Entirely my own opinion but I think you should keep your daughter away from him he seems not stable mentally and that's not good for someone as young as she is I wish you the best of luck
This doesn't sound right, all the way around. Why is she spending every other weekend there? Does he have some kind of custody right? Otherwise, I'd stop these visits and allow her to have a few hours during day light and/or supervise. Period. You don't want to squash the relationship but he sounds like he is stepping over the line. He may just be a lonely old man missing his daughter but that's not fair to project onto his granddaughter of such a young age. She needs time with friends and is probably in sports and activities that every other weekend with a grandparent isn't reasonable anymore. This is the excuse you can use and hey, if she's not signed up for anything yet, sign her up. lol It's time to get her active in school things, sports, theater, dance, etc. (if she isn't already).
But as the living parent, you should have rights to make decisions about what is appropriate or not and absolutely the sleeping arrangement is not okay and the suggestion to move in is not okay. I'd encourage a relationship but set strict boundaries for him. good luck