No modification is needed to the operating agreement and as long as you are calling for capital pro-rata from the investors their ownership percentages stay the same relative to one another.Having explained all that, if it were me I wouldn't do it. 

By work out costs, do you mean fees paid to the servicer to negotiate modifications or other terms in the scenario of non-payment, default, or other adverse situation?

Maybe what they meant to convey was that the current owner cannot make modifications to the building without changing over to the new use zoning .

Hundreds of holes in the wall, filthy carpet, leaking roof and number of different kind of modifications on flooring.

These modifications hinder the ability of the lender to easily sell it as a residential home if they were to have to take the property back.

I hope you have a no modifications allowed without prior written permission clause.

It's a loan modification or likely a ch 11 BK prospect if they want to attempt to keep while retaining ownership of the property. 

With a regular, regulated lender neither one is legally possible and wouldn’t meet fed/state banking regulations.The current lender will either give you a discounted pay off, or they won’t.....that is your only solution to refi.The deferred principle makes this sound like a loan Modification done by a major lender.....not sure what a “balloon payoff penalty” is, sounds you are mixing up terminologies.

The listing says that the roof needs repair so I'm including $20,000 to fix it up ($10k for the roof, $10k for other repairs).Without any modifications, this is not a good deal (Cash Flow: -272/mo, Cash-on-cash return: -2%)! 

Those people have been in limbo for a long time with mortgage modification.