I am under the impression that this is a legit way to do it.

you hit the nail on the head.for the 1000 time.. there are NO LOANS at 4% interest Period end of discussion.. the best you will get from a legit lender for HML is 8 to 15% with 2 to 5 points.. anything less than that the only one who will give you that is a personal friend or private lender you know personally..

Doesn't even sound legit or smart.

Ok, cite the legit media outlet source if you have seen it.

They would prefer them to be torn down and apartments, hotels or casinos built there as they bring in a much higher tax base for the city/county.

Is this just a ploy to squeeze a higher price or is it legit?

Your terms sound pretty legit--you'll find about the same anywhere.

They want to be sure that your income is legit. 

That will tell you how many units are at least legit and permitted (most likely). 

Whatever the reason, if you are prepared for everything and the numbers are legit, than the deal would pass most investors criteria, I think.