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In the children’s fairy tale “Goldilocks and the Three Bears,” a little girl enters the home of the three bears while they are away. She chooses from sets of three items ignoring some and settling on the one that is just right. She becomes complacent, falls asleep, forgetting about her trespass and is faced with confronting the three bears upon their return. In some respects, the story of Goldilocks can serve as a metaphor for the recent U.S. Supreme Court decision Sheetz v. County of El Dorado 601 U.S. (2024). Sheetz held that legislatively imposed development conditions are not automatically exempt from the Takings Clause of the Fifth Amendment. All building permit conditions will now face the same scrutiny as administrative permit conditions and the same constitutional takings tests. Practically speaking, regardless of how a local government chooses to require permit conditions, there will be no “Goldilocks” exemption from these decisions, and they must face the scrutiny of the “Three Bears” of exactions- Nollan, Dolan and Koontz.           

At some point every local official is faced with the challenge of how to address the financial burden of new demands for streets, sidewalks, schools, parks, public utilities, police, fire and emergency services while balancing the costs and constitutional rights of local citizens, landowners and developers. In April 2024, the U.S. Supreme Court weighed in on one important component governments use to address this challenge. In Sheetz, the Court held that the Takings Clause does not distinguish between legislative and administrative land-use permit conditions. For elected and appointed officials and professional staff, this means that development permit conditions, including fees, are not shielded from a Takings claim simply because of the way local government chooses to enact them, such as by local ordinance, zoning regulations or discretionary decisions.   

Sheetz and the Takings Clause

The case involved a challenge to a $23,420 traffic impact fee imposed on a building permit to place a small, prefabricated home on a residential parcel of land in El Dorado County, California because of a rate schedule applicable to all building permits under the county’s general (comprehensive) plan, as opposed to an individually determined fee. George Sheetz argued the fee was an unlawful exaction under the Takings Clause, in part, because the County was required to make an individualized determination that the fee amount was necessary to offset traffic congestion attributable to his specific development.

The County argued that since the fee structure was adopted uniformly by legislation, Nollan and Dolan only apply to permit decisions imposed on an ad hoc basis by administrators. The Supreme Court decided in favor of Sheetz reasoning that “there is no basis for affording property rights less protection in the hands of legislators than administrators.” However, the decision was narrowly focused and did not address the validity of the traffic impact fee or whether a condition imposed on a class of properties (e.g. residential, commercial, etc.) must be tailored with the same degree of specificity as a permit condition that targets a particular development.

Exactions and the “Three Bears” of Permit Conditions Takings Cases

Unlike most states, Michigan does not specifically authorize impact fees for monetary payments of off-site improvements such as roads. Impact fees or mitigation fees are collectively referred to as exactions. An exaction is a condition imposed upon the development of a certain property that is often meant to make the developer or landowner internalize the negative externalities or costs associated with the proposed development. (see Koontz v. St. Johns River Water Mgmt. Dist., 570 U.S. 595, 605 (2013). Exactions for on-site improvements are commonly used in Michigan as a condition of approval for residential subdivisions or Planned Unit Developments including property dedications and in-kind construction of public facilities (curb and gutter, water and sewer hook-ups, etc.).      

The U.S. Supreme Court has decided a trio of exaction cases that address the potential abuse of the individual permitting process and how exactions survive constitutional scrutiny. These cases include: Nollan v. California Coastal Commission, 483 U.S. 825 (1987), Dolan v. City of Tigard, 512 .S. 374 (1984), and Koontz, 570 U.S. 595 . Permit conditions must have an “essential nexus” to the government’s land-use interest (Nollan), a “rough proportionality” to the development’s impact on the land-use (Dolan) and may not require a landowner to give up (or pay) more than is necessary to mitigate harms resulting from new development (Koontz). In general, the Fifth Amendment may be violated through these cases when individual property owners must bear “public burdens which, in all fairness and justice, should be borne by the public as a whole.” (See Armstrong v. United States, 364 U.S. 40 (1960)).

What Pitfalls does Sheetz present to Communities and Local Officials?

