It helps you (or at least, me) to treat it more seriously.There are also asset protection and tax benefits.

Its not about how bad it is now, its about how bad it can get, and the unfair way its being treated as of now. 

If Spokane has treated you well, you could 1031 into some land and build some new multi-family with the resources you have.

Treat them as you would treat any other tenant who didn't pay and start the evictions proceedings as outlined by your state's law. 

Treat your tenants honestly and fairly, maintain the home, stay out of their business.I've seen many Landlords give their tenants gifts, rent reductions, free rent for Christmas, and other concessions to "keep them happy" and keep them longer.

@Brad RichardsI've been investing in the Rockford area for almost 30 years it has treated me very well.

To that end, I wonder if its better to treat my friend, instead, as a private investor receiving a percentage return; or to structure the partnership as a short-term loan.

Until the SBA comes out with official guidance specific to REI investors and how exactly we are to treat these funds, everything else we guess here is like reading tea-leaves to predict the future. 

Do I treat this as a prepayment or escrow type account, crediting cash and debiting the prepay? 

Treat it 100% like a business and don't make it personal and have agreed upon goals and plan with the partner.