BCD-87-002-PE
4-0210-990-2
STATE OF MINNESOTA
OFFICE OF ADMINISTRATIVE HEARINGS
FOR THE MINNESOTA BUILDING CODE DIVISION
In the Matter of the Appeal FINDINGS OF FACT,
of Knutson Construction Company CONCLUSIONS AND
of the Final Decision of the RECOMMENDATION
City of Bloomington
The above-entitled matter came on for hearing before Administrative Law
Judge Peter C. Erickson on December 2, 4 and 5, 1986 at the Office of
Administrative Hearings, 400 Summit Bank Building, 310 Fourth Avenue South,
Minneapolis, Minnesota. The final post-hearing brief was filed on January 9,
1987, at which time the record was closed.
Gilbert S. Buffington, Special Assistant Attorney General, 204
Administration Building, St. Paul, Minnesota 55155, appeared specially on
behalf of the Building Code Division of the Minnesota Department of
Administration and its Director, Richard Brooks. Timothy M. O'Brien, from the
firm of Hart, Bruner, O'Brien & Thornton, Attorneys at Law, 1221 Nicollet
Mall, Suite 700, Minneapolis, Minnesota 55403, appeared on behalf of the
Appellant, Knutson Construction Company. David R. Ornstein, Associate City
Attorney, City of Bloomington, Municipal Building, 2215 West Old Shakopee
Road, Bloomington, Minnesota 55431-3096, appeared on behalf of the Respondent,
City of Bloomington.
Notice is hereby given that, pursuant to Minn. Stat. 14.61 the final
decision of the Commissioner of Administration shall not be made until this
Report has been made available to the parties to the proceeding for at least
ten days, and an opportunity has been afforded to each party adversely
affected to file exceptions and present argument to the Commissioner.
Exceptions to this Report, if any, shall be filed with Commissioner Sandra J.
Hale, Administration Building, 50 Sherburne Avenue, St. Paul, Minnesota 55155,
STATEMENT OF ISSUES
The issues to be determined in this proceeding are: (a) which party has
the burden of proof; (b) whether the City of Bloomington properly valued the
construction of Olympic Place for the purposes of assessing a building permit
fee; and (c) whether the City of Bloomington is estopped from contesting the
Appellant's valuation of Olympic Place because of an agreement concerning a
method to resolve this dispute.
Based upon all of the proceedings herein, the Administrative Law Judge
makes the following:
FINDINGS OF FACT
1. Knutson Construction Company is a general contracting business which
has been in operation for approximately 77 years. On April 22, 1984, Knutson
received the plans and specifications for construction of a shell structure,
glass curtain wall construction, and an adjacent parking ramp for the Olympic
Place project, a nine-story office building. The owner of the proposed office
building was Shelard Companies, Inc. Knutson had received the plans and
specifications for the project for the purpose of making a bid on the
construction.
2. Arnie Grismer, a project estimator for Knutson sirce May of 1979, was
assigned the responsibility to prepare the competitive bid proposal for
Olympic Place. The scope of the project was only to construct the shell
structure and not to do any finishing work. Mr. Grismer made a determination
of the cost of materials, labor cost and added an estimated $200,000 of profit
for the Company. In addition, the bid proposals of many subcontractors were
included into the total cost. This bid estimation process consumed
approximately 160 hours of Mr. Grismer's time.
3. On May 11, 1984, Knutson submitted its bid to Shelard Companies, Inc.
in the amount of $6,444,000. Four other bids were submitted by Knutson's
competitors, including bids of Lovering Associates, Inc. in the amount of
$6,407,000; Krause Anderson Construction Company in the amount of $6,534,000;
and Witcher Construction Company in the amount of $6,596,700. Lovering
Associates, Inc. subsequently withdrew its bid, leaving Knutson as the low
bidder at $6,444,000. There is no evidence in the record to show that this
bid process was anything other than an arms-length transaction.
