Whatever the arrangement you come up with NEVER relinquish control of the deal.If you absolutely have to keep them in the deal for the long game them why not give them each 5% ownership in the LLC who will buy and when you cash out structure in such a way that you get 100% of your $$ back first before any profit is distributed.

Do I owe capital gains on any profit from the settlement, as I occupied the house for more than 2 of the last 5 years?

In exchange he's going to take 50% rental profits and 50% of what we get during the refinance. 

They're just trying to cover their costs and make a profit which is smart and you should want them to be successful too. 

@Calvin Lipscomb, When I represent a Buyer (in Illinois) on a purchase of a multi flat, I generally request actual leases, profit and loss, etc. through attorney review and keep the contract contingent upon the Buyer's review and approval of the same.

We have an LLC and split profits.

saving profit in reserve can equal the possible payment being out of your pocket with an expensive home and selling both at the same time. 

Delays and extra fees/inspections can really kill a projects profit margins fast.

I was also thinking of paying lower rates, but paying a percentage of profit on the refi. 

HOA fee - If HOA fees are not paid, business will incur fines, so it is necessary to make the profit in the business.8) Marketing expense and advertising9) Cleaning and maintenance10)Commission (Expenses like commission, abstract fees, recording fees to obtain your mortgage are not deductible but rather capitalized )11) Insurance12)Legal and other professional fees(Tax preparation for business, not personal part)13)Management fee if applicable14) Points- you generally cannot deduct the full amount the first year but have to deduct them over the term of the loan.15) Repairs (Note always do repairs rather than improvements to rental because repairs are deductible right away and do not have to depreciate over few years as done for improvements.