Impact of the Rosetta Stone deal

Jeremy Aldrich -- January 16th, 2009

Earlier this week, the Harrisonburg City Council voted unanimously to approve the sale of the old HPD headquarters to Rosetta Stone.  What will be the effects on the city’s bottom line, and what are the potential scenarios for the future?

In terms of direct fiscal impact, the city could collect around $18,500 this year.  Rosetta Stone will pay an estimated $6,403 in real estate taxes on the building, based on the 2009 assessment of the property’s value at $1,085,300. In future years, that assessment (and the collection from the .59 per $100 real estate tax) may rise, especially after Rosetta Stone finishes the renovations that are part of the deal.  The city will also collect on additional furnishings (taxed as “business personal property”) needed to fill the new building.  Based on last year’s taxes, 22% growth at the Harrisonburg offices would add an additional $12,000 to the city’s coffers, according to Commissioner of the Revenue June Hosaflook and Economic Development Director Brian Shull.

The company is exempt from the city’s business license fees until 2010.  Once that exemption expires, the business license could potentially be a significant source of revenue depending on which of the company’s sales receipts are counted as originating in Harrisonburg.  Though Harrisonburg is still referred to as the company’s operational headquarters, the company’s corporate headquarters are in Arlington, and receipts from some types of sales may be calculated there.  In addition, sales through the kiosks that the company operates in malls and airports would count in the localities where the kiosks are located.

The greater impact on Harrisonburg’s bottom line, though, will likely be through property taxes, sales taxes, and meals taxes paid by Rosetta Stone’s new employees.  The agreement calls for the company to “create and maintain” 100 new jobs in Harrisonburg within the next five years.   City officials say that compliance with the agreement will be monitored through contact with Rosetta Stone’s HR department.

According to media reports, the company already has about 450 employees in the city.  But according to the company’s SEC filing, there were 1209 company employees worldwide as of September 30, 2008, with 654 of them in kiosk sales.  The remaining 555 are spread among the company’s offices in Harrisonburg and Arlington as well as smaller offices in London, Tokyo, and Boulder, Colorado.

On January 8 of this year, the company announced that it had “decided to eliminate a small number of positions in our Harrisonburg office”, according to a statement by Rosetta Stone CEO Tom Adams.  He noted that the company has about 80 open positions, which include 23 in Harrisonburg.

Also according to the company’s November SEC filing, Rosetta Stone generated 78% of its revenue in 2007 from consumer sales.  It notes among its “risk factors” that, “We depend on discretionary consumer spending in the consumer segment of our business.  Continued adverse trends in general economic conditions, including retail shopping pattern, airport traffic or consumer confidence, may compromise our ability to generate revenue.”  The filing also says that, “Many of our employees are located in Harrisonburg, Virginia, a city that does not have a large pool of qualified replacement personnel.  The lack of qualified local replacement personnel may make it more difficult to find replacement personnel and may increase the costs of identifying and relocating replacement personnel to Harrisonburg.”

An additional consideration in the sale was the future expansion of the Rockingham County Jail.  In a 2007 DNR article, Sheriff Don Farley projected that expansion of the jail would need to occur in 2012 or 2013.  The old HPD headquarters was expected to be demolished to accommodate that growth.  According to Vice-Mayor Richard Baugh, the City Council received a letter from the Rockingham County Board of Supervisors reminding them of that plan and urging them not to sell the building.

Mayor Degner and City Manager Kurt Hodgen, in a joint email, say that:

The City does not concede that there is a “strong possibility” that the jail will be looking to expand.  Under current Virginia law, the Commonwealth is required to provide 50% of the construction funds for a new jail and there is no indication that funding will be available in that time frame.  Further, no architectural or engineering studies or design have taken place that identifies the best alternative for a new jail.  The best alternative could turn out to be a combination of “renting” jail space from other jurisdictions that have capacity, implementing alternative forms of incarceration/detention, and no longer accepting state and federal prisoners in the jail.  Regardless of what alternative is selected, the City is required to pay for 50% of the cost, as well as 50% of the ongoing operations cost.

