@Ariel GonzalezI would like to know how much capital, AKA, skin in the game they have.

If it is mostly smoke damage to the interior it will be ok, but if the roof caught fire and burned away that's a whole different ball game.

If you are looking to stay in the real estate game, leverage your equity and buy more real estate.

I would turn this little room into an amenity space, game room, spa, gym, etc.

Cash flow is the name of the game when it comes to controlling the asset so you are right it really doesn't matter whether the value goes up or down as long as you can carry it. 

I've dabbled in the new construction space here in Chicago and there is A LOT that goes into it...I'd highly suggest spending some 1:1 time networking with some other investors like @Jennie Berger or @Prashanth Mahakali who are both Chicago developersYou make your money with the land purchase and then systems/processes/volume over time in the development game, but it's not easy and competition is high!

Conversely, if the federal 8582 shows zero unallowed losses, is the game over for offsetting gains at the state level even when the prior losses were not used to offset the gains at the state level?

Last fall our girls soccer team had a game canceled because one of her friends found a dead body just off the pitch near the parkway.  

On the surface, I would consider house hacking here and play the appreciation game.

You made a generous offer, and it seems they are playing a game of racketeering.