Whilst there were no obvious structural issues caused by the settling, the evidence was there for a trained and impartial eye to see. 

I ran the numbers on the deal knowing that I would break even on cash flow in the first year with minimal rent increases but significant cash flow in year 6 when the 401k loan is paid off.

Sounds like you got a property with minimal out of pocket.You could try posting the room on FB or Craigslist.

I’m hoping to not build until I acquire more revenue from profits of the plot via flea market, parking, boat parking, or something else that requires minimal investment.

What steps would you recommend to minimize damages and resolve this issue efficiently?

minimizing free cash flow with larger mortgages or shorter term mortgages takes the cash flow which would be taxed and puts it into the amortization of the loan. 

I find single ADUs are mostly being added by people with minimal RE investment experience often without a clue as to the value that will be added by the adu addition.  

Would love to hear more about your thoughts on the refinancing options you’re considering or if you’re looking at any other ways to structure the financing to minimize those risks.

This, in my opinion, will help minimize your liability, in the event the dogs cause harm before the tenant moves out.Then, you can negotiate a peaceful move-out with the tenant.  

Doing a quick scan off I see there are about 5k STRs in Colorado Springs (assuming you are there and not a neighboring town I am gonna say the town has minimal restrictions).