The Sheetz Decision: Agencies May Now Have To Show Their Work on Impact Fees

Editor’s note: This blog has been updated from the original to expand on the nuances of the recent ruling in Sheetz v. El Dorado County.

Spend any time in a planning department and the names Nollan and Dolan will be discussed like the latest social media stars. Nollan and Dolan are not Instagram influencers, though, they are legal shorthand for two U.S. Supreme Court cases that describe the limits for government-imposed conditions on development: Nollan v. California Coastal Commission (1987) and Dolan v City of Tigard (1994).

Nollan and Dolan require that permit conditions must:

1. have a nexus to the government’s land-use interest, and
2. be roughly proportional to the development’s impact on the land-use interest.

As an example, a landowner proposes a new cellular tower on a developed parcel in Happy Valley, Washington. Happy Valley wants bicycle lanes throughout the city. As a condition to granting the various tower development permits, Happy Valley requires that the landowner install a bicycle lane on the frontage of the parcel and dedicate 30 feet of right-of-way for the bicycle lane. Such a condition would probably not satisfy Nollan and Dolan since a cell tower has no obvious relationship to bicycle traffic and the 30 feet of right-of-way is likely disproportionate to the impact of a cell tower — but what if Happy Valley instead proposed that the developer pay a transportation impact fee to fund the bicycle lane installation?

The Washington State Supreme Court has previously held that impact fees and other legislatively imposed requirements are not subject to the Nollan and Dolan test. In City of Olympia v. Drebick (2006), the state supreme court drew a distinction between “legislatively prescribed development fees” and “direct mitigation fees,” finding that impact and other user fees are legislatively prescribed and apply broadly to all development. As such, these fees were treated as taxes that are subject to statutory requirements but not to the Nollan and Dolan test. In contrast, individualized exactions were subject to the Nollan and Dolan test.

So, may Happy Valley impose the impact fee? Yes, but Happy Valley may have to affirmatively defend how it came up with that fee.

The Sheetz Case

Now the U.S. Supreme Court (Court) enters the scene with its unanimous decision in Sheetz v. El Dorado County (2024).

In Sheetz, the Court held that generally applicable, legislatively imposed conditions on development are not automatically exempt from scrutiny under the Takings Clause of the Fifth Amendment. In other words, legislatively imposed development conditions are now subject to the Nollan and Dolan test, meaning they must have a nexus to the development and be roughly proportionate to their impact.

The Court’s ruling in Sheetz was fairly narrow in several ways. First, as further explained below, the Court did not decide whether a legislatively imposed condition on a class of properties must be tailored with the same specificity as a condition that is imposed on a particular development.

Second, the Court did not address the threshold question of whether an impact fee is a “taking,” such that it would be subject to constitutional scrutiny in the first place. Accordingly, the Court did not directly find that impact fees, like those promulgated pursuant to RCW 82.02.050-.090, are subject to Nollan and Dolan. That said, Sheetz means that these kinds of impact fee programs are no longer automatically exempt from constitutional scrutiny as legislatively prescribed fees.

This ruling opens the door to challenges of impact fees as unconstitutional takings under Nollan and Dolan, and Washington municipalities should be prepared to respond to such challenges on that basis.

Washington Impact Fees

Haven’t impact fees have always had to have a nexus and proportionality to the new development? RCW 82.02.050(1)(b), which governs impact fees in Washington, states that such fees are to “promote orderly growth … [and ensure] that new growth and development pay a proportionate share of the cost of new facilities needed to serve new growth.”

WAC 365-196-850 contemplates nexus and proportionality by requiring that impact fees:

...only be imposed for system improvements that are reasonably related to the new development; ... not exceed a proportionate share of the costs of system improvements that are reasonable related to the new development; and must be used for system improvements that will reasonably benefit the new development.

This reads a lot like the Nollan and Dolan requirements: So what is the effect of the Sheetz case on Washington impact fees?

Effect of Sheetz in Washington

The Sheetz case affects Washington municipalities in two ways. First, Sheetz will likely shift the burden from the developer to the municipality when impact fees are challenged. Under Nollan and Dolan, the burden is on the municipality to prove that the fee has a nexus to the proposed development and is proportionate to those impacts. Because impact fees have been treated as taxes in Washington, the burden previously was on the developer to prove that the fee was wrongly applied or calculated. See Douglas Properties II, L.L.C. v City of Olympia (2021).

In practical terms, this means that municipalities should be prepared to show their work when calculating impact fees. This may seem like a minor distinction, but it does mean municipalities may no longer get the benefit of the doubt in these cases.

Second, the U.S. Supreme Court in the Sheetz ruling explicitly did not decide whether a condition imposed on a class of properties, like an impact fee, must be tailored with the same specificity as a condition that is imposed on a particular development. Again, with this question open, municipalities must be prepared to show their work in developing impact fees. The more specificity a municipality can show in their impact fee calculation, the stronger their argument that the fee meets the Nollan and Dolan requirements.

Just how tailored any particular impact fee must be is something another court will have to determine at some future date.

Editor’s Commentary

MRSC’s webpage on Impact Fees includes a section on how to determine fee rates. This section notes that the rate studies used to determine impact fees should be periodically updated, and the webpage includes examples of cities that build in automatic increases based on changes to the Consumer Price Index (CPI).

MRSC will monitor whether the Sheetz decision means that cities which provide for automatic indexing will have to provide more justification for building in that indexing factor, and we will update the page accordingly.