If I have several options, I would prefer a HELOC with no initial draw requirements (i.e. to establish a literal line of credit that I have no specific short term plans to use), i.e. not something like the better.com HELOC. 

I think the first step would be to contact a lender and figure out our best options moving forward.

We embrace S8 applicants, but screen them just like any other applicant.Many have an entitlement mentality and try to leverage their S8 voucher by pretending to be helpless:1) A percentage won't apply because they expect a landlord to waive application fees for them.2) Many cry broke and expect a landlord NOT to charge them a security deposit.3) Many of those same S8 tenants trying to avoid paying a security deposit, won't make an effort to call the list of nonprofits we send them that will pay their security deposit if they apply.4) A lot of them try to avoid paying for utilities.

Renovation loans can be a fantastic tool when you're ready to explore your options.

If you had no knowledge and they broke the lease I'd issue a notice of non renewal, but give them the option to remove the cats.

@Pat Aboukhaled I would ULS (unit lot segment) the primary house and include a clause in the call option that would prevent them acquiring the DADU.

At the risk of taking flak here, I'm going to say I've seen a lot of super cute stock tank pools that are low-cost options. 

This reduces exit options and affects the value. 10) Small number of small units is the most expensive residential development there is.

Your suggestion to list on open market likely is the best option for the OP.  

I have a clause in the lease that says the security deposit will be held in so and so bank with so and so address and interest rate will be xyz.