Agency’s Denial of Construction Permit May Be Unconstitutional
By Richard W. Goeken*
The U.S. Supreme Court has ruled on the scope of demands a regulatory agency may place on a property owner seeking a building permit to develop a plot of land. The recent decision in Koontz v. St. Johns River Water Management District recognizes that developers have a constitutional basis to fight permitting officials that attempt to hold up project approvals until onerous and unrelated conditions are met.
At issue in this case was the legality of a well-known practice whereby a property owner must agree to provide a payment (commonly called development “exactions”) in order to initiate land development. The Supreme Court determined that a state agency’s denial of a construction permit because a developer refuses to pay for offsite remediation of state-owed wetlands is subject to the same test of constitutionality governing an agency’s demand that a developer relinquish an interest in real estate as a condition for the granting of a construction permit. Thus, it makes no difference if the government is demanding that the land owner give up real property or money as a condition to obtaining a permit. In either case, the government agency’s demands during the permitting process must be related to, and be roughly comparable to, remediation of the impacts that would be caused by the project being permitted.
Mr. Coy Koontz sought a permit to begin construction of a building and parking lot on his undeveloped, 15-acre property located at the intersection of two major highways near Orlando, FL. The State of Florida had classified the parcel as wetlands and, as such, Koontz was obliged to offset environmental damage caused to existing wetlands by creating, enhancing, or preserving other wetlands. Prior to construction, Koontz submitted an application to the state permitting agency in which he proposed to develop about one-quarter of his parcel and mitigate impacts to wetlands by: grading the property; providing a dry-bed pond for retaining, and then gradually releasing stormwater; and granting a conservation easement to the State foreclosing any future development on the remaining portion of his property.
The agency denied Koontz’s permit application, but instead suggested that he reduce the size of his development to just one acre, deed a conservation easement to the State on the remaining 14 acres, install a costly subsurface stormwater management system beneath the construction site, and construct retaining walls rather than merely grading the property. This option was less than satisfactory for Koontz.
The agency then made a second offer: Koontz could undertake the construction project and mitigation measures as he had originally proposed – provided that he pay for enhancements to approximately 50 acres of state-owned wetlands located several miles away. The agency told him that it would also “favorably consider” other alternatives Koontz might propose, provided that they were “equivalent” to the agency’s own proposal.
Unwilling to agree to the agency’s demands that he pay for large, offsite remediation, Koontz filed suit in state court under a Florida law that allows for the recovery of money damages when an unreasonable state action results in a “taking without just compensation.” The Florida Supreme Court ruled that no violation of the Takings Clause of the U.S. Constitution had occurred (and therefore no damages were owed under the Florida law) because the state agency had merely: (1) denied the permit, rather than approving it subject to a condition that Koontz pay for offsite remediation; and (2) required Koontz to pay money versus relinquish an interest in specific property, which is the typical source of a takings claim. Koontz appealed to the U.S. Supreme Court, which agreed to review the decision with respect to issues of federal constitutional law.
The Existing Law: The Nollan and Dolan
All parties agreed that the Supreme Court’s past rulings in Nollan and Dolan were relevant to Koontz’s case and that those two cases stand for the proposition that a government agency can lawfully 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 was not satisfied, however, a taking had occurred.
But two key aspects of this particular case differentiated it from both Nollan and Dolan: First, the permitting agency did not approve the permit subject to Koontz giving up something, but instead denied the permit because he refused to pay for offsite remediation. Second, the permitting agency had not required Koontz to relinquish a specific interest in real property, but instead had demanded that he pay for offsite remediation.
The Supreme Court’s Ruling in Koontz
The Koontz decision expands on the Court’s rulings in Nollan and Dolan and more clearly establishes the conditions a state may impose when permitting property development.
Points of General Agreement: All nine 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 demands must meet the standards for “nexus” and “rough proportionality,” initially established in Nollan and Dolan.
All of the justices also appeared to agree that because the permit had been denied and Koontz had not paid for the cost of offside remediation, nothing had actually been “taken” from Koontz by the permit denial within the meaning of the Fifth Amendment. Yet, writing for the majority, Justice Alito found that a constitutional violation may still have occurred because:
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. (Emphasis added.)
Notably, however, the Court did not go on to consider what specific remedies might be available for a permit condition that unconstitutionally burdens, but does not actually “take,” a developer’s rights under the Takings Clause.
Point of Disagreement: The nine justices did disagree as to whether the “nexus” and “rough proportionality” requirements developed in Nollan and Dolan (both of which involved an agency’s attempt to condition approval of a permit on a developer’s agreement to give up an interest in his land) could also apply to the agency’s denial of Koontz’s permit unless he paid for offsite remediation on 50 acres of state-owned wetlands. The five justices in the majority ruled that, although the agency had only demanded money from Koontz, there was a “direct link” between this demand and Koontz’s property. Because of this direct link, the majority concluded that:
The 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 … diminish[es] without justification the value of the property.
The Majority did not decide whether the permitting agency’s demand for money from Koontz had actually violated the Nolan and Dollan requirements – let alone what an appropriate remedy would be if such a violation had occurred – but instead sent the case back to the Florida courts for further proceedings.
In a sharply-worded dissent, the four justices in the minority argued that the Nolan and Dollan requirements only applied when the government’s appropriation of property would constitute a taking if conducted 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 the developer to give up a constitutional right, i.e., the right to just compensation in instances when specific property is actually taken. Because Koontz’s right to specific property had not been taken, the dissent continued that the requirements of Nolan and Dollan simply did not apply. The dissent also warned that the majority’s ruling would blur the distinction between permit fees and taxes that are lawful as compared to permit conditions requiring payment of money that impermissibly burden the applicant’s rights under the Takings Clause.
The full effect of Koontz will likely be played out as lower courts apply the decision 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 U.S. Supreme Court believes that when a government agency denies a construction permit because the permit 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 will be found to impermissibly burden the permit applicant’s right not to have property taken without just compensation. As General Contractors continue to be drawn into the state and federal permitting process, particularly when involved in innovative undertakings such as public-private partnerships and design-build work, this is welcome news.
*Mr. Goeken is a partner in the Washington, D.C. office of Smith, Currie & Hancock LLP where his practice is focused on government contracts, environmental law and regulation. This update is for general, informational purposes only and, as such, does not contain legal opinions applicable to any specific situation and should not be used as a substitute for obtaining personal legal advice. He can be reached at (202) 452-2140 or RWGoeken@smithcurrie.com.
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