However, if you labeled it as an addition (not a separate dwelling unit), code only requires 30 minute fire assembly (1/2 gyp) between sleeping units (bedrooms).

All this is in you to identify what best you can do with what you know.At the end, this partnership will build on trust or you won't be able to sleep at night.

I would say, "the home has 5 bedrooms, with other spacious sleeping areas".   

Now, Sleep is a must. 

I am not sure I would ever actually sleep there or live there but the laws around this are confusing. 

1st sleeping with your contractor and now this!

Because I would not sleep at night knowing I have a mortgage on a property that someone else is responsible for paying.

I would do what makes you sleep better at night, not what some fella on the internet tells you to do.You can read what they have to say, but they aren't going to bed with your stress, your problems, your goals, and everything in between.

AND that should continue to grow as your equity grows. if you have $10M equity position, I suggest a MINIMUM of $.5M in cash but preferably $1M.You will sleep better, live a longer and happier life.Just my 0.02.

For anyone that has not dealt with Engelo and his team, one of my favorite things about them is that they are GREAT communicators, I'm not sure if they ever sleep.