In real estate development, exactions are conditions a local government attaches to a development approval that require the developer to contribute money, land, or infrastructure to offset the project’s impact on public services. They show up during zoning changes, subdivision review, and building permit issuance, and the Fifth Amendment sets real limits on how far a government can push. A line of Supreme Court cases running from 1987 through 2024 defines exactly where those limits sit.
The logic behind exactions is simple: a new subdivision generates traffic, draws on water and sewer capacity, and creates demand for parks and school seats. Without exactions, existing taxpayers would cover the full cost of expanding those services. Most developers accept that growth should pay its own way. The friction starts when a government asks for more than the project warrants, or demands something unrelated to the project’s actual impact.
The Forms an Exaction Can Take
Most projects run into more than one type. Which type a government chooses depends on the development’s size, the specific infrastructure need, and what’s practical for the site.
- Impact fees. One-time charges that fund specific public facilities like roads, schools, or parks. These are the most common form, and jurisdictions set them through published fee schedules calculated from projected demand.1Federal Highway Administration. Development Impact Fees
- Land dedications. The developer sets aside a portion of the project site for public use — parkland, open space, or right-of-way for road widening. The government then owns and maintains it.
- In-lieu fees. A cash payment substituted when a dedication or on-site improvement isn’t practical. If a park dedication is required but the site is too small or poorly located, the developer pays into a fund the government uses elsewhere.
- Construction of improvements. The developer builds specific infrastructure — roads, sidewalks, utility connections, stormwater systems — then turns it over to the local government for ongoing maintenance.
When Exactions Come Up
You’ll see exactions at several points in the approval pipeline. Zoning changes and rezonings often trigger them, because allowing a more intensive use creates new infrastructure demand. Subdivision approvals routinely include requirements for road construction, utility extensions, and parkland dedication. Building permits frequently carry impact fee obligations. Conditional use permits for specific activities, such as a commercial use in a residential zone, can come with tailored conditions addressing that use’s particular impacts.2Federal Highway Administration. Negotiated Exactions
For a developer, these conditions are a cost of doing business that belongs in feasibility analysis early. Discovering a six-figure impact fee after closing on the land is the kind of surprise that kills a project’s margins.
Constitutional Limits on What a Government Can Demand
The Fifth Amendment provides that private property cannot be taken for public use without just compensation.3Constitution Annotated. Amdt5.10.1 Overview of Takings Clause When a government conditions a permit on handing over money, land, or construction, that condition can function as a taking if it goes too far. Four Supreme Court decisions have built the framework that determines when an exaction crosses the line.
Essential Nexus (Nollan, 1987)
A permit condition must serve the same government interest that would justify denying the permit outright. In Nollan, the California Coastal Commission approved a beachfront rebuild only if the owners allowed public passage across their property. The Court found no logical connection between a larger house and a public pathway, and held that without an “essential nexus” between the condition and the project’s impact, the demand amounts to extortion.4Constitution Annotated. Amdt5.10.7 Per Se Takings and Exactions A traffic impact fee passes nexus because new homes generate new trips. A requirement to fund a public pool in exchange for a warehouse permit would not.
Rough Proportionality (Dolan, 1994)
Having the right kind of connection isn’t enough. The condition also has to be the right size. In Dolan, a hardware store owner wanted to expand her store and pave the lot; the city conditioned approval on dedicating roughly 10 percent of her property for a bike path and flood drainage. The Court found the city hadn’t shown the expansion justified taking that much land. A government must make an individualized determination showing the exaction’s scope is proportionate to the development’s actual impact. No precise math is required, but more than a hunch is.5Legal Information Institute. Dolan v. City of Tigard, 512 U.S. 687 (1994)
Monetary Demands and Permit Denials (Koontz, 2013)
Koontz closed two gaps left after Nollan and Dolan. The nexus and proportionality requirements apply even when the government demands cash rather than land, and even when the government denies the permit outright because the applicant refused to comply.6Justia Law. Koontz v. St. Johns River Water Mgmt. Dist., 570 U.S. 595 (2013) Without that rule, a government could sidestep constitutional review simply by framing its demand as a prerequisite rather than a condition.
