Also if I were to convert it back to a residence at some point, would there be any recapture?

We have a two-bed studio unit behind our larger single-family that has been converted into a business.

LoC has a 10-year draw period, and is then converted to a 10-year loan.Now, let's say the borrower decides to take $10k out.  

My debate is the following:1) Convert the ADU into 2 bedrooms / 1 bath. 

The challenge with a heloc is that the rates can change on you and unless you plan on paying it off in full you will eventually need to convert it to long term debt.

Would it make sense to attempt to convert the building into a quad-plex?

It was an old 1900's warehouse that was converted back in the 90s into a self storage building.

You can purchase a property that you later convert into your primary residence after a year or two (there's actually a safe harbor from the IRS at two years). 

Thank you I'm sure you could buy a property with a VA loan and live in it for 2 years or what ever the minimum requirement is and then convert it to a VRBO property.

Have you reviewed your state regs to determine if you are close on  your construction costs to convert the property - projecting that many beds will likely bump you into a category requiring much more oversight and scrutiny before you'd be allowed to open.