbelt outside the floodplain easement, and a bike path outside that one. For this requirement to pass constitutional muster, the Supreme Court concluded that, in addition to Nollan's essential nexus, there must be a "rough proportionality" between the impact of the project and the dedication demanded in exchange for the permit. As the Supreme Court put it, its concept of rough proportionality goes further than a mere finding of "reasonableness," which the Supreme Court believed was too easy for a regulator to satisfy.

Nollan and Dolan both involved exactions of property. Koontz was necessary to explain to regulators that exacting money instead of property did not change the constitutional equation. Same rules applied.

As explained in the Sheetz opinion, the California Supreme Court was apparently not enamored of the U. S. Supreme Court's rules. In a series of decisions, it constricted the "essential nexus" and "rough proportionality" rules to cases where the exactions were imposed as part of an administrative process applied to one property at a time. In that situation, the California court believed the greatest danger lurking was of local government taking "unreasonable advantage of landowners who seek a permit" (as the Sheetz court put it). The California cases are San Remo Hotel v. City & County of San Francisco, 27 Cal.4th 643 (2002), Ehrlich v. City of Culver City, 12 Cal.4th 854 (1996), Santa Monica Beach, Ltd. v. Superior Court, 19 Cal.4th 952 (1999), and California Building Assn. v. City of San Jose, 61 Cal.4th 435 (2015).

In a nutshell, the California Supreme Court has refused to apply the Nollan/Dolan/Koontz rules to development exactions that are generally applicable, as opposed to being imposed in individual administrative proceedings. In its view, the sine qua non for applying such scrutiny is the discretionary application of the land use conditions in individual cases.

With respect, that is not what the U.S. Supreme Court cases hold. Nor, as noted earlier, is it what they factually involved. Although the cases came up from administrative application of rules, the rules in the cases had been established as across-the-board requirements. The respective administrative processes simply applied those standard rules to the matters before them. In Nollan, the general rule was to require a dedication of all dry sand on all projects seeking development permits. In Dolan, the general rule was to require the tripartite rings of dedication from all projects seeking development permits along the creek.

We understand that the court of appeal is an intermediate court in the judicial system that, as one panel colorfully put it, makes up "the Light Brigade in the army of the judiciary. We look down for the facts and up for the law." Myers v. Carini, 262 Cal.App.2d 614, 620 (1968). In that context, this court of appeal panel necessarily felt constrained to follow the California Supreme Court's lead when it restricted the impact and application of Nollan, Dolan and Koontz. But that does not stop the California Supreme Court from reexamining its earlier holdings. Nor does it prevent this intermediate court from complaining about the necessity of following state court holdings that unduly restrict holdings of the U.S. Supreme Court. See, e.g., Morrow v. Hood Communications, Inc., 59 Cal.App.4th 924, 927 (1997) (Kline, P.J., dissenting and explaining that he "cannot as a matter of conscience apply the rule announced" by the Supreme Court). It is time for either the California Supreme Court to revisit its earlier decisions in light of the clear holdings and analysis of Nollan, Dolan and Koontz, or for the U. S. Supreme Court to once again bring California back into line with federal constitutional law.