Does this mean that we will just pay less at closing and not get the physical security deposits?

If so, make sure agreement is in writing, signed by both parties, specifies new end date and ensures any existing security deposit will still be dealt with properly per landlord/tenant laws, and I'd also ask for a partial payment to be issued at signing to make obtaining his new place easier.  

Rent is rent, deposit is deposit, and I suggest keeping it that way.

If you get a deed on a rented property are you then on the hook for security deposit, etc?

Just download all your transactions monthly to excel and just code them there (rental income, security deposit, insurance, taxes, and etc).

Many lenders will require a 12 month lease to be in place along with the security deposit and first month rent collected. 

I've read that I should open a business savings and checking at a local institution - particularly for the security deposits.  

@Carl Rowles we screen all tenants exactly the same, but know several of our local competitors cut corners to attract more S8 applicants - waiving application fees, security deposits, etc.You can try to weed out applicants that have poor "house maintenance" skills by doing surprise zoom calls and asking them to show you their kitchen, bathroom and another room.

It also means that your renters will want to vet their subletters carefully to ensure they get their security deposits back, etc.

I chose to forfeit my deposit and walk away from the project.