Mitigation Fees: Where Are We?

In this episode of Digging Into Land Use Law, Joseph Haney and Ben Rubin dive into the pivotal case of Sheetz v. County of El Dorado and discuss its far-reaching implications on the affordability of homes, not just in California, but nationwide. Listen as they unravel how a major legal decision could reshape housing costs through the lens of development, impact fees and local government constraints.

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Transcript: Mitigation Fees: Where Are We?

0:00:00.1 Joseph Haney: Today, we're diving into the pivotal case of Sheetz v. County of El Dorado and its far-reaching implications on the affordability of homes, not just in California, but nationwide. My name is Joseph Haney, and I am a partner in Nossaman's Real Estate Practice Group. Please join me and my colleague, Ben Rubin, a partner in the firm's Environment and Land Use Practice Group, as we unravel how a major legal decision could reshape housing costs through the lens of development impact fees and local government constraints.

0:00:29.1 Speaker 2: Welcome to Digging into Land Use Law, Nossaman's podcast covering the development of all things in, on, or above the ground.

0:00:45.6 JH: So Ben, why should we care about the decisions in Sheetz v. County of El Dorado?

0:00:51.9 Ben Rubin: It really goes to the affordability of homes in California and more generally across the nation, but because we're looking at a California Court of Appeal decision that was appealed to the U.S. Supreme Court, it really has potential significant implications for California home pricing. And that's because a big component, and it seems to be getting bigger each year, is the fees that are associated with home pricing. So it's not just the land, it's not just the construction costs. There are a number of fees that both local jurisdictions and others impose, which increase the cost of a home. And when you're dealing with affordability issues, like you are in California up and down the coast, anything that perhaps reduces those fees could make that housing more affordable.

0:02:03.9 JH: And what is the authority for cities, counties, and other municipal bodies to charge these fees? And are there any limits on them statutorily?

0:02:21.2 BR: So California has the Mitigation Fee Act, which is a process that a jurisdiction has to go through in order to impose certain types of fees. There are other things that can be charged that are not considered fees subject to the Mitigation Fee Act. Taxes, for example, aren't considered fees subject to the Mitigation Fee Act. There are other things that, based upon open questions with the U.S. Supreme Court, may or may not qualify as fees subject to the Mitigation Fee Act, which we may discuss later, including things like inclusionary housing. But for purposes of California, there is a Mitigation Fee Act. And for the longest time, there was a differentiation between what was considered a project-specific fee and a legislatively enacted fee, which would apply to a class of properties as opposed to a specific project. The difference there being that under the Mitigation Fee Act, when it was a project-specific fee, there were requirements to establish both that there was a nexus and rough proportionality between the fee and the project-specific impacts. However, for purposes of those legislatively enacted fees, up until the Supreme Court's decision in Sheetz, the Mitigation Fee Act allowed for just a demonstration of a nexus. So there was not the same requirement to demonstrate a rough proportionality between that legislatively enacted fee and a project.

0:04:09.7 JH: So it's probably worth taking a step back at this point and talking about those limitations of nexus and rough proportionality. If you were a law student for the last 30 plus years or you worked in real estate, you've heard the cases Nollan and Dolan. But can you describe the test that those cases set forth?

0:04:32.7 BR: Yeah, absolutely. So those are two Supreme Court cases, one of which came out of California dealing with imposition of an exaction associated with a development project in the coastal zone. That case, Nollan, required a demonstration of an essential nexus between the project, the project impact, and the impact fee or the exaction that the public agency, in that case the California Coastal Commission, was requiring for purposes of allowing that project to proceed. So a project approval, it's a condition of approval is what was in that case. And so the Supreme Court said that you can't just condition approval of a project on anything. You need to have a nexus between the impact of the project and what you're trying to mitigate. So it could be a fee or it could be an actual physical exaction, such as in that case, public access. So the other case, the Dolan case, took it a step further and said, yes, there is this essential nexus requirement, but there is also this requirement of rough proportionality. That is, not only must you demonstrate a nexus between the project, the project impact, and that condition of approval that is going to mitigate for that impact, but that mitigation can only be roughly proportional to the project's impact. In other words, you can't force that one project to mitigate for all of the impacts associated with a similar type of project. It's only that specific project's impact that you can require mitigation for. Rough proportionality is a key term there because it does not say proportional. So it does not need to be one-to-one. There is more discretion for a public agency to impose a fee that is accounting for some vagaries in the numbers. And so roughly proportional is all that is required. If it is beyond rough proportionality, and if the public agency can't demonstrate rough proportionality for that project-specific impact, then you can have a takings claim. So that condition goes beyond what the Constitution will actually allow.

