It may well form part of the bank valuation in terms of square foot, and it may be covered in the habitation license (the habitation license would cover house + annex), but it will be treated differently and need to be closed off for rental.

As far as I can tell, this may be over capacity and is also a huge red flag. 

Just need to stat under the occupancy limit.Also keep in mind basement needs to be livable square footage, ie have egress and proper ceiling height. 

They are cheaper than red potatoes.  

I don’t see anything glaringly wrong with their concept but 2 things have caused a red light.  1.

The amounts of square footage cover is so low the delta becomes a rounding error. 

If you really want one then I would have one drafted by an attorney to make sure you are square on all issues, liabilities, scheduling etc.  

Negative cash flow with high HOA fees is a red flag.

I believe that it will effect the rental market harder in blue states than red states due to the sanctuary city policies .

Find Brandon's videos on YouTube for the "four square" method of analyzing homes and practice.