Doing a quick look on bizbuysell shows a price to EBITDA of 4.2-10x (depending on state and size), for businesses where the RE is included. Granted, that is just what they are listed at, not necessarily what they sell for.
I would walk away from this deal, as it doesn't pencil for a lot of the reasons you mention, chiefly that it is too highly leveraged, and that it would pretty much not generate any cash flow (assuming your calculation of 1.3x debt service coverage is correct, it would not leave a lot to pay the operator and cover taxes on the profit and debt service).
As well as something is really off with your calculations between debt service and EBITDA. As if the seller wants a 8.5x multiple, but you are planning on paying them off over 5 years (assuming the 85% financing is a seller backed note), there is a mismatch. If the EBITDA is 100k, purchase price is 850k, with debt financing of 722.5k (85% debt). So the annual service would be at least $144.5, so your coverage ratio would be .69x, which means that the cash flow wouldn't even cover the debt.
The only potential upsides would be if there is some sort of value add play, such as being way before market rates that you could jack up, excess development land you could sell, or something of that nature.