An analysis of affordable/work-force housing initiatives and their legality in the state of Florida.

In Florida, "local governments have no ... authority to tax, other than ad valorem taxes, except as provided by general law." (1) Up until the middle of the 20th century, local governments in Florida relied almost exclusively on public revenue sources, such as ad valorem taxes, to fund capital growth. However, over the past 40 years, local governments have increasingly turned to private revenue sources by imposing impact fees and exactions on new development. "The basic theory behind ... impact fees [i]s that users of capital facilities such as sewers or roads could fairly be charged the cost of providing the additional facilities required for their use." (2) This type of cost-shifting helps local governments finance necessary infrastructure improvements without dipping into the public coffers. (3) Nevertheless, impact fees and development exactions must not violate the Florida Constitution, U.S. Constitution, or any federal legislation that binds the states. (4) Many of the early attempts in Florida to impose impact fees were challenged on the basis that such fees constituted an illegal and unconstitutional tax. (5) From those early cases evolved a test that local governments must satisfy to lawfully impose impact fees or development exactions.

The Impact Fee Rationale

The seminal case addressing the legal requirements attendant to the assessment of an impact fee is the Florida Supreme Court case of Contractors and Builders Association of Pinellas County, et al. v. City of Dunedin, 329 So. 2d 314 (Fla. 1976). The Dunedin case involved a challenge to a City of Dunedin ordinance that required payment of a connection fee as a condition for receiving the city's water and sewer services. The city claimed that the ordinance simply raised revenue that was needed for expanding the water and sewer systems to accommodate the increased demand that each new connection would create. The plaintiff argued that the connection fees were not legitimate regulatory fees, but were taxes that the city could not lawfully impose. (6)

In Dunedin, the Florida Supreme Court accepted the concept that new development may be required to pay for its "fair share" of any additional regulatory costs that it creates, rejecting the claim that connection fees are unlawful taxes, per se. Reasoning against a windfall for existing property owners, the Florida Supreme Court cautioned, however, that the connection charges would be considered illegal taxes if they had "no relationship to and [were] greatly in excess of the costs of the regulation which [were] supposed to justify their collection." Thus, the Dunedin case teaches that local governments must operate within the following parameters when imposing a fee on new development:

* The money collected must be used to meet the costs of expanding the public facility.

* Only users who are benefited from the expansion should be responsible for the costs of expansion.

* To the extent fees are collected from new users, those users are not required to finance replacing public facilities, but only for the additional capacity their uses require. (7)

The Dunedin case involved the most common type of impact fee--those based on the amount of public infrastructure that the new development will consume. These so-called "consumption based fees" are calculated by determining the "value of the public infrastructure consumed per unit of land use." (8) The other type of impact fee is known as an "improvement based" fee. Improvement based fees are usually based on a set of improvement projects that the local government has set forth in its long-range capital growth plans. New developments are charged their proportionate share of the costs of those projects. (9) A third approach is to require a developer to actually construct the additional infrastructure required to serve the new development.

All of these approaches share some common characteristics. In particular, the local government must always establish a level of service standard for each facet of infrastructure that it finances with impact fees, such as police, fire, transportation, wastewater treatment services, etc. This required level of service is then applied to both new and existing development. If the level of service standard is lower than current service levels, then a deficiency exists in that service, and as ruled in Dunedin, new development cannot be charged fees to make up for existing deficiencies. Each new development can only be charged for accommodating level of service deficiencies that are the result of that particular development. (10)

The "Dual Rational Nexus" Test

Since Dunedin, a two-pronged test had developed under Florida law that all local governments must satisfy to lawfully impose an impact fee or development exaction. More specifically, local governments must demonstrate 1) a rational nexus between proposed development and the need for additional capital facilities for which the fee or exaction is imposed; and 2) a rational nexus between the improvement/ expenditure of funds collected or exaction and the benefits accruing to the subject property. (11) This is known as the "dual rational nexus" test. (12)

