Regarding the lease: if the banks would work with borrowers in doing loan modifications, people would have have to resort to such arrangements.

Will major modifications trigger fire code requirements (sprinkling)?

You'll likely loose a tenant if she has to keep paying late fees, when all that is needed is a small modification to the rental agreement to make it easier for you to get all of the rent.Now, to your point, if the tenant was a pain to deal with, I'd be much less flexible.

I've tried the loan modification process where they strung me along for close to 18 months only to "LOSE" my file.

As a business, you have requirements for the origination, processing, underwriting, buying, selling, servicing, modification and funding loans secured by residential property, the exemptions apply to personal investors, again using their own funds.

Did they forget the part of the lease that states they are not to do any repairs or modifications to the place?

I did not do any physical improvements to the property but I did spend many hours with engineers and city planners defining exactly what could be built on the lot and with what modifications (like soil retention, drainage, engineering requirements, etc.)

It's a matter that you address to ensure your tenants are treated fairly, but you don't have any liability unless it was made as a modification to the lease, such as a letter that could be seen as modifying the written agreement, then you could be liable for the agreements in a settlement at the end of that lease, IMO.

So build a small but very loyal team and reward them. it may necessitate some risk capital on your side.

So what is your question about the 1099C - Did your seller do a Modification on the mortgage or did the lender issue the 1099C in error - I suggest reading this article and if you need more help - I will more than happy to get you in contact with the right person(s) 1099C