The only other vacant property near the jail, which was part of the old Whetsel building, sold in September for $1.65 million, which is more than its assessed value (the deal encompassed two separate parcels).  That building is slated to be transformed into retail and office space as well as housing the Union Station restaurant.

Shawna Fowble, who spoke on behalf of Rosetta Stone at the Council meeting, declined to comment for this article after repeated attempts to contact her by phone and email.

22 Responses to “Impact of the Rosetta Stone deal”

  1. Lowell says:

    Jeremy,
    Do you have an idea what the cost/benefit ratio is to our locality in housing prisoners from other areas? I wonder also how many, or what percentage of the jail capacity is used in such a manner.
    This brings to mind the fact that the local landfill is being overwhelmed by imported garbage from all over the east coast. Is this a good thing? Should we be looking to changing our direction. Our philosophy?
    Do we want to be an importer of other areas’ trash and lawbreakers? Or would we rather be productive and progressive in cultivation of our shared heritage and future?

  2. Gary says:

    I’m grumpy that they want to make Water St one-way. I go east on it almost daily, and it will be quite annoying not to be able to go that way anymore.

  3. Gary,

    I agree that the road issue is important. I hope a deal is worked out to keep it open, at least one way.

    Jeremy,

    I believe the Whetsel building is larger and was in better shape when sold than the one in question for the Rosetta Stone deal, although I stand to be corrected. Also, it was sold at a time when property values were higher than they are now, in reality.

    Regarding all this stuff about a jail expansion, we are dealing with a really fundamental question. Is Harrisonburg to be locked into stupid decisions that were made in the past? I am talking about the old Walter Green crowd’s’ idea that the future of downtown Harrisonburg was to be a “judicial complex,” that is a court with a big jail next to it. Ugh.

    I happen to know from the primary source that Harrisonburg had the opportunity to have what Staunton now has, the Blackfriars Theater. We do not have it because of those idiots who turned it down when it was offered on a silver platter to them. So, do we have to have Harrisonburg go along with them and be the city of “criminal justice” while Staunton is the city of arts? Here is the alternative in the form of Rosetta Stone, an employer who started here who employs highly educated and cosmpolitan people, a company that is becoming known throughout the world, a company that is putting Harrisonburg on the map more than anything else that has happened here.

    So, you want to accommodate those who made the stupid decision of sending Blackfriars to Staunton by saying no to Rosetta Stone so that we can build more jails in downtown Harrisonburg? I say if the Sheriff of Rockiingham Countiy needs more jail space, then let it be bulit in Rockingham County and not in downtown Harrisonburg. I suggest Elkton as an appropriate alternative location.

    There is a great deal at stake here. Harrisonburg has a real opportunity to redefine itself, or to be more precise, to in fact really and seriously define itself to the entire world. It has not been known so far worldwide. It is only now beginning to be known globally, and it is JMU and EMU and Rosetta Stone that are that image, not big jails. We have a new mayor who was born abroad and brings to this whole matter at a crucial moment the ability to project an image of Harrisonburg that is in fact true, one of an unusual and deeply grounded cosmpolitanism, a city in rural Shenandoah Valley with the highest percentage of students in its school system speaking a foreign language in the Commonwealth of Virginia, and an economic base of global significance. For the city not to support this would be an unfortunate mistake.

  4. Frank J Witt says:

    Perhaps Jeremy would prefer another empty building like the Circuit city building will be by March 31…

  5. Emmy says:

    I agree with Mr. Rosser here. We can’t let Rosetta Stone go in favor of more jail space. The fact that we lost some great little shops to the court house and a theater to a parking lot is depressing enough. Downtown is starting to rebound and this will make that happen faster.

    The longer I think on this the better it actually sounds. Downtown needs this, Harrisonburg needs this, and 100 people need this.

  6. Jeremy Aldrich says:

    Lowell, great questions. Maybe we can try to find out next week.

    Gary, the city decision makers I talked to expressed that the Water Street traffic changes are really at the forefront of their minds. One pointed out that if the change to one-way traffic doesn’t work out, there’s no reason why it can’t change back.