Imposing conditions on development permits can often result in tension between developers and local officials. How the impacts of development are addressed through permit conditions can have legal consequences that should be analyzed early in the process. The following are a few examples of situations that may arise under Sheetz.

1. Now any fee will be subject to a takings challenge. This could increase the vulnerability of legal challenges to zoning fees and escrows. A review of fees may be necessary to determine their appropriateness and avoid a monetary exaction under Koontz.
2. Even in a legislative scheme regarding fees, conservation easements, etc., there needs to be a formula or set of standards that will justify an individualized assessment of the project. The Nollan-Dolan test developed by the Supreme Court is designed to carefully balance the competing interests of the landowner and the government in the context of development exactions.
3. While Impact Fees are not authorized per se in Michigan, the use of other techniques such as Community Benefit Agreements or Develop Agreements must be tailored to avoid an exactions takings challenge. A condition that requires a landowner to give up more than is necessary to mitigate harms resulting from new development could result in a takings claim.

Avoid unreasonable conditions by making certain they are directly related to the review standards within the Zoning Ordinance. The Michigan Zoning Enabling Act requires conditions to “be necessary to meet the intent and purpose of the zoning ordinance, be related to the standards established in the ordinance for the land use or activity under consideration, and be necessary to insure compliance with those standards.” (MCL 125.3504(4)(c))

Michigan Law Adopts Nollan-Dolan Test for Permit Approval Conditions

Michigan’s courts have adopted the Nollan Dolan test to determine if a conditional approval imposes unconstitutional conditions. Just last year, Michigan courts affirmed that “the government’s demand for property from a land-use permit applicant must satisfy the requirements of Nollan and Dolan even when its demand is for money.” (Charter Twp of Canton v 44650, Inc, unpublished per curiam opinion of the Court of Appeals, issued on April 13, 2023 (Docket No. 354309)). “Generally, under the unconstitutional condition’s doctrine, the government cannot attach conditions to government benefits that effectively coerce individuals into relinquishing their constitutional rights.” Id. at 26-27. However, certain conditions will be upheld, “so long as there is a nexus and rough proportionality” between the condition that the government demands and the social costs of the development. Id. at 29.

As a rule of thumb, when imposing conditions on any permit, always ensure that the condition is tailored to alleviate burdens caused by the development and not to achieve some ancillary purpose. The requirement should be carefully tailored to alleviate those concerns without overburdening the developer. Moreover, if the community is trying to use the permit conditions as a means to an end that is unrelated to the particular project (e.g. using conditions to improve roadways that are not impacted by the development), the condition will not satisfy the Nollan Dolan test.

Moving Forward with Permit Conditions Under Sheetz

Sheetz v. County of El Dorado held that an unconstitutional conditions (Nollan/Dolan) analysis applies to monetary exactions imposed on development, regardless of whether they are administrative or legislative in nature. The Court held that the Constitution’s text does not limit the application of the takings clause to a particular branch of government; the requirement for just compensation when the government expropriates private property does not vary between branches.

However, the Court stated that when government can deny a building permit for a valid police power purpose, it can place conditions on the development to the same end. For example, if a development will increase traffic congestion, the local government can condition a building permit on the property owner’s willingness to deed over the land under the Court’s reasoning. At that point, the government can ask the landowner to choose between “accepting the bargain or abandoning the proposed development,” which the Court referred to as a “hallmark of responsible land-use policy.”

Overall, it remains to be seen whether Sheetz will have the effect of shifting development costs onto taxpayers in some cases or increase development costs in other communities. To avoid litigation costs some communities may further limit the use of permit conditions. Nonetheless, local officials and staff will need to gain expertise or seek legal counsel to make individualized determinations of permit conditions. As with the “Goldilocks” fairytale, the lasting moral of the story under Sheetz may be to balance wisely the use of permit conditions when under the roof of Nollan-Dolan-Koontz, the “Three Bears” of exactions and the Takings Clause.

By Wayne Beyea

This publication is intended for educational purposes only. This communication highlights specific areas of law and is not legal advice. The reader should consult an attorney to determine how the information applies to any specific situation.