Legal Minute: How Do Impact Fees Affect Self-Storage Development?

Anyone who has developed any type of real estate, especially in Western States like California, Arizona, Nevada and Colorado, has suffered the addition of “impact fees” charged to the project by local municipalities where the site is located. Many states regularly fund the construction of their local infrastructure (like roads, bridges and safety services) by charging these fees to developers of the projects in their jurisdictions.

These impact fees have generally been permitted based on state legislative action which authorizes local municipalities to charge developers an additional fee based on the type of project being developed and its location (and its ultimate “impact” to the area). This governmental financing approach has been premised on the understanding that the “Takings Clause” of the U.S. Constitution did not apply to these types of governmental fees.

However, this determination on impact fees changed recently in the U.S. Supreme Court case of Sheetz v. El Dorado County, in which the Court issued an opinion that the “Takings Clause” did apply, even to legislatively permitted fees and therefore the municipalities that are charging these fees must demonstrate that the fees being charged have an “essential nexus” to the government’s use of the land and that the amount of the fees meet a test of “rough proportionality” to the project itself.

The Court’s decision does not prevent local municipalities from charging impact fees. However, the fees charged must meet the scrutiny tests set forth by the Court based on earlier Supreme Court decisions. It appears that future impact fees will have to be calculated to specifically relate to the impact caused by the particular project, and they will need to be assessed based on a proportionality of the costs to mitigate any harm attributable to the particular project. Accordingly, any impact fees imposed will have to be based on an “individualized determination” of that particular development. 

It is clear that in certain states, California in particular, impact fees have been used to offset the local governments’ infrastructure costs that would otherwise be affected by limits on the property taxes that can be charged (like Proposition 13 in California). But the U.S. Supreme Court has recognized that, even though impact fees may be warranted, they cannot be applied using a schedule of fees relate to particular “classes” of project development. Future fees must be determined by looking at the individual parcel at issue.

The decision will likely trigger more litigation in states like California where these types of impact fees have regularly been imposed with the State legislature’s permission. The Sheetz decision generates a significant amount of uncertainty for state and local governments that charge impact fees. Based on the Court’s decision, these governments must reassess their systems for charging fees. The decision also invites developers to push back on the fees being charged to ensure that the fees will meet the scrutiny of the requirements set forth by the Supreme Court in its decision. 

Thanks to Anne Mari DeCoster for raising this important topic!