I've been mulling this over in my head today and here is my opinion. Gaige Grosskreutz was not carrying a real gun that night.

He had the prime position to kill Kyle after Skate-N-Die took a bullet to the chest. Kyle was in the inferior position weapon not trained on Arm-man. Arm-man instead of simply pointing and shooting cowered and then decided to charge at Kyle.

Now my buddy thinks maybe the dude was an idiot and I'm willing to concede that point as plausible. It just doesn't make sense since he was chasing him down and had every opportunity and was tactically (in my opinion) in a superior position to end Kyle.

I'm reminded of that scene in Snatch with the replica gun.