Commercial lease negotiation mess!!

[Luke Mccandless]

To start off - this is a small town  (3500 people) and there are not a lot of demand for small commercial lease space. I would really recommend against investing is small towns after this experience!

We have a vacant ~1000 foot units we are trying to rent for $795 a month plus utilities.  We are asking for first last and deposit for move in ($2385). This is the exchange: 

"I have read through the amended lease. Thank you for making the changes to the points of concern.
I appreciated talking with you this morning about the ability to launch our business in your space within our budget.
I have a proposal for you regarding your offer of reducing the upfront rent, or prorating the last months rent payment.
I purchased 60 boxes of commercial flooring each covering 18.1 square feet. Amazon has this flooring for 66.34 per box. The value of the flooring that I am ready to install is $3980.40. This would cover the entirety of both rooms of the space we are looking at putting our restaurant. My friend, a licensed contractor from, bid the installation of this flooring at $2.00 per square foot including baseboards, at $2000.00. That makes the value of the flooring installed $5980.40. He is willing to help me install the flooring. My cost for the flooring, and his help installing is $1600. So, value of 5980.40, we can get it in and installed for $1600.
I propose that the discount of our rent on the front end, and our security deposit, sell you the floor installed. Either a discount if $100 per month for the first 8 months, or $200 per month for the first four months would account for the first $800.00. The security deposit of $795 would be paid by us in the form of the flooring installed, and refunded to us contingent on our leaving the space acceptable when we vacate, whenever that would be. At that point the floor would be yours, remaining in the space. I have attached pictures of the flooring in its current condition. I will also be emailing a link to the flooring for sale on Amazon. I can send you pictures in the morning of the purchased flooring in boxes if you wish.
Thank you for considering our needs as we start our new business. I will look forward to seeing you this weekend to hopefully sign a lease. Please consider my proposal." 

My response: 

"Thank you for the detailed proposal. It's important to us that you rent this space and we would like to work with you. It's also important for us as a business to have a reasonable amount of security from a small deposit in case there is damage or other issues.

With that in mind it's reasonable for us to have a first, last, and deposit in hand at signing. The total would be $2385 this is a small and fair amount for a commercial space. We would be willing to help you with the flooring and to that end we are willing to offer the 2nd month for free to compensate you for part of your investment in flooring. You will retain the option to keep the flooring at the end of the lease if you would like to do so. In short we are offering a free month of rent at a value of $795 for the second month of a two year lease.
Does this seem reasonable?"

Their response: 

"I wrote this over a week ago.'In order to sign a lease on this space, we will need to have confidence that the arrangement will allow us to recover the initial investment into our business, and to make a living operating our business out of that space. We also will need to know that the landlord will be an advocate for the success of our business.' I, now, have lost all confidence that either of you have the integrity, honesty, ability, or business ethics to be trustworthy landlords to my business. Your inability to communicate, your inability to take responsibility for improvements needed to the space, and your inability to honor verbal offers has eliminated any trust I would need in you as building owners and landlords. We are no longer interested in leasing from you."

Question : Where did we go wrong? Should we try to salvage this or did we dodge a bullet?