If they do, there may be very strict guidelines such as 2 year minimums, 180 day minimums, an HOA application and approval for potential tenants, etc... lots of weird stuff. 

I say that as some HMLs are strictly collateral-based and thus need you to have a property identified first.

I don't believe zoning will be an issue due to the city's apparent willingness to work with the investor.My main question is surrounding what legally needs to be done to turn this into an assisted living facility (outside of ADA building code compliance and zoning)1. 

We keep track of property expenses - all maintenance expenses, improvements, and business expenses, as allowed in the tax code (like a subscription to Wall Street Journal and lunch with other investors). 

Because of its location, I cannot have two proper units, but can have a main unit and an ADU or rent as one house (although I’m hoping the new development will bring a change to my zoning code)  The basement has 8ft ceilings and is completely finished but I’m thinking of digging down behind the rear wall to add a full bedroom and reconfiguring the floor plan to accommodate another room, kitchen, and door to walkout (2 bed/1bath unit).  

The wiser option would be get the property to strictly rent it out completely since I am searching for at least two to three family multifamily.Im not sure if this will work but here is the link to the analysis I did - https://www.biggerpockets.com/...

We plan on retiring there after my 20+ years in the Navy.Are you going to be using your VA loan or is this strictly a rental property?

I believe I am supposed to follow the 2018 IRC code, but it's so dang complicated you need a specialty engineer to understand it.

Your first few properties, especially as house hacks, should strictly be viewed as a means to an end.

My line of work (nuclear engineering), I view everything in incredibly strict, detail-oriented processes.