Many real estate industry professionals are familiar with the government's substantial power and discretion in land-use permitting. Land-use applicants on the verge of lucrative development opportunities find themselves in a vulnerable position when the government attempts to condition permit approval on receiving something in exchange from the applicant, also known as "exactions." Exactions occur when a governmental entity approves a land-use application conditioned upon the applicant dedicating some of the landowner's property for public use. Since 1994, the United States Supreme Court has held that the government cannot condition its approval of a land-use permit on the relinquishment of a portion of the landowner's property unless there is a nexus and rough proportionality between the government's demand and the effects of the proposed land use. This has been known as the Nollan and Dolan test to determine if the exactions are unconstitutional and amount to a taking of property for which the landowner must be compensated under the Fifth Amendment Takings Clause.

In a significant ruling on June 25, 2013, the Supreme Court held that the protection against a government-coerced taking of property established by Nollan and Dolan applies even when the government denies the permit because the applicant refuses to turn over property. The Court also held that the Nollan and Dolan protections against unconstitutional exactions include a governmental demand for the payment of money.

The Nollan and Dolan test is a particular application of the unconstitutional conditions doctrine: the government cannot deny a benefit to a person when she is exercising her constitutional right. More specifically, the Nollan and Dolan standard protects the Fifth Amendment right to just compensation when the government takes property—in the form of a demand or exaction—in exchange for its approval of a land-use permit.

The Supreme Court extended this doctrine to situations when the government denies the land-use permit because a landowner would not submit to the governmental coercion.  In addition, the Supreme Court ruled that exactions of money, as opposed to property, are subject to the Nollan and Dolan test.

As a result, governmental entities cannot circumvent constitutional protections by phrasing their demands for property as "denied until," rather than approving land-use permits "only if" the applicant relinquishes her property. Denying a land-use permit still runs afoul of the Fifth Amendment Takings Clause even though no taking actually occurred because "extortionate demands for property . . . impermissibly burden the right not to have property taken without just compensation."

The Supreme Court extended these protections because of the "direct link between the government's demand and a specific parcel of real property." This direct link gives rise to the Nollan and Dolan protections, mandating that the exercise of the government's power and discretion in approving or denying land-use permits has a nexus and rough proportionality to the owner's proposed use of the specific property.

Despite the "win" for land-use applicants, the Supreme Court left open several important questions:

• The Court did not consider how concrete and specific a demand must be to implicate the Nollan and Dolan standard, leaving the issue upon on remand;
• Although a government denial burdens a constitutional right, just compensation is due only when a taking has occurred; thus, state or federal law determines the available remedies instead of the Fifth Amendment;
• Whether the governmental entity could circumvent Nollan and Dolan and achieve an economically equivalent result by simply levying a "tax."

The dissent frames the unconstitutional conditions doctrine in another way: "Independent of the permitting process, does requiring a person to pay money to the government, or spend money on its behalf, constitute a taking requiring just compensation?" Justice Kagan, who authors the dissenting opinion, believes the answer is no because the government's demand for money merely imposes a general liability to pay money. According to Justice Kagan, it is insufficient to trigger heightened constitutional scrutiny when the land-use permitting process is sole reason the demand for money relates to a property interest. Stated differently, the dissent argues that unconstitutional conditions doctrine should apply "only if imposing a condition directly - i.e., independent of an exchange for a government benefit - would violate the Constitution." The prevailing majority, however, acted out of concern for the special vulnerability of land-use permit applicants when faced with a government's extortionate demands for money.

The full opinion is known as Koontz v. St. Johns River Water Management District, 570 U.S. ___ (2013).