Start off by searching this forum for tons of books,podcast and conversations on this subject. 

Otherwise, we will take ownership of all remaining items (it's not garbage, it just a lot of stuff...some of value, some not).3) In exchange for this, we will office out of part of the building, rent-free, that is tenant-ready and hasn't seen the wrath of his wife.

And, of course, since they knew they wouldn't get any of their partial security deposit back, they left the unit filthy and stole some items out of it. 

. -- I typically have the property under contract, and thus approach the conversation from a position where there is a strong possibility of a working relationship.  

If the 15% remaining items are pretty much set costs, (counter tops, carpet, paint etc.), you should feel comfortable putting together a typical counter offer. 

This letter should have an itemized list of deductions from their security deposit (missed rent, damages, etc.).

Reading this conversation has been interesting, at times entertaining, but it won't do us any good unless we get to the bottom of this.

My question is what things can I do during the initial rehab period to help work towards possible condo conversions in the future.

This conversation is mostly for those landlords that live out of town, and manage their own property. 

I believe the tax basis is the value of the property at the time of conversion.