Subject
title
Approval of a Subordination Agreement between the Mayor and Council and NeighborWorks Capital related to Scarborough Square Townhomes and Apartments, and authorization for the City Manager to execute the Subordination Agreement and related documents
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Department
Housing and Community Development
Recommendation
Staff recommends that the Mayor and Council (i) approve the subordination agreement (Attachment 1) and (ii) authorize the City Manager to execute the documents required in connection therewith, subject to approval as to legal sufficiency and final form by the City Attorney.
Discussion
Rockville Housing Enterprises (RHE) has requested that the City of Rockville subordinate the City’s existing $1.2M MPDU loan to the new NeighborWorks mortgage. This will give RHE two years to close its LIHTC deal and pay interest to NeighborWorks at a significantly better rate than its current loan.
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.
According to RHE, ORLO forgave $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). RHE and ORLO have agreed to several extensions on the remaining $24,000,000 owed to ORLO.
In July 2025, RHE secured a loan from Montgomery County for One Million Five Hundred Thousand and 00/100 ($1,500,000.00) in housing initiative funds to assist RHE Scarborough in the payment of “essential mortgage payments, interest reserve replenishment, and new extension fees related to the prior financing of the acquisition of [Scarborough Square Apartments]”. In September 2025, Montgomery County provided additional loans to RHE to buy-out ORLO’s ownership interest.
RHE is seeking a loan from NeighborWorks America to buy-out ORLO’s loan. This new loan will provide RHE with a lower interest rate and more favorable terms on repayment and length, providing RHE with the time needed to close their proposed LIHTC deal with the state and other partners. At the time of the LIHTC closing, the City of Rockville’s MPDU loan will be repaid.
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.
On September 30, 2024, the Mayor and Council adopted a resolution to approve RHE Scarborough Square, LLC’s sale of a beneficial interest in the Scarborough Square Townhomes and Apartments. The Mayor and Council also approved and authorized 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.
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
After the Subordination Agreement is approved, RHE and NeighborWorks America will proceed with the transaction, and the City Manager will execute the requisite document(s)