4. On May 22, 1984, Knutson and Shelard entered into a construction
contract wherein Knutson agreed to perform all the work shown on the plans and
specifications for Olympic Place for the sum of $6,444,000. This amount
included a contractor's fee of $200,000.
5. On June 27, 1984, Knutson submitted an application for a building
permit to the City of Bloomington together with the plans and specifications
for the work to be covered by the permit. The application listed the building
valuation as $6,444,000.
6. The construction price of $6,444,000 did not include architectural
fees, engineering costs, legal fees, interest expense on building funds during
the period of construction, processing fees or service charges, the cost of
the land, or the cost of any change orders which might occur during
construction. The architectural fees which were paid by Shelard were in the
amount of approximately $270,000.
7. After a question arose as to the proper valuation of the proposed
construction, Shelard submitted a copy of the general construction contract, a
sworn construction statement, and a copy of AIA Document G703, which reflects
the scheduled values of respective portions of the work to the City of
Bloomington.
8. The City, using building valuation data and a formula prepared by the
International Conference of Building Officials (ICBO), valued Olympic Place at
$9,431,000 for the purpose of determining the building permit fee. The ICBO
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drafts and promulgates the Uniform Building Code (UBC) which has, in large
part, been adopted by the State of Minnesota and is in use state and
nation-wide. The ICBO valuation procedure uses average cost figures for
different types of building construction and includes a "regional modifier"
for most states. The cost figures represent finished construction, however,
and not a shell construction as reflected in the construction contract for
Olympic Place. The ICBO valuation factors are revised on a quarterly basis.
An explanatory statement included on the ICBO cost sheet reads:
At the request of numerous building officials, Building
Standards offers the following building valuation data
representing average costs for most buildings. Because
residential buildings are the most common for many cities,
two general classes are considered for these, one for
"average" construction and the other for "good."
Adjustment should be made for special architectural or
structural features and location of the project. Often
higher or lower unit costs may result.
The unit costs are intended to comply with the definition
of "valuation" in Section 423 of the Uniform Building Code
and thus include architectural, structural, electrical,
plumbing, and mechanical work, except as specifically
listed below. It also includes the contractor's profit
which should not be omitted.
The determination of plan check fees for projects reviewed
by the International Conference of Building Officials will
be based on valuation computed from these figures.
9. Although Knutson disputed the City's valuation of Olympic Place, it
paid a fee of $43,302.43 based on the $9,431,000 figure under protest. That
fee amount includes $23,760 as a building permit fee, $2,376 for a certificate
of occupancy, $15,444 as a plan check fee and $1,721 as a state surcharge.
10. Pursuant to Minn. Stat. 16B.70, a surcharge is added to the permit
fees collected by municipalities which is paid to the state to offset the
costs of administering the state building code. This surcharge, like the
building permit, is graduated based on the valuation of the construction. In
February of each year, the Building Code Division (BCD) mails out "Building
Valuation Data" to municipalities "for use in computing the building permit
surcharges for remittances to the State or for comparison with valuations
submitted by the applicant for permits." City Ex. 13. This valuation data is
the same as the ICBO valuation data but is only updated once per year.
Approximately 400 municipalities use the BCD data to assess surcharges and
most also use it to value construction for building permits. The BCD cost
sheet states, that, "The unit costs are intended to include architectural,
structural, electrical, plumbing and mechanical work, except as specifically
listed. . . ." City Ex. 13.
11. In calculating the $9,431,000 valuation for Olympic Place, the City
deducted the amount of $10.00 per square foot from the ICBO calculation for
the office building portion of the construction as an offset for the
anticipated finishing costs. The average square foot finishing cost figure as
established by the permits issued subsequent to the "shell" construction was
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approximately $15.00 p er square foot. The City issued the finishing cost
permits based on the value of the work as stated by the applicants.
