Can the county charge a monetary fee to offset the impacts of a big new residential subdivision? And if so, what are the limits on the fee? Two notable cases from the last couple of years—one from the North Carolina Supreme Court and one from the U.S. Supreme Court—offer guidance on these questions.

In short, here are the key takeaways. Based on the decisions in Anderson Creek Partners, L.P. v. County of Harnett, 382 N.C. 1 (2022) and Sheetz v. County of El Dorado, California, 601 U.S. 267 (2024):

• North Carolina courts have a definition of “exaction”;
• Impact fees are exactions that must meet tests for essential nexus and rough proportionality under Nollan v. California Coastal Comm’n, 483 U. S. 825 (1987), and Dolan v. City of Tigard, 512 U. S. 374 (1994);
• Courts will apply the Nollan/Dolan tests to exactions whether the exactions are imposed administratively (ad hoc) or legislatively (generally applicable); and
• Questions remain about how precisely to tailor impact fees and where to draw the line between monetary exactions that are subject to Nollan/Dolan and general taxes and fees that are not.

Exactions Generally

Before we jump into the legal details, let’s be clear about terminology. What is an exaction? When a government agency requires a property owner to dedicate property to the public as a condition of obtaining a development approval, that is an exaction. So, for example, if a developer wants to subdivide property for a large residential subdivision development, commonly the local government will require the developer to construct the streets for the development and dedicate those streets to the city or state to be public streets. That  is an exaction.

Over recent years there has been debate and litigation about what counts as an “exaction.” What if the developer pays a fee instead of dedicating property? What if the fee is an general impact fee rather than dedication of property? As discussed more below, each of those—fees-in-lieu of dedication and impact fees—are now treated as exactions.

Exactions are a matter of balancing—ensuring that each side is paying its fair share. On one hand, the private developer ought not force the public to pay for the costs of private development. The developer should be responsible for their own impacts and costs, so if the development is creating new traffic, it is appropriate for the developer to address the transportation needs. At the same time, the public ought not force a private individual to cover an unfair share of a broad public issue. If an intersection is already failing to keep up with current traffic, it is not appropriate for one developer singularly to shoulder the cost of addressing that longstanding, broadly shared community issue.

Note that an exaction is distinct from a mere regulation of land use. If a local zoning ordinance requires a developer to preserve open space as part of a development (private open space), that is regulation of the land use, not an exaction (nothing is given to the public). If, however, the zoning ordinance requires the developer to dedicate the open space to the public as a park, that is an exaction.

Now that we have a definition of what exactions are (and are not) we can turn to the legal issues and limitations. For  land use exactions in a state like North Carolina, there are two distinct legal issues. First, is there statutory authority for the exaction? And second, is the exaction constitutional?

The first question is an essential question about what power has the state delegated to local governments? Local governments in North Carolina need to point to clear statutory authority to require exactions or charge a fee to mitigate development impacts. Notably in Lanvale Properties, LLC v. County of Cabarrus, 366 N.C. 142 (2012), the state Supreme Court was clear that school impact fees are not authorized by general statute. The issues of statutory authority for exactions and fees  are complex, varied, and good subjects for future blogs. You can find relevant discussions in current blogs on school impact fees, system development fees, and subdivision exactions generally.

The second question—is the exaction constitutional?—is the subject of the recent court decisions and this blog.

Exactions and Constitutional Protections

Exactions have long been the subject of U.S. Supreme Court jurisprudence through cases like Nollan, Dolan, and Koontz. But the constitutional limits on exactions are not merely a matter of the federal Constitution; they are also a matter of the North Carolina Constitution. With Anderson Creek Partners, L.P. v. County of Harnett, 382 N.C. 1, (2022), the North Carolina Supreme Court answered these legal questions before the U.S. Supreme Court addressed them and  hinted at the possibility of going further.

Courts recognize the balance necessary between legitimate land use regulations and the Fifth Amendment protection against governments taking property without compensation. Constitutional protections “enable permitting authorities to insist that [permit] applicants bear the full costs of their proposals while still forbidding the government from engaging in ‘out-and-out . . . extortion’ that would thwart the Fifth Amendment right to just compensation.” Anderson Creek Partners, 382 N.C. at 13 (quoting Dolan, 512 U.S. at 387).

The United States Supreme Court addressed that balance between private interests and community impacts through a pair of notable cases—Nollan and Dolan. As stated in the Sheetz decision, Nollan and Dolan set up a two-part test:

First, permit conditions must have an ‘essential nexus’ to the government’s land-use interest. The nexus requirement ensures that the government is acting  to further its stated purpose, not leveraging its permitting monopoly to exact private property without paying for it. Second, permit conditions must have ‘rough proportionality’ to the development’s impact on the land-use interest. A permit condition that requires a landowner to give up more than is necessary to mitigate harms resulting from new development has the same potential for abuse as a condition that is unrelated to that purpose.

Sheetz, 601 U.S. at 275-76 (citations omitted).