    Barkley and Emmy, I wonder what the combined economic impact of having the legal community concentrated downtown is, compared to Rosetta Stone? And I wonder how much the city would be expected to chip in if the current jail, built in 1994, was moved elsewhere.

  7. Lowell says:

    Emmy,
    You are so right. The loss of the Virginia was heartbreaking. That old theater was a landmark treasure, which is now but a fading memory.

  8. Emmy says:

    I guess I’m looking at it from citizen appeal versus economic impact. Perhaps it is a more sound financial decision to have the jail downtown, but is that what we want our downtown to be? I have no idea how many prisoners are held in the current jail, or what types of criminals they are. I don’t know how all that works.

    But, based on pure assumption and speculation, could we leave the current buildings as they are and add an additional facility somewhere else? With the volume of lawyers who have their offices downtown, it makes sense to keep the court and a jail there. But I assume there are varying levels of prisoners housed there. Could long term prisoners be moved to a different facility and prisoners awaiting trial, or in for shorter stays be housed in the downtown facility?

    Again, I really have no clue how that all works, perhaps someone could clear that up for me.

  9. Of course we are not going to send the city jail to Elkton. However, there is an obvious alternative that is better than having the jail take over the property that RS is planning to take over, build up. Add a story to the existing building or build a new, taller building on the same site. Maybe there is some reason this is impossible, but a jail does not earn any property tax revenue, and certainly does not add in any wasy to the appeal of downtown, compared to Rosetta Stone. There are no, or very few, positive multiplier effects from expanding the amount of land used by jails downtown, if anything it may be a negative multiplier by driving people and interesting businesses away.

    BTW, just for record, the failure get the Blackfriars Theater in town was not the only example of city fathers in the past discouraging innovative develolpment. I also have it from the primary source that when the Joshua Wilton House was initially proposed, it was opposed by the then mayor, although clearly it was not blocked, and I understand that individual later changed his mind after he saw what a success it was. But, indeed, the issue here is the direction that Harrisonburg is going to go and the nature of its economic base and related activities. Harrisonburg has a real opportunity now, but it could blow it if its leaders behave as they did in the past. Fortunately, and hopefully, we will not be seeing that happen.

  10. Jeremy Aldrich says:

    I’m trying to find the study that was done in 2007 by the Central Shenandoah Planning District Commission about expansion of the regional jail. My understanding from talking to Richard Baugh is that they aren’t really able to build up, but they may be able to fill in some space inside the jail for limited expansion of cell areas. Here are a few DNR articles about the study.

  11. Don says:

    This is very interesting Jeremy; thank you for doing this research. Rosetta Stone states in the SEC filing:

    “Many of our employees are located in Harrisonburg, Virginia, a city that does not have a large pool of qualified replacement personnel. The lack of qualified local replacement personnel may make it more difficult to find replacement personnel and may increase the costs of identifying and relocating replacement personnel to Harrisonburg.”

    If past performance is any indication, Rosetta Stone may be making it clear about its intent with regard to how it will fill 100 positions called for in the contract. It’s good that we are clear on that point.

    Did Ms. Fowble actually decline to comment or were you just unable to reach her?

  12. Jamie Smith says:

    There has been a lot of chest thumping about the downtown revitalization. We have new brick sidewalks and a lot of fancy signage. What else has taken place besides several new restaurants and a new shop or two. At the same time, Dr. Green’s building, the old Legett building and One Court square have all been taken off the tax rolls. Sure, some apartments have been created and more are coming but will that bring new businesses to downtown? A&N was the best retail draw downtown had and now it’s gone. I see nothing wrong with trying to grow the legal presence downtown. In this economy the lawyers may be the only ones that aren’t non-profit organizations.

