Having a couple buddies renting out rooms isn't ground breaking and to me doesn't leave you with many options.

You can also state that during your walkthrough you saw that it needs: (a kitchen upgrade, the hvac is old, etc) and state these are things you don't plan on bringing up in the inspection phase.  

Good luck in getting this off the ground!

Should I honor the request, or stand my ground?

How easy was it to get renters, what is your property like (Phase I, II, III, etc.), beds, baths, and what is the monthly rent you are charging.  

I came across BP while doing research about grounding up a house.

Besides the good points given about the condition, you *might* have grounds to keep the deposit on the fact that he gave less than 60 day notice of his vacating.

Have you ever been to the city or have boots on the ground?

More important than any property is the team on the ground, and in this case it's the turnkey operator.

And any excess start up costs over 5k (or any costs that don't get deducted due to phase out) are also amortized.