You may be much better off having a consultation with a local real estate lawyer before you take action on your own that may necessitate quiet title procedures on both properties later.

The owner may qualify for short term help in the form of a loan modification.  

Do I really need to go through escrow/title company for this modification of a note by the same parties?

My experience with "historic zoning" (in PA) is that if you do any modification to the structure or ANYTHING to the outside you need to get your plans approved by a special board (who are all jerks).

You want to compare like to like, or make modifications.

You may still need to do some modifications to meet the codes.

The previous owner made several significant modifications without pulling permits.

What percentage of these notes end up with a loan modification?

We are wanting to increase the number of concurrent projects which necessitates using GCs in addition to our own crews.

You may want to also pull out statistics in project cancellation/project shutdown due among other things, State induced strict compliance to the letter, contractor's compliance and liability costs (biggest reason why significant California contractors are put out of business aside from tight competition), it's just next to impossible to earn contractor wages based on economic conditions (that being current prevailing economic depressed consumer wages cannot support re-construction costs or that wages to property modification ratios is not sustainable in long term basis), indicators, and indices (unit labor ratios, material integrity and application ratios, Local, State, and Federal (labor, occupational hazard, environmental) compliance costs, and certain and uncertain risk factors.