While Dunedin marked the critical differences between impact fees and taxes, the foundation for the rational basis test was established that same year in Wald Corporation v. Metropolitan Dade County, 338 So. 2d 863 (Fla. 3d DCA 1976). In Wald, the plaintiff challenged a condition that required the dedication of a drainage canal and drainage easement for subdivision approval. The plaintiff claimed that the requirement violated the Florida Constitution and the Due Process and Equal Protection clauses of the U.S. Constitution. (13) The Third District Court of Appeal upheld the condition upon determining that the condition was rationally related to the fact that the subject property required drainage and that adjacent properties would have been adversely impacted absent the drainage improvements. (14)

Like the U.S. Supreme Court eventually did in Dolan v. City of Tigard, 512 U.S. 374 (1994), the Third District reached its decision by striking a balance between two divergent standards for reviewing land use exactions. The court refused to review the constitutionality of the exaction under a "merely reasonable" standard, a highly deferential standard that would have provided local governments with too much unfettered discretion. The court also refused to require the exaction to be "specifically and uniquely attributable" to the proposed development because the court believed that such scrutiny would prevent local governments from ever considering how a proposed subdivision plan affects surrounding residents. (15) Instead, relying on the same Minnesota Supreme Court case that the U.S. Supreme Court would later cite in Nollan v. California Coastal Commission, 483 U.S. 825 (1987), the Florida court adopted a compromised approach, the "rational nexus" test. (16)

Subsequently, in 1983, the Fourth District Court of Appeal rendered its decision in Hollywood, Inc. v. Broward County, 431 So. 2d 606 (Fla. 4th DCA 1983), and fully articulated the "dual rational nexus" test. The Fourth District stated:

... the local government must demonstrate a reasonable connection, or rational nexus, between the need for additional capital facilities and the growth in population generated by the subdivision [and] ... the government must show a reasonable connection, or rational nexus, between the expenditures of the funds collected and the benefits accruing to the subdivision. (17)

The Florida Supreme Court ultimately adopted the "dual rational nexus" test in the 1991 decision of St. Johns County v. Northeast Florida Builders Association, Inc., 583 So. 2d 635, 638 (Fla. 1991).

Application of the Dual Rational Nexus Test

Similar to the "essential nexus" requirement under Nollan/Dolan, the first prong of the dual rational nexus test requires an assessment of the local government's "rational basis" to require the improvements. In that regard, the local government must be able to reasonably show that the new development will create more than a possible or incidental need for increased capacity of any public facilities that serve the new development. Further, like the rough proportionality requirement, a developer must only pay fees or dedicate property that represent its pro rata share of the burden imposed on public facilities by the new development. In Hollywood, Inc., the county satisfied this "needs" requirement by presenting evidence that it had to acquire and develop additional land to maintain a previously adopted level of service for parks as new residents moved into new residential developments. (18)

In contrast, the Fifth District Court of Appeal applied the dual rational nexus test in case of Hernando County v. Budget Inns of Florida, Inc., 555 So. 2d 1319 (Fla. 5th DCA 1990), to strike development exaction. The county imposed a condition of approval on a proposed hotel development that required the developer to design a frontage road servicing the hotel and then to construct the road at some time in the future when the county decided it was necessary. Notably, the county conceded to the fact that "no present need for the road exist[ed]." As a result, the court found that the condition failed to satisfy the dual rational nexus test because:

for the nexus test to apply, thus making a compulsory dedication constitutionally valid, the nexus must be rational. This means it must be substantial, demonstrably clear and present. It must definitely appear that the proposed action by the developer will either forthwith or in the demonstrably immediate future so burden the abutting road, through increased traffic or otherwise, as to require its accelerated improvement. Such dedication must be for specifically and contemplated immediate improvements--not for the purpose of "banking" the land for use in a projected but unscheduled possible future use.... (19)

The second prong of the dual rational nexus test demands an assessment of whether the new development will "benefit" from the local government's use of the collected fees. The local government must demonstrate that the new development will actually receive more than an incidental benefit from the expenditure of the impact fees or dedication of property. (20)

In sum, cases such as Hollywood, Inc., St. Johns County, and Dunedin illustrate the basic contours of the "dual rational nexus" test as follows:

* The local government must be able to justify the fees or exactions by showing that the new development will create more than a possible or incidental need for increased capacity of any public facilities that serve the new development.