12. During the construction of Olympic Place, change orders in the amount
of approximately $170,000 were issued by Shelard. Consequently, the total
price for the structure paid by Shelard to Knutson was approximately
$6,604,000. That figure includes a profit to Knutson in the amount of only
$65,000, due in part to an increased expense for liability insurance.
13. Negotiations between the City and Knutson continued because the
dispute concerning the valuation of the Olympic Place construction could not
be resolved. Consequently, on December 18, 1984 during a meeting between
representatives of Shelard, Knutson and the City of Bloomington, the City
proposed a review of the final certified building costs as a basis to
reconsider the valuation question. However, on December 28, 1984, Tim Skusa,
Plan Check Engineer for the City, wrote to Arnie Grismer, advising him that
the City would not change its calculation for the Olympic Place construction.
14. On January 25, 1985, Knutson filed a "Notice of Appeal" pursuant to
"the provisions of Minn. Stat. 16.863" with the Commissioner of
Administration. App. Ex. L. However, a Notice and Order for Hearing was not
issued until October 16, 1986.'
15. On February 5, 1985, Jan Gasterland, Assistant Manager of the
Building and Inspection Division for the City, wrote a letter to Knutson which
stated, in part:
. . . Our final decision is that the fees will remain as charged
and paid by Knutson Construction Company with the following
option:
If you still feel overcharged at the time of substantial
completion, you may allow the City of Bloomington to audit
the construction companys records at the expense of the
construction company. If the true costs are less than the
city's estimate a proportional refund will be given. If
the true costs are more than the city's estimate a
proportional additional fee will be charged.
I trust this will be acceptable to you and that this will
finally put this matter to rest.
16. On October 10, 1985, Alan Johnson, an auditor employed by the City of
Bloomington, conducted an audit of Knutson's certified costs of construction.
Knutson made all of its records available to Mr. Johnson for this purpose. As
a result of this audit, Mr. Johnson concluded that the actual costs paid by
Shelard to Knutson for the work Knutson had performed was $6,604,000.
However, because architectural fees were not included in these costs, Mr.
'Minn. Stat. 16.863 (1982) was repealed by 1984 Laws, ch. 544, 90 and
replaced with Minn. Stat. 166.67 (1984), the statute under which this case
was commenced by the Department of Administration.
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Johnson requested that he be allowed to audit Shelard's records to complete
the audit process. Shelard would not permit Mr. Johnson to audit its books,
however. Consequently, the City did not make any refund to Knutson for any
portion of the permit fees which it had paid.
17. In November of 1986, the City hired a real estate appraiser,
Culver E. LaSalle, to perform an appraisal of the replacement cost of the
Olympic Place construction as of June of 1984. This appraisal did not include
tenant improvements, or finishing costs, or the cost of the land. The
appraisals did include costs for architectural, engineering and surveyor
fees. Mr. LaSalle used two valuation services, the Boeckh Valuation System
and the Marshall Valuation System, as the basis for his appraisals. In
addition, Mr. LaSalle used the sales of comparable office buildings in the
area to corroborate his estimated value. Mr. LaSalle's appraisal of the
replacement cost for Olympic Place in June of 1984 was $9,400,000,
18. In addition to the Olympic Place project, there are four other
building constructions in the Bloomington area where the valuations derived
from the ICBO valuation data is significantly different from the construction
cost as stated by the general contractors.
19. The City of Bloomington has in the past accepted general contractors'
statements as to the value of construction work for the purpose of issuing
permits. However, the City uses the ICBO valuation data as a way to ensure
uniformity of building permit fees. Use of the ICBO data negates the need for
audits and appraisals and guards against "Inside deals" made between owners
and contractors to lessen the cost of construction, and thus the permit fees.
20. Some municipalities in the state have adopted ordinances which
require the use of the ICBO valuation data to compute building permit fees.
The City of Bloomington has not adopted such an ordinance, however.
