State and local governments, through their individual permitting and regulatory processes, play a critical role in the size, scope, and cost of all types of commercial real estate projects, from new development to the restoration of existing commercial buildings and warehouses. Each state and local unit of government has its own approach; these vary, based on geography, natural resources, climate, and other governmental or political priorities. With 50 states and more than 89,000 local units of government in the U.S., the permitting and regulatory structure can be complicated, unpredictable, inconsistent, and/or bureaucratic, depending on the local jurisdiction.
The commercial real estate industry is acutely aware of the government’s role in the permitting process and the complexity of compliance in order to complete a project. If a governing jurisdiction places unfair or excessive conditions on a commercial project that infringe the rights of the property owner, it may even constitute a misuse of government authority and a violation of the Takings Clause within the Fifth Amendment of the U.S. Constitution. The Takings Clause states, in part, that no person “shall be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”
The U.S. Supreme Court recently clarified which government actions constitute an unconstitutional taking without just compensation in Koontz v. St. Johns River Water Management District. Unlike the Supreme Court’s decision in Kelo v. City of New London, which sided with local government by affirming the city’s proposed condemnation of privately owned land for “public use” as consistent within the meaning of the Fifth Amendment, in the Koontz case the Supreme Court agreed with a central Florida property owner, Cy Koontz Sr., who claimed his rights were violated under the Fifth Amendment by excessive restrictions and conditions placed on the property’s development by the regional water management district.
The 5-4 decision overturned a Florida Supreme Court decision that found in favor of local regulators and against the landowner. Given the broad implications for how land use and other government agencies obtain concessions from landowners, NAIOP joined with other national real estate associations in filing an amicus brief with the Supreme Court in support of the plaintiff landowner.
Specifically, Koontz requested a permit from the St. Johns River Water Management District in 1994 to develop land in addition to that which had been originally allowed in a permit. The water management district agreed, but demanded in return that Koontz deed the rest of his property into a conservation area and perform wetlands mitigation work on other county land several miles away. Koontz agreed to deed the property, but refused to perform the mitigation work, and sued St. John’s, claiming that the permit requirements amounted to an unconstitutional taking without just compensation.
The majority opinion, written by Supreme Court Justice Samuel Alito, reasoned that the fact that the state did not actually take any property from the landowner was not the only consideration in determining the outcome, stating that “[e]xtortionate demands for property in the land-use permitting context” also would violate the Fifth Amendment protections afforded by the Constitution. While it accepts the government’s ultimate authority to use wetlands mitigation requirements in public policy, the majority opinion enables landowners and developers to demand a heightened scrutiny of the land use decisions that affect them.
While state and local governments retain their oversight role and authority to place requirements or conditions on the development of a property, the Koontz decision more clearly defines what constitutes a taking of an owner’s property under the Fifth Amendment. The full impact of the Koontz decision has yet to be realized, but coalitions are forming to look at land use management reform and best practices at the state and local levels.
NAIOP recognizes that the debate about transparency in government and the decision-making process is growing within state capitols and city halls across North America as governments continue to enact new laws and regulations impacting commercial real estate. In much the same way that NAIOP Minnesota is working to establish greater transparency in the reporting of local budgets that drive property taxes (see “Working Toward Greater Transparency in Local Government Budgeting”). NAIOP supports state and local efforts to establish greater transparency in the permitting and regulatory process with requirements to reveal the identity of the party challenging a commercial development project, who is actually financing that challenge, and the merits of that challenge based on facts.
Because government plays a critical role in commercial development projects, the commercial real estate industry must remain engaged and work with state and local authorities to improve the permitting and regulatory processes and prevent any abuses as the relationship between government and property owners continues to evolve.