0:07:09.8 JH: So Dolan was decided in 1994. So you've got this 30-year period where you've got these two tests. What comes along in Sheetz that changes it? What's different or unique about that case that was not already covered over literally decades of Supreme Court precedent?

0:07:38.4 BR: And the Supreme Court had never addressed to what extent when you have legislatively enacted mitigation requirements or fees, what is the standard? Does Nollan-Dolan apply in that situation? Every jurisdiction had applied Nollan, but the question was, does Dolan rough proportionality apply to those legislatively enacted requirements, or do they not?

0:08:06.1 BR: Various states had come to differing conclusions, and the Supreme Court decided that they would finally resolve that issue in Sheetz. So, it's often the case that the Supreme Court will want to allow the state courts or lower federal courts to deal with an issue in order there can be a robust body of law for them to consider. Again, Sheetz provided them that specific opportunity to address what is the requirement. Is rough proportionality, that Dolan standard, required for all mitigation fees, or is it only for those project-specific fees? And the Supreme Court said, yes, it is required for all mitigation fees. But it also didn't address some very important issues associated with that. For example, it didn't tell us what the standard is or what that test is to determine rough proportionality in the context of these legislatively enacted fees. It decided that it would remand that issue back to the California courts so they could take a stab at that in the first instance. And again, this goes back to how the Supreme Court doesn't really want to decide things where there hasn't been an opportunity for the lower courts to deal with the issue so that they can consider all potential sides.

0:09:47.2 JH: And Ben, just because you've been using the phrase or the term legislatively enacted fees, could you explain what is a legislatively enacted fee, give some examples of it, and how that might be different from other fees?

0:10:03.5 BR: Absolutely. So a project-specific fee would be something that is not generally applied to all classes of development or particular classes of development. It would be a jurisdiction looking at this specific project, determine that there are these specific impacts, and so they will require mitigation for those specific impacts. So it could be things such as this project will result in the removal of two oak trees, and so they need to pay this mitigation in order for the planting of oak trees in some other area. The legislatively enacted fees are dealing with a larger class of project. So it will apply in the typical sense to all classes of a particular type. So for example, what was at issue in the County of El Dorado case, Sheetz v. County of El Dorado, was a transportation impact fee that was applied to single-family residential developments. And it was the same impact fee for each single-family residential development in a specific zone. So there were more gradations in the County of El Dorado case. It was actually eight different zones and 11, I believe, different classes of projects. But for a residential development in a particular zone, all of those residences had to pay the same impact fee.

0:11:48.2 BR: So that's dealing with a class of projects. It's not dealing with just one specific project. And in that case, in the Sheetz case, you had that transportation impact fee that was being imposed on a small home project when that same transportation impact fee would be imposed on a 7,000 square foot home. So it's that the size of the home didn't matter. And she brought that issue to the court and said, "Well, it should matter. There should be a difference." Again, the Supreme Court didn't actually say that there should or shouldn't be a difference. All it said is that the rough proportionality requirement would apply. But that's a demonstration of how you can have a class of development that is subject to rough proportionality, and then you can have a project-specific determination that is subject to rough proportionality.

0:12:49.7 JH: So is this a big shift for development impact fees, particularly in California?

0:12:59.6 BR: It's a very big shift, although we don't know how big it is just yet. And that is because of the open question as to what is the standard for determining rough proportionality. In that Sheetz decision, the U.S. Supreme Court said we're gonna kick that issue back to the Court of Appeal, the California Court of Appeal. But there was a concurrence by Justice Gorsuch that advocated for the same project-specific inquiry that would be required for those project-specific impact requirements. So saying that it should be treated exactly the same as any other impact fee or impact requirement, whether it is a project-specific impact or this legislatively enacted impact fee, the same analysis should apply. Now you had a competing concurring decision authored by Justice Kavanaugh and joined by Justices Kagan and Jackson that said there was nothing in the Sheetz majority that questioned the ability to continue to use schedules or formulas for determining those legislatively enacted fees and rough proportionality. So what often happens in California is you'll do these nexus studies for public agencies, and public agencies will both demonstrate that essential nexus, or at least they'll try to, I should say.

