Etc.Essentially, you're banking on these units being financeable with conventional financing after taking ownership, but don't have the protections in place to ensure that is the case. 

2) How can an investor be protected from the above?

No people should not share in the suffering equally.

Liquidated damages are paid by you regardless of how much damages the Seller actually suffers(ed).For example, if the EM is $ 25K and the Seller resells the property to a new buyer with an actual out of pocket loss from your breach of $ 10K, an argument can be made that Seller should not make a profit, unless the contract allows for such a situation.2.

I thought this may be best option as it still gets bank in space on time (and protects me in case there are issues with title). 

If your zoning application WAS approved, you would then have to submit signed and sealed alterations plans by a registered architect that demonstrates that the conversion meets all current codes, including existing building, Architectural life safety, Electrical, plumbing, mechanical, energy and fire protection.

That way even if something goes wrong your investor is still protected.

The first time syndicators purchasing in PHX circa 2018-2019 are in the witness protection program and I wouldn't expect a call back anytime soon.I'm sorry to be the bearer of bad news but if you invested in a PHX multifamily purchased in 2018-2019 then you are probably in for long and bumpy ride.

I understand that his business may be suffering a bit, but I dont believe that he is not able to pay his rent.

If you can come up with some kind of income protection agreement with the seller - more power to you!