Based upon the foregoing Findings of Fact, the Administrative Law Judge
makes the following:
CONCLUSIONS
1. The Administrative Law Judge and the Department of Administration
have jurisdiction in this matter pursuant to Minn. stat. 16B.67 and 14.50
(1984).2
2. The Appellant, Knutson Construction Company, has the burden of proof
to show by a preponderance of the evidence that the actions taken by the City
of Bloomington to value the Olympic Place construction were improper.
3. The City is not estopped from implementing its valuation of Olympic
Place because of the dispute resolution methodology offered to Knutson and
acted on by the City.
'Although Minn. Stat. 16B.67 does not mandate that the appeal herein be
heard pursuant to the Administrative Procedures Act, this matter clearly falls
within the definition of "contested case" found at Minn. Stat. 14.02,
subd. 3 (1984).
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4. The Appellant has proved that the City's valuation of the Olympic
Place construction was improper.
S. The proper valuation of the Olympic Place construction for the
purpose of assessing permit fees should have been $6,874,000, the audited
contract amount plus the architectural fees.
Based upon the foregoing Conclusions, the Administrative Law Judge makes
the following:
RECOMMENDATION
IT IS HEREBY RECOMMENDED that the Department of Administration issue an
Order valuing the cost of construction of Olympic Place at $6,874,000 for the
purposes of the issuance of permit fees in June of 1984.
Dated this 9th day of February, 1987.
PETER C. ERICKSON
Administrative Law Judge
NOTICE
Pursuant to Minn. Stat. 14.62, subd. 1, the agency is required to serve
its final decision upon each party and the Administrative Law Judge by first
class mail.
Reported: Taped, No Transcript Prepared.
MEMORANDUM
The Administrative Law Judge has concluded that the Appellant in this
matter, Knutson Construction Company, has the burden to show that the City's
valuation of the Olympic Place construction was improper. Minn.
Rule 1400.7300, subp. 5, states that, "The party proposing that certain action
be taken must prove the facts at issue by a preponderance of the evidence,
unless the substantive law provides a different burden or standard." In this
case, Knutson Construction Company is challenging the validity of the City's
valuation and proposing that the valuation be changed to reflect what it feels
is the actual cost of construction. In applying the cited rule, the Appellant
clearly has the burden of proof. Knutson has cited no law to the contrary.
In Lyons v. City of Minneapolis, 63 N.W.2d 585, 589 (Minn. 1954), the
Minnesota Supreme Court specifically held that persons attacking the validity
of license fees have the burden of proving that the fees are excessive.
The Appellant next argues that the City is estopped from using the ICBO
valuation because it agreed to reconsider and make a refund after an audit of
Knutson's books. In order for estoppel against the City to apply, Appellant
must prove that the City made representations or inducements upon which
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Knutson relied to its detriment and that Knutson will be harmed if the claim
of estoppel is not allowed. Brown v. Minnesota_Department of Public Welfare,
368 N.W.2d 906 (Minn. 1985); Ridgewood Development Company_v. State, 294
N.W.2d 288 (Minn. 1980); Mesaba Aviation v. County of Itasca, 258 N.W.2d 877
(Minn. 1977). In this case, the City did make a representation or inducement
to Knutson Construction Company that a refund would be given for excess permit
fees if an audit showed that the valuation for Olympic Place Was less than the
amount used by the City. At the time this "agreement" was made, Knutson had
already paid the permit fees and took no further actions to its detriment in
reliance on the City's proposal. Consequently, the City's failure to adhere
to its proposal did not result in any additional harm or prejudice to Knutson
because the assessed fees had already been paid. Consequently, the doctrine
of equitable estoppel is not applicable in this case because there was no
detrimental reliance.
The general rule in Minnesota is that license or permit fees assessed by
municipalities must be an amount that is reasonable and not in excess of the
expenses incurred by the issuing body. Minneapolis Street Railroad Company v.