0:14:44.1 BR: The purpose of that nexus study is to demonstrate an essential nexus in that the impacts through substantial evidence is roughly proportional to this class of development. So they'll assign, for example, residential development generally has X number of trips, or between X and Y number of trips. That generally results in this amount of impact, and therefore this compensation is appropriate. So that kind of sort of schedule on a class-wide basis as opposed to a project-by-project specific inquiry, which is what Justice Gorsuch advocated for versus what Justice Kavanaugh, Justice Kagan, and Justice Jackson advocated for. If the Supreme Court were to say that no, the same analysis that applies to a project-specific mitigation measure applies to legislatively enacted mitigation measures, that would be a gigantic shift. And that would require essentially the end of legislatively enacted fees because you cannot do a project-specific inquiry without knowing what the project is, and legislatively enacted fees are established based upon project types, not any specific project. So if that's the way that the Supreme Court were to eventually decide, that would be a major shift. If the Supreme Court decides and the lower courts decide that the use of schedules and reasonable formulas are still permitted, there would likely be a number of jurisdictions that are required to update their nexus studies, but very well could result in the same exact fees being imposed in the future, just they now provide more evidence to support those fees.

0:16:48.4 JH: So we've talked a lot about this from a legal perspective, but if we were to try to get more practical, has anything changed for developers?

0:16:59.3 BR: There's definitely a change for developers in the sense that they are in a much better position now than they were just a couple of years ago for purposes of challenging fees. The open question of what Sheetz means can cause some public agencies to decide that they don't want to take the risk of having their development impact fees invalidated if they were enacted through some legislative program. And a housing developer can then go in, maybe push on that Sheetz issue and get a significant reduction in fees. So I think what it is is a tool through which developers can now go into the various public agencies, the local jurisdictions and say, "Let's go ahead and reduce the fees that you were originally gonna impose." That is a going-forward type situation because under the Mitigation Fee Act, in order to challenge a fee, you had to pay the fee under protest. And so the Sheetz decision doesn't really change what happened in the past. It only allows for a change going forward.

0:18:22.4 JH: With regards to your statement that developers are in a better position to challenge fees, have you seen a good amount of activity in that area? And are you seeing developers being successful?

0:18:36.5 BR: I think we've definitely seen developers sending more letters into jurisdictions saying that the fees should be reduced. We've seen some success associated with that strategy. There are some jurisdictions that feel very confident in their position and the adequacy of their nexus study and so have decided to force the developer to make a decision. We've also seen jurisdictions that have decided that the cost associated with a potential Mitigation Fee Act challenge versus the reduction in fees weigh in favor of just simply reducing the fees. So there's that analysis that can take place. It's interesting in that the use of these challenges have actually gone beyond mitigation fees as they are traditionally understood. As I mentioned earlier, there has been a push to try to use the Sheetz decision to go after inclusionary housing requirements. So in 2015, you had the California Building Industry Association v. City of San Jose case, the California Supreme Court case, that essentially concluded that inclusionary housing requirements were not exactions or fee mitigation requirements that were subject to Nollan and Dolan.

0:20:14.2 BR: And after Sheetz, you've seen a resurgence of cases trying to challenge that determination. A lot of those challenges that I'm aware of have been filed in federal court because they feel like the federal forum is more friendly to them, which makes sense because if you are in a California state court and the California Supreme Court has spoken on an issue, that court is required to follow the California Supreme Court's case decision on the issue. So filing in federal court makes sense. I've yet to see that that argument actually prevail, but I think it's still early on. And what I anticipate happening is that there will be various challenges in various federal courts sort of up and down the California coast until they get a favorable decision or until the Ninth Circuit says that inclusionary housing is not subject to Nollan and Dolan.

0:21:18.2 JH: What about... You talk about this bleeding into other areas, what about VMT? Does Sheetz have some potential impact on VMT?

0:21:33.9 BR: Sheetz itself doesn't necessarily have an impact directly on VMT, although as a result of AB 130 from last year, Assembly Bill 130, I should say, the Public Resources Code was modified to expressly require or reference that mitigation measures should be roughly proportional and that there should be substantial evidence demonstrating a nexus between a mitigation measure and a project impact. So those are essentially the Nollan and Dolan standards, which Sheetz reinforced. Recently, LCI issued the technical guidance for the proposed VMT program. In May, they closed public comment on that. Part of what they focused on and reinforced in that technical guidance was the need to demonstrate both a nexus and rough proportionality for the mitigation measures associated with VMT reduction. Those concepts have worked their way into CEQA expressly now, and they're at least acknowledged by LCI in their latest technical guidance. For the longest time, it was considered for purposes of CEQA, it was not a violation of CEQA to have a public agency require a project proponent to over-mitigate for a potential impact or perceived impact. Now with this change and with the reinforcements of Sheetz, you are more likely to see pushback on those types of over-mitigation requirements that public agencies might have done in the past.

0:23:35.8 JH: Just then as developers and builders are getting more aggressive and using Sheetz to challenge fees, are public agencies reading Sheetz and responding with either more robust studies or seeking to have more measured fees when approving projects or enacting standards?

