Tenant Does Unapproved Improvement - Good thing or bad thing?

[Doug Poff]

RESIDENTIAL rental newbie question: I have a solid B/B+ class SFR out in Denver in which the tenant came on in December. The tenant is a contractor who just moved to the metro area with his family. While working a utility issue with the PM and tenant, I was informed out of the blue by my property manager (who also had found and vetted the tenant) last week that the tenant had actually finished out the basement. Dry wall, textured paint.....the works. Electrical and plumbing were already installed as was insulation. We also have stub outs for a bathroom, though he did not finish that out - but did ask if we would like that done too.

To be clear, he did not ask for prior approval, nor is he asking for any compensation or consideration - unless we do the bathroom. He stressed to the PM that he finished it for his family's convenience and is NOT looking for any compensation or consideration.  However, he did provide pictures to the PM, and if accurate, the work actually looks quite well done.  

So my questions are:

1.  I am pretty sure he did not pull county permits, since as the owner I would have been notified - but am not sure if any of the work would have required permits since it was essentially only drywall and paint?  Any thoughts or experience? 

2.  I have a rep out there who could verify the actual quality of the work, but if I were to get it county permitted after the fact (if needed), and thus counted as new living space, will the tax go up? 

3.  What, if any, legal obligation do I encounter if he leaves after the year (or sooner) and decides to seek compensation?  Or, conversely, should I actually offer any consideration/compensation for his work now?  

Bottomline, I suspect that the legal thing is that I do not owe him anything since this was unapproved beforehand - but if it was done correctly, he may have realistically added about $15-20K value to the home, or about another $200/month rent potential in the future - so what is the RIGHT thing to do.  

4. Should I pursue getting it permitted - and add any tax increase pro-rated back into the rent? 

What am I missing?

or  should I just shut up and enjoy my good fortune that I have a tenant who actually might take care of the property better than I would myself?