In 2013, the U.S. Supreme Court extended the Nollan/Dolan test to monetary exactions in Koontz v. St. Johns River Water Management District, 570 U.S. 595 (2013). In Koontz, the property owner seeking development permits had to either dedicate property for wetlands conservation or pay a fee for off-site wetlands improvements in lieu of on-site mitigation. The Court found that the fee-in-lieu was a monetary exaction and was subject to the Nollan/Dolan test. The Court drew a clear distinction from general taxes or fees which are not subject to the nexus and proportionality test of Nollan/Dolan. But the court found that the particular fee-in-lieu at issue in Koontz was effectively a monetary equivalent to a physical exaction, and thus should be subject to the same limitations as other exactions (nexus and proportionality). Additional discussion on Koontz is available here.

The Koontz decision and related commentary raised notable questions about the scope of the Nollan/Dolan test. Where is the line between monetary exaction and general fee or tax? Does it matter if the exaction is generally applicable (imposed as a legislative act) or ad hoc (imposed on a discretionary, case-by-case basis)?

A North Carolina Case

Those questions have been winding through state and federal courts. The North Carolina Supreme Court addressed the issue in 2022 in Anderson Creek Partners.

Here’s the background. Through an interlocal agreement with a water and sewer district, Harnett County operated a water and sewer system and charged capacity use fees in advance of regulatory permits for land development. Under the 2016 ordinance, the capacity use fee per residential unit was $1,000 for water service and $1,200 for sewer service. According to the ordinance the fees were to recover the cost of growth and ensure new development did not place an additional burden on existing water and sewer customers.

The developer argued that these fees were monetary exactions subject to Nollan/Dolan. The county, as defendant, argued that the capacity use fees were generally applicable fees, not exactions. The North Carolina Court of Appeals ruled in favor of the county, finding that the fees were generally applicable user fees imposed in a consistent manner and at a predetermined amount, not ad hoc charges based on the particular development like the fees that were struck down in Koontz.

The North Carolina Supreme Court disagreed and ruled in favor of the developer. Justice Ervin wrote the opinion for the four-justice majority. Two of those four concurred with language indicating they may interpret the North Carolina Constitution to require a test more stringent that Nollan and Dolan. The three dissenting justices would have found the fees to be generalized fees (not exactions) and warned against the potential wide-ranging implications of the decision. I discuss the implications below, alongside the implications from the federal case.

A Federal Case

The lingering questions of exactions also wound through the federal courts and found their way to the U.S. Supreme Court in Sheetz v. County of El Dorado. In this case, the property owner, George Sheetz (not the gas station chain), proposed  to build a modest prefabricated house on his property. Under the county’s legislatively adopted General Plan, the county required a traffic impact fee of $23,420 as a condition of receiving a building permit. Sheetz challenged the permit as an unconstitutional exaction. On appeal, state courts dismissed the challenge, ruling that the Nollan/Dolan test applies only to challenges of exactions imposed by administrative action, not those imposed by legislative action.  The U.S. Supreme Court offered a narrow ruling on exactions: An exaction is subject to Nollan and Dolan regardless of whether the exaction was imposed through an administrative process (ad hoc) or a legislative (generally applicable) process.

That narrow ruling, though, included a broader implication: The U.S. Supreme Court accepted that general impact fees (not just fees in lieu of property dedication) are monetary exactions.  Though, as discussed below, the opinion and concurrences open questions about the level of tailoring necessary for general impact fees.

These cases—Anderson Creek and Sheetz—have notable implications for development regulation in North Carolina. Here are a few: North Carolina courts have a definition of “exaction”; impact fees are exactions subject to Nollan and Dolan tests for essential nexus and rough proportionality; courts will apply the Nollan/Dolan test for exactions whether the exactions are imposed administratively (ad hoc) or legislatively (generally applicable); and questions remain about how precisely to tailor impact fees and about where to draw the line between monetary exactions (subject to Nollan/Dolan) and general taxes and fees.

Define “Exaction” in North Carolina Caselaw

Prior to Anderson Creek, the North Carolina Supreme Court had not had the need or opportunity to adopt a definition of “exaction.” The court, of course, has taken up a range of cases related to development and exactions, but those cases had not necessitated a clear definition in order to apply the law. Anderson Creek presented that opportunity.

The state Supreme Court adopted the definition previously adopted by the state Court of Appeals, in turn, adopted from former School of Government faculty member, Richard Ducker. The adopted definition of exaction is as follows:

a condition of development permission that requires a public facility or improvement to be provided at the developer’s expense. Most exactions fall into one of four categories: (1) requirements that land be dedicated for street rights-of-way, parks, or utility easements and the like; (2) requirements that improvements be constructed or installed on land so dedicated; (3) requirements that fees be paid in lieu of compliance with dedication or improvement provisions; and (4) requirements that developers pay “impact” or “facility” fees reflecting their respective prorated shares of the cost of providing new roads, utility systems, parks, and similar facilities serving the entire area.

