So talk to the city to see what they'll need before you can sell the lots. 

My concern is whether the city could deny permits for these modifications, such as removing walls or converting a garage, or if they are mainly just concerned with safety and habitability.

Is it a legal 3-family on the city card?

I got a note from the USPS asking me to show permits of the units from the city of Bay Point, CA.

Then these are applied to all properties in that area of the city.

Cities usually don't care if the OWNER lives in the basement, just tenants.You could use the extra income to offset cost of finishing basement and more.

Quote from @Waylon Bruce Moore: I own a house in the Wellswood neighborhood across the river from Seminole Heights in the city center of Tampa.

I've done all of these locally for noticing packages that the City requires be sent on certain projects. 

It's also illegal for cities to attempt to regulate fees related to screening or applications.

But historically in my experience it was never done on time and i would get notices from the city about it.