You assume a known, fixed financial loss (the cost of the premium) to mitigate your risk from an unknown and potentially catastrophic financial loss.

So, that's the time to see what works and what doesn't and back out if something looks catastrophic.

What issue or risks are associated with this type of loan structure and what type of planning should be done if you hit a catastrophe? 

I'm a realtor and I have about 5 years as a State Farm catastrophe claims adjuster.  

Cover things like death of a partner, partner not living up to agreement, decisions related to exit strategy should the market change, decisions related to influx of additional capital, how losses are distributed if the project doesn't turn a profit, how to handle catastrophic events (i.e., house burns down and insurance pays out), etc.Remember, the agreement is pretty much unnecessary when things go well; it's mostly for when unexpected things happen. 

Low likelihood, catastrophic consequence.  

For example, if the roof was replaced last year, chances are you have at least 10 years (unless something catastrophic happens - which is why you would have insurance) on the roof before it needs to be replaced.  

You should also talk to a insurance broker and have them review the policy with you to eval your exposure in the event of a catastrophic issue. insurance also covers lost rent and it also covers liability if a renter injured themself in your unit and sued you.

What an LLC does well is protect you from catastrophic claims (think $10,000,000 claim).  

While I and my colleague partners (save for one) didn't, we felt the effects but they weren't catastrophic.