I agree there may be times to lower the rent, but in my cities, county and generally state I have found that to be rare   Other parts of the country have different economic, real estate and supply & demand situations.Ultimately it is the market, laws & condition that determine what rent is appropriate and what the community will accept. 

That in itself is what I think will lawfully determine this.In the end, the amount of time needed to simply go through proceedings for a months rent, and then try to collect it from the landlord isn't worth it in my opinion. 

The reason for the fail determines where you can place the loan.

You can determine this by understanding if you are looking for cashflow, appreciation, or a bit of both. 

If you go through the exercise to determine a property value via NOI/cap rate adjusted for the mandated owner occupancy for what value is added by the ADUs it would be nice if you could post the results.   

Consult with a real estate attorney and a tax counselor to determine the optimal transaction structure.Good luck!

The primary determinant (beyond the tax implications) is whether the lender will underwrite and permit the borrower to close in a company or require the individuals to be reflected on title. 

If they say no, ask them what is a determining factor for them leaving.

Even if you have a preliminary approval from zoning, you still need to determine that it works with your specific site constraints. 

(To determine how much tax you could avoid with a 1031.)3) how big is your current loan?