As additional cases proceed and questions arise about the scope of constitutional limits on exactions, this definition may be significant for drawing boundaries for what is an exaction and what is not.

Impact Fees as Monetary Exactions

Under the prior caselaw, through Koontz, we knew that fees-in-lieu of property dedication was an exaction. It was not clear, however, if impact fees (unrelated to any property dedication) are exactions. Anderson Creek and Sheetz make it clear that yes, impact fees for development are monetary exactions subject to Nollan and Dolan analysis.

Nollan/Dolan Applies Regardless of if the Exaction is Ad Hoc or Generally Applicable

There had been a strand of legal reasoning, in courts and commentary, that the constitutional scrutiny of exactions depended upon the nature of the decision that led to the exaction. If an exaction is determined in a case-by-case, ad hoc, or administrative manner—so the argument went—that has a heightened concern for abuse and should be subject to the limitations of Nollan and Dolan. In contrast—this line of reasoning argued—if the exaction is determined by legislative action and is generally applicable, those exactions are properly remedied by the democratic political process, not court review.

The North Carolina Supreme Court rejected that argument and ruled that exactions, including monetary exactions, are subject to Nollan/Dolan whether the exaction is ad hoc or generally applicable.

In Sheetz, the U.S. Supreme Court went the same way. It ruled that exactions are subject to Nollan/Dolan, even if they are adopted legislatively. The opinion outlined the textual, historic, and precedential treatment of the Takings Clause and applied that across to exactions, regardless of the administrative or legislative nature of adoption.

Lingering Question: How Precisely to Tailor Impact Fee “Rough Proportionality”

In Sheetz, the U.S. Supreme Court did not address “whether a permit condition imposed on a class of properties [such as impact fees] must be tailored with the same degree of specificity as a permit condition that targets a particular development.” Separate concurring opinions from Justice Gorsuch and Justice Kavanaugh, point in different directions. Justice Gorsuch indicates that a fee for a class must meet the same tailoring as a fee for a particular property. 601 U.S. at 282. Justice Kavanaugh, joined by Justices Kagan and Jackson, emphasized that Nollan and Dolan did not address “the common government practice of imposing permit conditions, such as impact fees, on new developments through reasonable formulas or schedules that assess the impact of classes of development rather than the impact of specific parcels of property.” 601 U.S. at 284.

With that, the degree of specificity necessary for an impact fee to meet “rough proportionality” is unclear.

Lingering Question: Where is the Line Between Monetary Exaction and Regulatory Fee or Tax

The Anderson Creek and Sheetz cases each clarified the treatment of impact fees (they are subject to Nollan/Dolan analysis), but the cases also leave substantial questions for practice: Where is the line between a monetary exaction and a regulatory fee or tax?

In Koontz, the U.S. Supreme Court addressed the question of cash payments and exactions. That court determined that in-lieu fees—fees paid in lieu of dedication of property—are “functionally equivalent to other types of land use exactions,” and thus must satisfy the Nollan and Dolan tests of essential nexus and rough proportionality. The Court, though, clearly distinguished taxes and user fees which are not exactions and not subject to nexus and proportionality.

In Anderson Creek, the North Carolina Supreme Court went further. Monetary exactions are “not limited to ‘in lieu of’ fees and, instead, encompassed a broader range of governmental demands for the payment of money as a precondition for the approval of a land-use permit.” For the facts of Anderson Creek, that meant that capacity use fees charged in advance of regulatory permits for land development were monetary exactions subject to Nollan and Dolan nexus and proportionality. What other fees charged in advance of regulatory permits are also subject to a nexus and proportionality review? This question remains unanswered.

State Constitution Implications

The Anderson Creek decision clarified the legal framework for exactions in North Carolina in 2022, well before the Sheetz decision answered the questions at the federal level in 2024. Not only that, but the concurring opinion in Anderson Creek highlighted the role of the North Carolina Constitution in these matters. Justice Berger, joined by Chief Justice Newby, joined the majority opinion generally but wrote separately to emphasize the state constitutional aspects. Justice Berger notes that the requirements of nexus and rough proportionality in Nollan and Dolan are “the constitutional floor” for protections against government exactions. He indicated that additional protections may be afforded by the state constitution. Justice Berger wrote, “Although not argued by the parties, given our State’s history of jealously guarding property rights, heightened scrutiny requiring such exactions be directly proportional to the projected impact may be available under the North Carolina Constitution.” Time will tell if the North Carolina Supreme Court will apply more stringent tests to exactions in the state.

Conclusion

The law around exactions is about balance between the governmental authority to regulate land uses and the individual protection from governments taking property without compensation. The line of cases from state and federal courts has refined and clarified the rules for that balancing. With these recent cases, Anderson Creek and Sheetz, the North Carolina Supreme Court and U.S. Supreme Court clarified that impact fees are subject to essential nexus and rough proportionality requirements and that exactions are subject to scrutiny whether they are ad hoc or generally applicable. But, questions remain about where to draw the line between monetary exaction and tax or fee, and how to tailor the proportionality for impact fees.