* The local government must demonstrate that the new development will actually receive more than an incidental benefit from the expenditure of the impact fees or dedication of property.

* The developer cannot be required to pay impact fees or dedicate property that exceed a pro rata share of the burden imposed on those public facilities.

* In the case of impact fees, the fees must be earmarked to fund expansion of capital facilities that serve the area in which the new development is located.

* The impact fees must be used to provide only the additional capacity required by the new development and not any existing deficiencies.

* The impact fees must not be used to benefit other residents by financing capital growth that is bound to occur with or without the proposed development.

* The impact fees must be spent within a defined, reasonably short amount of time or returned to the payer of the fee.

* The local government's showing of a rational nexus between the proposed development and the community's need for increased capacity of public services, or between the expenditure of the impact fees and the benefit accrued to the new development, may be refuted by the developer with additional evidence or an alternate study. (21)

An Affordable Housing Tax May be Unlawful

As noted by the Florida Supreme Court, satisfaction of the dual rational nexus requirements is important because of the relationship between taxes and fees. (22) A local government that wishes to impose affordable housing fees or mandatory exactions on a new development without first establishing the dual nexus requirements must rely upon an explicit and unequivocal grant of such taxing authority from the legislature or Florida Constitution. (23) To that end, a local government will not be able to avail itself of F.S. [section] 166.04151 or [section] 125.01055 because those statutes merely state that local governments may enact inclusionary zoning ordinances, but they do not proscribe how those ordinances can operate, i.e., whether they can be mandatory or voluntary. As such, the legislature has not removed all doubt as to whether local governments can impose an affordable housing tax on new development. (24) The most logical conclusion that can be drawn from F.S. [section] [section] 166.04151 and 125.01055 is that while local governments have no authority to levy affordable housing taxes, they may adopt an affordable housing law, rule, ordinance, or other measure provided that any such measure satisfies the "dual rational nexus" test.

However, the authors submit that a mandatory affordable housing impact fee or exaction program would have a difficult time surviving the scrutiny employed by the "dual rational nexus" test. The imposition of such a program would necessarily raise several problematic questions. For instance, how could an affordable impact fee be tailored to benefit solely the developer or the new residents of the project? Moreover, given that the affordable housing problem already exists, is it legal (let alone equitable) to require the developer, and ultimately the prospective purchaser of other-market rate housing in the development to pay to address an existing problem? Pondering such questions only leads to other, perhaps more difficult questions. The task of adopting a level of service for affordable housing is not as easy as measuring the amount of potable water required to service new development. The capacity to provide traditional municipal services is almost always controllable by either the local government or a utility. By contrast, the availability of housing depends in large measure on individual property owners and the price they are willing to sell their properties, an item generally outside of direct government control. Therefore, how does a local government measure its need for affordable housing?

Significantly, the Florida Supreme Court has held that a countywide need for infrastructure improvements cannot serve as the basis for an impact fee or exaction. In Volusia County, the Florida Supreme Court explained that a countywide standard would amount to an unlawful tax because: there is no requirement that taxes provide any specific benefit to the property; instead they may be levied throughout the particular taxing unit for the general benefit of residents and property. Fees, by contrast, must confer a special benefit on feepayers in a manner not shared by those not paying the fee. (25)

