Is it common for developers to use subsidies to cover 100% of the construction costs without needing to obtaining debt or raising equity?

Now, I'm imaging a scenario when every one of these tenants move out that I'll be paying their entire security deposit + interest even if there are damages beyond normal wear and tear. 

You can run the same scenario accounting for the tax hit if you kept it past the 2 of 5 year time frame I presume you are referencing. 

.: So I have been thinking the last number days about a particular scenario. 

In the meantime I would love to have some helpful information or ideas to share with the buyers when we meet and ideally an agreement/contract we could fill out together once new terms are agreed to and then share that with the attorney so he could draft up the formal instrument for recording.If you have experience with this type of scenario, I’d love to hear any recommendations you have or any helpful resources you could point me to for the appropriate paperwork.Under foreclosure laws, you have to send appropriate notices and try to work with the borrower and offer a loan mod before foreclosure anyway. 

Quote from @Anil Shah: Quote from @Derek Brickley: Pretty common, you can definitely use commission as down payment conventional loans and not have it count toward IPC as long as you're on the loan. 

Hard money would be the easiest and most common route to fund the purchase/rehab.

I would outline your scenario to a few local mortgage brokers - with everything you've said this seems like a pretty easy deal. 

Most hard money loans will need to be in first position lien and will generally go up to 70-75% (maybe 80% in certain scenarios) of the ARV.

If you want to run few scenarios reach out.