What do you think we're looking at here? How is it unsafe?

The key to the riddle: The red circle encloses a temperature/pressure relief valve. It's supposed to open and vent if pressure or temperature within the water heater go beyond certain limits. But how does it do that?

A part of the T&P is a probe that MUST extend into the tank. Here, the end of the probe is a good foot outside the heater. The white circle designates how much closer it should have been to the tank in order to function. This tank could explode and be on its way through the ceiling (and perhaps into somebody's apartment) before the T&P became "aware" that it was time to do its job.

Ironically, there was a port provided for the T&P by the manufacturer, enclosed by the yellow square. Instead,the installer used it as part of the recirculation system return.