Thus, in Volusia County, the court held that an otherwise valid school impact fee could not be applied to dwelling units that were governed by a deed restriction that explicitly prohibited school age children from residing in them. It simply did not matter that the county needed new schools if the new development at issue was neither responsible for contributing to that need nor would not have benefited from the expenditure of funds to address that need. (26)

Moreover, even if a local government is convinced that sound public policy calls for the implementation of an affordable housing impact fee, it may not sidestep the "dual rational nexus" requirements. In Collier County v. State, 733 So. 2d 1012 (Fla. 1999), Collier County had imposed an "interim governmental services fee" because it believed that the then current ad valorem scheme unfairly created a windfall for property owners of recently improved property. According to the county, owners of improved property did not always pay their fair share of county services because of the lag time between the improvement and updated property appraisals. (27) The fee was meant to correct the inequities in the system, but the court determined it constituted a tax because it did not meet the dual nexus requirements. (28)The Florida Supreme Court instructed that "[i]f there is a windfall created by the current statutory scheme, ..., the [c]ounty's redress lies with the [l]egislature." (29)

Conclusion

For the reasons set forth above, mandatory inclusionary zoning programs will face considerable judicial scrutiny and raise a panoply of questions that most local governments are not prepared to answer. The authors submit that mandatory programs have been proposed and in some instances adopted because they are both politically expedient and provide an easy answer. The affordable housing crises didn't appear overnight, and will not be solved overnight. The authors submit that local governments should consider making such programs voluntary. To ensure voluntary programs achieve the same result as mandatory programs, local governments must strive to eliminate doubt as to the availability of their incentives through clearly drafted land development regulations duly adopted after consultation with the development community and the public. As one of the early fathers of land-use law, Richard Babcock, noted years ago, "[w]hat is required from all participants, laymen, planners, lawyers, and judges is an effort to turn zoning from the petty parochial device it now is to a viable tool of land-use policy." Through coordinated efforts, the authors submit that voluntary programs premised on respect between the public, development community, and local governments has the potential to yield far better results than legally questionable mandatory programs.

(1) Collier Cty. v. State, 733 So. 2d 1012, 1014 (Fla. 1999); Broward County v. Janus Development Corporation, et al., 311 So. 2d 371 (Fla. 4th D.C.A. 1975).

(2) William M. Merrill & Robert K. Lincoln, The Missing Link: Legal Issues and Implementation Strategies for Affordable Housing Linkage Fees and Fair Share Regulations, 22 Stet. L. Rev. 469, 474 (1993).

(3) Impact fees are simply a nontaxation source of revenue paid by those persons who are responsible for additional capital expenditures. James Nicolas, et al., Impact Fees in Florida: Their Evolution, Methodology, Current Issues and Comparisons with Other States 2-4 (Sept. 2005) (unpublished manuscript on file with the Florida Impact Fee Review Task Force, Florida Committee on Intergovernmental Relations).

(4) Hollywood, Inc. v. Broward County, 431 So. 2d 606, 609 (Fla. 4th D.C.A. 1983).

(5) Contractors and Builders Association of Pinellas County, et al. v. City of Dunedin, 329 So. 2d 314 (Fla. 1976).

(6) Id. at 315-16.

(7) Id. at 321-22. See also Janus, 311 So. 2d at 374-75 (ruling that an ordinance imposing an impact fee to be used for building roads, streets, highways, and bridges was "simply an exaction of money" when there are no provisions in the ordinance that specified where or when, if ever, the government would spend the money collected). In Home Builders & Contractors Association of Palm Beach County v. Board of County Commissioners of Palm Beach County, et al., 446 So. 2d 140 (Fla. 4th D.C.A. 1984), the Fourth District Court of Appeal upheld a county ordinance that imposed an impact fee for new roads.

(8) Nicolas, Impact Fees in Florida: Their Evolution, Methodology, Current Issues and Comparisons with Other States at 7 (Sept. 2005).

(9) Id. at 8-9.

(10) Id. at 10.

