Some of the things you have described sounded like the structural integrity of the home could be compromised so it might be more then cosmetic things.

My assumption was that if, let's say, the structure burnt down, the property's insurance would then pay me out FIRST as the lender and NOT issue a check in both the Lender's and Property Owner's name.

Garages do not add much value to the structure if you ask any appraiser ask them the difference between build cost of a garage and the added value upside.

I would also like to know what effect business structures have on taxation (LLC/ LLP/ LP).

Is it feasible....if the structural integrity of the house is maintained, are there other issues to consider. 

If you plan to add more properties in Illinois, separating the two LLCs could also limit liability exposure between states.In Kentucky, having a holding company structure will avoid tax per LLC.

This new structure has come with many many headaches for me, the prime one being there was absolutely zero communication with owners like me about the change.

I could definitely appreciate your purchase if you are running a more active and construction based real estate business but I have some qualms about liability and would want to know more about your business structure.   

I'm working with the City of Kansas City on determining the highest and best use, which will hopefully lead to building 1-3 new multi-family structures (ideally duplex, triplex, or quadplex).

Since you’ve already gained experience with partnerships and deal structuring, those skills will serve you well in any path you choose.