Legislative Fees Face the Same Scrutiny (Sheetz, 2024)
For years, many jurisdictions argued that fees adopted through legislation — like a countywide impact fee schedule — were exempt from Nollan and Dolan because those tests targeted ad hoc conditions imposed by planning staff. The Supreme Court rejected that argument unanimously in Sheetz. The Takings Clause doesn’t distinguish between legislative and administrative permit conditions, and legislatures are subject to the same constitutional limits as planning commissions.7Justia Law. Sheetz v. El Dorado County, 601 U.S. ___ (2024)
The Court left one question open: whether a fee imposed on an entire class of properties must be tailored with the same specificity as a condition targeting a particular project. That issue is still working through the lower courts, so the full practical effect of Sheetz isn’t settled yet.
Challenging an Exaction You Think Is Unlawful
If you believe an exaction fails nexus or proportionality, you aren’t stuck paying it and moving on. The practical path depends on whether you’ve already paid, whether the permit was granted or denied, and your jurisdiction’s procedural rules.
Most developers start with an administrative appeal to the local planning commission or governing board. It’s the fastest and cheapest route, and it forces the government to justify the exaction on the record. If the condition was imposed without an individualized analysis tying its scope to your project’s specific impacts, raising that failure early builds the foundation for any later legal challenge.
If the administrative process doesn’t resolve it, the next step is court. A takings claim in state court, sometimes called an inverse condemnation action, seeks compensation for property effectively taken without just compensation. Koontz confirmed this framework applies whether the exaction involved land or money, and whether the permit was approved with conditions or denied for noncompliance.6Justia Law. Koontz v. St. Johns River Water Mgmt. Dist., 570 U.S. 595 (2013) Federal court is also an option under 42 U.S.C. § 1983, which allows civil claims against government officials who deprive someone of a constitutional right while acting in their official capacity. Available remedies include compensatory damages, injunctive relief, and in egregious cases, punitive damages.
Timing matters. Statutes of limitations for takings and civil rights claims vary by jurisdiction, and waiting too long after paying a fee or completing a dedication can forfeit your ability to recover. If an exaction looks questionable, get legal advice before you comply. Paying under protest and then challenging is generally viable; quietly accepting the condition and suing years later often isn’t.
How Exactions Are Treated for Tax Purposes
Developers sometimes assume impact fees and exaction costs can be written off as current business expenses. They can’t. The IRS determined in Revenue Ruling 2002-9 that impact fees paid during construction are indirect costs that must be capitalized into the cost basis of the building, not deducted in the year they’re paid.8Internal Revenue Service. Revenue Ruling 2002-9
The treatment falls under IRC § 263A, which requires capitalization of both direct and indirect costs associated with producing real property. Because impact fees are assessed based on the building’s characteristics and are refundable if construction doesn’t proceed, the IRS treats them as costs allocable to the building itself.9Office of the Law Revision Counsel. 26 USC 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses The same logic applies to the cost of constructing improvements you’re required to dedicate, like roads or utility infrastructure. Those costs get folded into the project’s overall basis.
For developers building to sell, capitalized costs reduce taxable gain at sale. For rental property, the capitalized amount gets recovered through depreciation over the useful life. Either way, the tax benefit is spread over years rather than taken upfront, which is a cash flow reality that belongs in your pro forma from day one.
Managing Exaction Costs on Your Project
Understanding the law is one thing. Keeping exactions from eating your project alive is another.
Research fee schedules before you buy the land. Most jurisdictions publish them, and you can estimate total exaction costs with reasonable accuracy during due diligence. A site that looks like a bargain can stop looking like one when $50,000 or more in impact fees goes into the development budget.
Ask whether reductions or credits are available. Some jurisdictions reduce impact fees for projects near transit or for higher-density housing that generates fewer vehicle trips per unit.1Federal Highway Administration. Development Impact Fees Others offer credits when you build infrastructure that was already on the capital improvement plan. If you’re constructing a road segment the government would otherwise have funded, the cost of that construction should offset your traffic impact fee. You usually have to ask.
Commission your own impact study if the government’s numbers look inflated. The rough proportionality requirement from Dolan means the exaction has to reflect your project’s actual impact, not a worst-case assumption.5Legal Information Institute. Dolan v. City of Tigard, 512 U.S. 687 (1994) An independent traffic study or utility demand analysis showing lower impacts gives you concrete leverage to negotiate a reduction.
And don’t treat exactions as non-negotiable just because they appear on a fee schedule. After Sheetz, even legislatively adopted fees are subject to constitutional scrutiny.7Justia Law. Sheetz v. El Dorado County, 601 U.S. ___ (2024) If a fee bears no reasonable relationship to your project’s actual burden on infrastructure, you have grounds to push back, and the government knows it.