City of Minneapolis, 52 N.W.2d 120 (Minn. 1952); Lyons, supra. License fees
set by a city are presumed to be valid unless the party challenging those fees
can offer evidence to overcome the presumption. Lyons at 589.
In this case, the City relies on section 304(a) of the Uniform Building
Code which reads:'
3This section was amended in the State Building Code (1983 Rules) to read:
1305.0800 SECTION 304.
Section 304(a) of the UBC is amended to read as
follows:
UBC Section 304. (a) Permit Fees. Each municipality
must adopt its own schedule of permit fees. The fee
schedule of Table No. 3-A is optional for use by the local
authority and is a recommended schedule. In areas outside
of the enforcement authority of a city, the fee charged for
the issuance of permits and inspections for single family
dwellings may not exceed the greater of $100 or .005 times
the value of the structure, addition, or alteration.
(Minnesota Statutes, section 16.851.)
The determination of value or valuation under any of
the provisions of this code must be made by the building
official. The value to be used in computing the building
permit and building plan review fees is the total value of
all construction work for which the permit is issued as
well as all finish work, painting, roofing, electrical,
plumbing, heating, air conditioning, elevators, fire-
extinguishing systems, and any other permanent equipment.
However, the issue herein, valuation, is not affected by the amendment.
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Fees
Sec. 304(a) Permit Fees. The fee for each permit
shall be as set forth in Table No. 3-A.
The determination of value or valuation under any of
the provisions of this code shall be made by the building
official. The value to be used in computing the building
permit and building plan review fees shall be the total
value of all construction work for which the permit is
issued as well as all finish work, painting, roofing,
electrical, plumbing, heating, air conditioning, elevators,
fire-extinguishing systems and any other permanent
equipment.
The terms "value" or "valuation" are defined by section 423 of the UBC as
follows:
Sec. 423. VALUE or VALUATION, of a building shall be the
estimated cost to replace the building and structure in
kind, based on current replacement costs, as determined in
Section 304(a).
When read together, the two sections equate replacement cost and the total
value of all construction work.
The real issue in this case is what figures are the true indication of the
replacement cost or value of the construction work at the time the building
was constructed. The Judge has determined that the audited certified costs of
construction, with the addition of architectural fees, is the value that
should be used in this case. The record shows that Knutson's construction bid
was very close to the bids tendered by competing companies. Because all bids
were based on the same plans and specifications, the Judge must assume that
the cost of change orders would have been approximately the same regardless of
who did the construction. The Judge has also accepted the interpretation of
the Building Code Division and the ICBO that architectural fees should be
included as part of the construction costs. Knutson does not dispute this
inclusion.
The above-discussion should not be read to imply that the Judge has found
the City's use of the ICBO valuation data to be in violation of either statute
or rule.4 The City, specifically the building official, is authorized to
make a "determination of value." There is no method prescribed as to how that
determination should be made.' The determination of the building official
'The Judge was able to find only one reported case that even mentions use of
the ICBO "Building Valuation Data." City of Kalispell v. Schaffer, 700 P.2d
1000, 1003 (Mont. 1985). That case is applicable herein only for the
proposition that architectural fees are appropriately part of construction
costs .
'The Building Code Division may want to consider adopting a rule which would
resolve this question.
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has a presumption of Validity. Lyons, supra. However, in this case, use of
the averaqe cost figures contained in the ICBO data gave an incorrect
valuation.b The applicable rule requires that the "value of all
construction work" be the standard, not the regional average cost figures for
the work as calculated by the ICBO. If the term "value" is to be interpreted
to mean something other than actual st, rules should be promulgated to adopt
that meaning. In this case, Knutson has proved that the value of the Olympic
Place construction, for purposes of section 304 of the UBC, is the certified
construction costs with the addition of the architectural fees.
P.C.E.
'The appraisal figure offered into evidence is also based on average
valuation tables much like the ICBO data.
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