Builders may fight ‘impact fees’ that fund municipal projects in California, Supreme Court rules

The Supreme Court ruled Friday that developers and home builders in California may challenge the fees commonly imposed by cities and counties to pay for new roads, schools, sewers and other public improvements.

The justices said these “impact fees” may be unconstitutional if builders and developers are forced to pay an unfair share of the cost of public projects.

Developers have contended that limiting California’s high fees would lead to the construction of more affordable new housing.

California state courts had blocked claims arising from “a development impact fee imposed pursuant to a legislatively authorized fee program” for new development in a city or county.

But the 9-0 Supreme Court decision opened the door for such challenges. The justices revived a constitutional claim brought by an El Dorado County man who put a manufactured home on a small lot and was told he would have to pay a “traffic mitigation fee” of $23,420.

The decision could have wide impact in California, since local governments have increasingly relied on impact fees rather than property taxes to pay for new projects.

But the justices did not spell out when such fees become unfair and unconstitutional.

Liberal Justices Sonia Sotomayor and Ketanji Brown Jackson said they joined the majority opinion in Sheetz vs. El Dorado County because it merely allows such challenges.

In a separate opinion, conservative Justice Brett M. Kavanaugh said he saw merit to the “common government practice of imposing permit conditions, such as impact fees, on new development through reasonable formulas or schedules that assess the impact of classes of development rather than the impact of specific parcels of property.”

State and county attorneys had made just that argument. They said it was fairer to impose a development fee on all the lots in an area.

But the justices nonetheless ruled that homeowners and developers may sue to challenge these fees as an unconstitutional taking of their private property. The case will now go back to the California courts.

The Pacific Legal Foundation in Sacramento hailed the ruling as a significant victory for property rights.

“Holding building permits hostage in exchange for excessive development fees is obviously extortion,” said attorney Paul Beard, who represented the El Dorado County homeowner. “We are thrilled that the court agreed and put a stop to a blatant attempt to skirt the 5th Amendment’s prohibition against taking private property without just compensation.”

Beard said El Dorado County “failed to show — and cannot show — that the fee is sufficiently related and proportionate to the traffic impacts” of his client’s “modest home.”

The debate over development fees is especially relevant in California, where local governments have increasingly relied on the charges to finance parks, streets, schools and other infrastructure and services since the 1978 passage of Proposition 13 limited property tax revenues.

The fees have come under scrutiny in other cases as developers and others have blamed them for driving up the cost of housing and for a wide disparity in cities’ fees.

A 2018 study by UC Berkeley’s Terner Center for Housing Innovation found that, depending on the city, fees for new single-family homes could range from $21,000 to $157,000, and could account for 6% to 18% of the median home price.

For decades, the Supreme Court has cast a skeptical eye at California’s regulation of private property. In a pair of decisions, it limited the power of government officials to demand concessions from a property owner in exchange for a building permit.

In 1987, justices ruled for the owner of a beach bungalow in Ventura who was told he could not obtain a permit to expand his home unless he agreed to allow the public access to the beachfront. The conservative majority at the time described this demand as akin to “extortion” and said it violated the 5th Amendment’s clause that forbids the taking of “private property ... for public use without just compensation.”

In a follow-up decision involving a store owner who was forced to allow a bike path on her property, the court said the government may not impose such special conditions on property owners unless it can show an owner’s new development would cause direct harm to the community.

But since then, it has been unclear whether this property right applies to development fees or in situations where fees are set by legislation rather than imposed on a single owner seeking a permit.

Writing for the court in Friday’s ruling, conservative Justice Amy Coney Barrett said that “there is no basis for affording property rights less protection in the hands of legislators than administrators. The Takings Clause applies equally to both — which means that it prohibits legislatures and agencies alike from imposing unconstitutional conditions on land-use permits.”

The case arose when property owner George Sheetz sought a permit to put a manufactured home on a lot he owned in Placerville, outside Sacramento. El Dorado County required him to pay a “traffic impact mitigation” fee to obtain the permit. Some of the money was to go toward upgrades to Highway 50, which runs through the area, but most was to go toward new or expanded roads in the county.

Sheetz paid the fee and obtained his permit, then sued to challenge the fee as unconstitutional. He argued that the taxpayers of the county, not the new owner of a small home, should be required to pay for road building.

The justices agreed to hear his appeal after he lost in the California courts.

State Sen. Scott Wiener (D-San Francisco), who has supported legislation to rein in developer fees, said he didn’t expect Friday’s decision by itself to have a significant effect on the debate in Sacramento because it only called out one extreme situation.

“Ultimately, the solution is the same today as it was yesterday,” Wiener said. “The California Legislature needs to put in place an actual structure for impact fees. Right now, it’s all over the map.”

Wiener said he sympathizes with local governments that turn to the fees because it’s easier than raising revenue through broad-based taxes — but he said some cities use sky-high fees to block housing development.

“There is something a little odd about effectively taxing new housing to pay for societal needs that should be paid generally by taxpayers — by the entire community,” he said.

Graham Knaus, executive director of the California State Assn. of Counties, said in a statement Friday that the organization was still reviewing the ruling to understand its implications.

But he said that “limiting the ability to legislatively enact fees will negatively impact the ability of our 58 counties to protect the health and welfare of their communities and drastically limit the building of vital local infrastructure.”

“In many cases,” Knaus said, “these fees are the only tool available to pay for new infrastructure around certain development projects.”

Times staff writer Liam Dillon in Los Angeles contributed to this report.