  13. Bill says:

    IMO there will be many options explored for needed jail expansion. One option mentioned in a previous post, “not taking federal or state prisoners” is not an option. The feds payed for part of the original jail construction and thus purchased X number of bed spaces in the current facility. As for transportaion of prisoners to other locations, while this may be an option , it is one with considerable expense and risk. We have already lost one deputy doing this, is it worth the life of another to try it again? If the state reduces jail time requirements for non-violent offenders, there might be an opportunity to delay the need for an expanded jail. But as our community continues to grow, the unfortunate reality will be a need to have more jail space. I for one feel that the jail needs to be near the courts. If there is a need to expand the jail, then there will more than likely be some “taking” of more real estate in the downtown-court square area to accomidate that need. Otherwise, the jail and the courts would more than likely be moved out to county property in the Pleasant Valley area. This would have both a positive and negative affect on downtown. But as mentioned earlier also, there is no money to build anything if you are dependent upon the state to partner with you. If the economy doesn’t improve soon and the state’s fiscal crisis is not resolved, we will all have a lot more to worry about than just a jail. Things like the public library, public transportation funding and other “non-essential” state funded grants and programs are likely to go away for awhile. Which in the final analysis of this discussion makes the Rosetta Stone decision and the pending approval of the economic development on the southern city limits and the county very good decisions, not only for the present, but also for the future. We can argue about the jail and the courts in the future.

  14. John says:

    Jamie said, “Sure, some apartments have been created and more are coming but will that bring new businesses to downtown?”

    Hell, yes! People who reside downtown are much more likely to patronize the shops and restaurants there. Entrepreneurs know this – and as more people start living in all of the new units being built at Urban Exchange, etc. you’ll start hearing about even more new businesses going in down there….

    LOTS of the people who already live downtown in the existing residential units are there specifically because of it’s proximity to work, school, food, etc.

  15. Bill,

    Jeremy may be right that there is some reason why it is not possible, or perhaps is very costly, to “build up” on the existing site of the jail. But if there are not such limits, then all your talk of needing to “take more downtown real estate are simply not relevant. As it was, I was unable to link to the articles in the DNR, so I do not know what the situation is regarding the difficulty or lack thereof of the “build up” option that Jeremy has suggested might be there.

  16. Andy Perrine says:

    I, too, agree with Bill on many of his points. And it’s great to see an honest-to-goodness economist of global renown commenting on the developments in downtown Harrisonburg; thanks for joining the discussion, Dr. Rosser!

    Additionally, on the matter of expanding the jail, as a board member of Harrisonburg Downtown Renaissance, I was present at many of the early meetings with consultants brought in by the Virginia Main Street organization. One consultant retained by the National Register of the Historic Places was an expert in demography and gave a presentation exploring who worked, lived and shopped in downtown Harrisonburg. This was about five or six years ago before the renaissance began to increase in momentum and not many people were living downtown — by choice, that is. We all had to chuckle at the seemingly insurmountable challenge we faced when the presenter described as one of our number one groups living downtown as “the incarcerated.”

  17. I would also like to note that this deal will be subject to a “second reading” at next week’s council meeting. It’s not a done deal quite yet.

  18. Jeremy Aldrich says:

    Rosetta Stone submitted an amended filing to the SEC on Wednesday. Here are some highlights from the additional info added:

    – “As of December 31, 2008, we had 1,217 total employees, consisting of 713 full-time and 504 part-time employees. Our personnel consisted of 190 employees in sales and marketing, 188 employees in research and development, 220 in general and administrative, and 619 kiosk sales employees.” – this is over 150 kiosks, the corporate headquarters in Arlington, the office in Harrisonburg, and “small offices in Boulder, Colorado, Tokyo, Japan and London, United Kingdom. Our Boulder office serves as a research and development location while our Tokyo and London offices serve as our regional sales offices. ”

    – The top 5 company executives earned a combined $2.5 million in 2008.

    – The IPO date is not mentioned, but the current estimated value of stock would be $22.74 per share.

  19. Jeremy Aldrich says:

    OK, now it’s a done deal. No comment from any Council members (again) before the vote finalizing the sale.

  20. Lowell says:

    Jeremy,

    There will be another council election in 2010…
    Feel like dippin’ your toe in the water?…

  21. Dave Briggman says:

    Yep, those “done deals” were not just unique to Rodney Eagle and Roger Baker…they will continue on City Council as long as voters remain ignorant as to what is going on in their City government.

    FWIW, I think the City Manager’s a stand-up guy though.

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