It's ok to work at a loss or break even, if you make it up in volume.

You have zero equity the moment you start, and zero equity when you get to the balloon payment.You are simply delaying the day of reckoning when you have to buy the property for a short term gain in cash flow and tax loss.

If the last two years of tax return show a net loss (because of depreciation etc), does anyone know how it impacts this calculation?

I can't be the first person that's done this for sure.I have an LLC setup with partner(s) with all the very specific terms in our operating agreement (Ownership Percentages, profit/loss, who's responsible for what initial costs, etc.) 

Losses?

It depends on overall profit levels (for example, a $50,000 salary on losses or profits less than $50,000 would not make sense).So here's what I do... 

Do you clients that self-insure keep a reserve in place in case of fire and total loss?

In addition, of course, you may have different partner makeups per LLC and need an LLC for handling your membership requirements for profit/loss/capital (P/L/C) and divvy up percentages (same logic also applies for Investment Tax Credits for people who like to pay no current or future taxes... like the 'bigly' man for the past 20+ years). 

As a rental, the cost of the garage would need to be recovered before you started to turn a profit. 

While the taxes are a cost that has to be figured in, the risk of total or significant loss to the owner is a big motivating factor.