Subject
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Adoption of Resolution to approve RHE Scarborough Square, LLC’s sale of a beneficial interest in the Scarborough Square Townhomes and Apartments. Approve and authorize the City Manager to execute on behalf of the Mayor and Council the First Amendment to the City of Rockville Moderately Priced Housing Fund Loan Agreement with RHE Scarborough Square, LLC, and the First Amendment to the Deed of Declaration of Restrictive Covenants made by RHE Scarborough Square, LLC for the benefit of the Mayor and Council.
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Department
Housing and Community Development
Recommendation
Staff recommend the Mayor and Council (i) adopt the attached Resolution approving the sale of a beneficial interest in the Scarborough Square Apartments by RHE Scarborough Square, LLC to ORLO, Scarborough Investors, LLC, subject to the RHE Scarborough Square Owner agreeing to amend the City Loan Agreement and the City Restrictive Covenants to extend the MPDU Compliance Control Period for an additional 83 years, and (ii) approve and authorize City Manager to execute on behalf of the Mayor and Council the First Amendment to the City of Rockville Moderately Priced Housing Fund Loan Agreement with RHE Scarborough Square, LLC, and the First Amendment to the Deed of Declaration of Restrictive Covenants made by RHE Scarborough Square, LLC for the benefit of the Mayor and Council
Discussion
On November 1, 2022, RHE Scarborough Square, LLC (the “RHE Borrower”) acquired Scarborough Square Townhomes and Apartments (a 121-unit multifamily rental apartment complex) from Montgomery County for $40,000,000. The acquisition was initially financed with a short-term $40 million promissory note from Montgomery County. Rockville Housing Enterprises guaranteed repayment of the Montgomery County loan, for which payment was due May 1, 2023.
On December 20, 2022, ORLO Scarborough Investors, LLC (“ORLO”) provided the RHE Borrower with a short-term loan of $33,000,000. The ORLO loan accrues interest at the rate of 8% per annum. The RHE Borrower is required to make monthly interest payments on the loan. Initially, the full outstanding balance of the loan was due and payable on December 20, 2023. $28,200,000 of the ORLO loan proceeds were used by the RHE Borrower to pay down the Montgomery County loan.
After receiving the $28,200,000 from the ORLO loan proceeds, Montgomery County agreed to refinance its short-term loan to the RHE Borrower and issued an $11,800,000 promissory note. The refinanced Montgomery County loan accrues interest at 1% per annum. The RHE Borrower is required to make monthly interest payments on the refinanced loan, and the full outstanding balance of the loan is now due and payable on December 14, 2027.
On July 17, 2023, in order to ensure that 61 apartment units in Scarborough Square apartments are reserved and designated for occupancy by low-income households for 15 years, the Mayor and Council approved and authorized a loan of $1,200,000.00 (the “MPDU Loan”) to the RHE Borrower and provided the RHE Borrower with a $600,000 grant. The MPDU Loan accrues interest at the rate of 0% per annum. The RHE Borrower is not required to make periodic loan payments, and the full outstanding balance is due and payable on December 14, 2027.
On October 30, 2023, the RHE Borrower submitted a letter to ORLO requesting an extension of the repayment term of the ORLO loan. After the RHE Borrower paid the $330,000 extension fee, ORLO agreed to extend the loan's maturity date from December 20, 2023, to December 20, 2024.
Proposed “Refinancing”
According to RHE, ORLO is proposing to forgive $9,000,000 of the $33,000,000 ORLO loan in exchange for acquiring a 49% ownership interest in the RHE Borrower (sole owner of Scarborough Square apartments). The remaining $24,000,000 owed to ORLO would still be due and payable on or before December 20, 2024.
RHE is proposing to use the proceeds from the sale of 4% Low-Income Housing Tax Credits (LIHTC) and the issuance of Tax-Exempt Bonds to, among other things, (i) repay the remaining $24,000,000 owed to ORLO, and (ii) fund certain renovations to Scarborough Square apartments. Prior to the closing of the anticipated LIHTC and tax-exempt bond transactions, RHE will need to create a new entity which will, upon closing, acquire Scarborough Square apartments from the RHE Borrower. LIHTC investors will own approximately 99% of that entity.
On September 13, 2024, Jeff Shinensky, Chief Investment Officer for ORLO Corporate emailed the City Manager seeking permission from the Mayor and Council to release the amended operating agreement (which is the document that converts a portion of the loan to equity) from escrow.
Mayor and Council History
On August 1, 2023, the Mayor and Council considered and approved a $1,200,000 moderately priced dwelling unit loan and a $600,000 grant to RHE Scarborough Square, LLC.
Fiscal Impact
The terms remain the same pursuant to the terms of the $1,200,000 Moderately Priced Housing Loan Agreement by and between the Mayor and Council and the RHE Scarborough Square Owner, as evidenced by the Rockville Moderately Priced Housing Fund Promissory Note payable to the Mayor and Council, which shall expire on December 14, 2027, unless the agreement is earlier terminated by prepayment of the Rockville MPDU Loan.
Next Steps
Following the approval of the Resolution, RHE and Orlo will proceed with the transaction.