They excavate the sewer main for their tie in, while exposed they cut my active line and capped it. 

I'm just gradually deleveraging, this next time by likely buying all in cash, and continuing to not lever my properties until cap rates are lower than interest rates... unless I can get cheap and low leverage debt through assumption.

Capturing high cap rate nonsense is just grabbing low hanging fruit.

Is this structure standard, though, in terms of capping investor returns at 12%?  

Raise it once a year and raise it to market value (unless there are rental caps in your area). 

The alternative is I pay cap gains taxes and dump the capital into my rebuild project on my primary which would allow me to rebuild without any financing at all. 

All the "bad" affects them first.Pref equity has a known capped upside and more downside protection, but as @Lane Kawaoka said, getting paid and/or getting your money back is not a guarantee.

Typically these policies are also capped at a max interest rate around 8%.

Second, we start with a 7.5 cap.  

Which is its a low cap rate deal, you might need to put 40% down in order to meet the banks DSCR loan covenant.