Any legal issues I should be aware of in this situation? 

Also you can find lenders that are a lender (have their own guidelines and terms) who can also broker to make sure you're getting the best of both worlds. 

So I contacted the tax collectors office and was told there was a legal loophole and that since the building had been owned by a non-profit for part of the year it would receive tax exempt status for the full year.

My humble advice to anyone attempting to do creative finance is:Creative finance is for experienced investors who have access to capital if anything goes wrong.Learn the lawsDon't use a contract "off the internet", laws vary by state and are also regulated on a federal levelLearn the financing techniques correctlyDon’t skip parts of the processDon’t ever do a “kitchen table” closingUse the proper deedAn attorney can help you with the legal work, but the rest you are on your ownYour guru will not bail you out“Investing” in someone else’s deal by providing a small 2nd loan so the “investor” can pay for “cash to the seller” and for “closing costs” so he can do the deal is a very bad planKnow what problems can ariseLearn the responses and solutions to problems before they are neededKnow everything there is to know about Title and what that meansKnow who a "protected class" individual isLearn the "back doors"Learn human natureUnderstand timelinesUnderstand regulation enforcement (some of these "mistakes" have a 10 year statue of limitations ( they can charge you 10 years AFTER you do the transaction) and carry hefty fines and possible imprisonmentThe court doesn't accept "I didn't know" for an answer"Know that the source of the lead plays a serious role in some states and federallyKnow how much of a "profit" pushes the boundaries to invite an investigationYou can be sued by the seller if you don’t do things correctlyYou are automatically at fault if an investigator or attorney or regulator gets involved.

.: I haven't passed this past legal review so for what its worth: Part of my standard requirements for everyone include income is at least 3X rent, minimum credit score, say 640, Clean record and no evictions as well as deposit is paid in full at signing of lease and 1st month rent is paid in full prior to handing over the keys.

After a grace period of 1.5 days give another notice and mention legal action or law enforcement5.

I am not sure of the legality associated with this and the issues of going from 4 units(residential) to 5 units (commercial) even if one unit will only be owner occupied.

There are some legal considerations as well as practical considerations 1.  

Your client should consult a real estate attorney to draft an agreement with the ex and ensure there are no legal or tax issues, especially since this is an investment property.

On June 7th, we sent an itemized list of deductions via text; he responded on June 8th, disagreeing and threatening legal action.