0:24:03.8 BR: I think your question is right. And what we've seen since Sheetz is, depending upon how confident a public agency feels about its studies, They will either stick with them and not make modifications to their programs, their fee programs, or they have decided that there is perhaps some vulnerability and they are in the process of or have already updated those nexus studies to try to conform better to those concurring opinions by Justice Kavanaugh and saying what is permitted, reasonable use of formulas and schedules to a sufficient class of projects as opposed to being more generic, as all residential shall pay this. Maybe they will divide it by multi-family of some size, residential of some size, single-family of some size. Office space is often done by square foot, so it's already pretty discrete. But that's what we've seen since Sheetz. There have not been as many new nexus studies as I would have anticipated, but that was probably because when on remand from the Supreme Court, the Court of Appeal upheld the County of El Dorado's transportation impact program. That decision was appealed to the California Supreme Court. They denied the appeal, but they depublished the decision afterwards, which under the California Rules of Court doesn't necessarily mean that they disagree with a decision, although it's more often the case that that is what it means. What they disagree with, no one really knows.

0:26:21.8 BR: For example, in the remand, the Court of Appeal decided to set up a sort of burden-shifting regime where if the public agency demonstrated that the use of schedules and formulas was appropriate, the burden would then shift in that case to Sheetz to demonstrate that the fee that was imposed was not roughly proportional. So initial burden is on public agency. Once they meet their burden, it then shifts to the developer to say, "Even so, their fee program fails and fee in this case fails because it's not roughly proportional." So we don't know if when the California Supreme Court depublished, they disagreed with the standard that was set up, they disagreed with the conclusion that was reached, or they disagreed with burden-shifting or some other aspect of the decision. That's all to say that again, once you have that Court of Appeal come down in favor of the public agency, a lot of public agencies felt reaffirmed or confident in their belief that their existing nexus studies were adequate.

0:27:40.7 JH: So Ben, as we draw to a close, the Sheetz decision came down two years ago. Where are we and what should people be looking for?

0:27:51.3 BR: Yeah, the Sheetz decision came down two years ago. And right now there's another cert petition to the U.S. Supreme Court by Sheetz. As we discussed, the Supreme Court did not decide that standard, how to tell whether or not something is roughly proportionate. The Court of Appeal established this burden-shifting regime and concluded that the County of El Dorado's program satisfied that Dolan standard, it was roughly proportional. Sheetz has now filed that cert petition. It has been fully briefed, and it is possible that the Supreme Court will decide to grant that petition and tell the various jurisdictions as to what standard should be applied when looking at legislatively enacted fees. For purposes of granting a cert petition, four justices need to vote to take the case. In this scenario, we already have four justices who are on opposite sides of things. Remember, we have Justice Gorsuch, who thinks that there should be a specific project inquiry, and then you had Justices Kavanaugh, Kagan, and Jackson, who believe that you can use schedules and reasonable formulas. So if those four decide that it's worth taking the case now and providing some clarity, it could be that Sheetz is heard by the Supreme Court and we do get that clarity. It is not often that the Supreme Court will take a case so close to when it's previously heard, but it is not unheard of. There are some examples of that, like the Sackett versus EPA decision and some other handful of cases. So it's possible, but if I were gonna bet on it, I would say it's unlikely because, as I discussed before, the Supreme Court really likes to let the lower courts struggle through with some issues, build up the case law so that they can see all sides. They just decided this issue two years ago. There are a number of courts still, particularly lower courts, federal courts, dealing with the issue. And I think that is more likely than not that they will deny the cert petition. So it'll probably be at least a handful of years before we get some real clarity, at least from the Ninth Circuit in California, as to whether or not a standard should be project-specific or it can be these formulas and schedules.

0:30:42.9 JH: So with that in mind, we'll keep our eyes open, focused on the courts. And maybe we have you back in another month, and maybe we have you back in a period of years when we finally have greater clarity on what Sheetz means with more authority going forward.

0:30:58.3 BR: Sounds good. Appreciate the time. Thanks, Joseph.

0:31:01.1 JH: Thanks, Ben. Thank you to our listeners for joining us for this episode of Digging into Land Use Law. For additional information on this topic or other environment and land use matters, please visit our website at nossaman.com. And don't forget to subscribe to Digging into Land Use Law wherever you listen to podcasts so you don't miss an episode. Until next time.

0:31:23.7 S2: Digging into Land Use Law is presented by Nossaman LLP and cannot be copied or rebroadcast without consent. Content reflects the personal views and opinions of the participants. The information provided in this podcast is for informational purposes only, is not intended as legal advice, and does not create an attorney-client relationship. Listeners should not act solely upon this information without seeking professional legal counsel.