My daughter's father-in-law and I split the down payment as a gift to the kids to get started. 

Is it because:* California or local municipality laws prevent this?

Mat helped to establish my Solo(k) through his law firm a few years ago.

@Christle Stezskal Some states have expanded the ban the box law of which Illinois is one. 

According to State statue 509.032 (b) A local law, ordinance, or regulation may not prohibit vacation rentals or regulate the duration or frequency of rental of vacation rentals.

Also, you don’t need  $360k if the loan gets called; with a principal loan balance of $240k it would be more like $250k.Whether you do a wrap, sub to, or lease option when dealing with a owner occupant / consumer there are many legal “traps” to navigate because of consumer protection laws at a state level, and CFPB and Dodd Frank at the Federal level.  

I don’t own anything in Arizona, and just looked up the related laws: https://www.azleg.gov/ars/33/01321.htm.It sounds like you may be familiar with them, as you did what’s expected by the letter of the law.

Each state will have their own contracts, laws, etc. 

My question is, why isn't there a legal challenge against this law?

Sounds like NC's law is the same/similiar.