This would be the least passive but potentially the largest upside. 

What risks were associated with the transaction?

To your point, there is some risk associated with buying a note, but that is why we are selling them at least 25% under market BPO value.

A client can close on a new property with us in less than 45 days so no long closing or pre construction risk anymore with our program.

Hard to give up such a low mortgage rate, but in the end that's small potatoes compared to potential OOS problems.  

In light of that did the developers wind up getting a pretty decent deal out of this after they took a big risk on a property with crazy restrictive zoning and no clear path forward prior to purchase?

Obviously, with any investment, if there is more risk, there is more reward. 

The seller will lose some rent, potentially incur costs to evict, possibly costs to clean out the units depending on your sales agreement.

Assume a couple of months of vacancy, consider potential unexpected repairs (like HVAC or plumbing issues), and test the numbers with rents dropping by 10-15%.

I should also mention we shut off the breaker (to the garage) after confirmation from two electricians and our contractor that we had a serious fire risk.