(11) Hollywood, Inc. v. Broward County, 431 So. 2d 606, 611 (Fla. 4th D.C.A. 1983).

(12) In addition to the dual rational nexus test, all locally adopted impact fee ordinances must comply with the requirements of the "Florida Impact Fee Act," which was created by the Florida Legislature during the 2006 session. The Florida Impact Fee Act is intended to ensure that local governments assume a certain level of accountability given the "growth of impact fee collections and local governments' reliance on impact fees." Fla. Stat. [section] 163.31801(2) (2006). To that end, the Florida Impact Fee Act requires that impact fee ordinances must, at a minimum: "(a) Require that the calculation of the impact fee be based on the most recent and localized data. (b) Provide for an accounting and reporting of impact fee collections and expenditures ... [and] account for the revenues and expenditures of such impact fee in a separate accounting fund. (c) Limit administrative charges for the collection of impact fees to actual costs. (d) Require that notice be provided no less than 90 days before the effective date of an ordinance or resolution imposing a new or amended impact fee." Fla. Stat. [section] 163.31801(3)(a)-(d).

(13) Wald, 338 So. 2d 863, 864 (Fla. 3d D.C.A. 1976).

(14) Id. at 868.

(15) Id. at 867.

(16) Id. at 868 (citing Jordan v. Village of Menomonee Falls, 137 N.W.2d 442, 448 (1966)).

(17) Hollywood, Inc. v. Broward County, 431 So. 2d 606 (Fla. 4th D.C.A. 1983).

(18) Id.

(19) Hernando County v. Budget Inns of Florida, Inc., 555 So. 2d 1319 (Fla. 5th D.C.A. 1990). But see St. Johns County, 583 So. 2d at 638 (ruling that school impact fees would be valid even if the additional capacity in public schools may or may not be used in the immediate future because "[d]uring the useful life of the dwelling unit, school-aged children may come and go.").

(20) Hollywood, 431 So. 2d 606 (Fla. 4th D.C.A. 1983).

(21) See Nicolas, Impact Fees in Florida: Their Evolution, Methodology, Current Issues and Comparisons with Other States at 15 (Sept. 2005).

(22) Volusia County v. Aberdeen at Ormand Beach, LP, 760 So. 2d 126, 135 (Fla. 2000).

(23) For example, municipalities have been granted the statutory authority to levy public service taxes on "the purchase of electricity, metered natural gas, liquified petroleum gas ..., manufactured gas ..., and water service." Fla. Stat. [section] 166.231(1)(a) (2005). Certain counties have been granted the authority to levy tourist development taxes and convention development taxes. Fla. Stat. [section] [section] 125.0104, 212.0305 (2005).

(24) See State v. City of Port Orange, 650 So. 2d 1, 3 (Fla. 1995).

(25) Volusia County, 760 So. 2d at 135 (internal citations and quotations omitted).

(26) Id.

(27) Collier County, 733 So. 2d 1012 (Fla. 1999).

(28) Id. at 1015-1018.

(29) Id. at 1019.

J. Michael Marshall is a land use and planning attorney with the firm of Siemon & Larsen, P.A., in Boca Raton. Mr. Marshall earned a B.S. in civil engineering, cum laude, from North Carolina State University, an M.B.A., magna cum laude, from the University of North Carolina, Wilmington, and received his J.D., cum laude, from The Florida State University College of Law.

Mark A. Rothenberg is a land use attorney with the firm of Morgan Lewis & Bockius. Mr. Rothenberg practices in both Florida and California. Mr. Rothenberg's experience includes having represented numerous local governments in Florida in formulating land use controls and in obtaining development entitlements on behalf of institutional clients in Florida and California. He received his J.D., magna cum laude, from the University of Miami School of Law. The authors thank Charles L. Siemon, Wendy U. Larsen, and Jeffrey Bercow for their assistance and support.

This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Sandra Fascell Diamond, chair, and William P. Sklar and Richard R. Gans, editors.