I would focus on staying professional, and when the renewal date comes up do not hesitate to send a notice of non-renewal.

Even if you create a non-CA LLC, if you are managing the business from California, you will likely be deemed to be "doing business" in California and therefore likely subject to CA taxes.

I would focus on saving towards your down-payment and closing costs.

I have no pay stubs/proof of income but I do have a very good credit score and 50-75k for a down payment.

show your accountant your payment to them. 

Not looking to game the system and using the property for ourselves is part of the plan as it's where we normally vacation anyway, so considering that the 10% down payment is much more appealing if we are able to balance out the rules and keep the cash flow positive. 

I am not evicting them because they are still paying the rent but I don't want to continue leasing to them come Oct 1.If I give them notice of non renewal long before the lease expires, they will get angry and thrash the place.

Help me evaluate this off market deal that's non-traditional.

As I mentioned above, I never understood CFD's in non-judicial states, they make sense in places like Indiana, Ohio and some places in the midwest but in the south, they are essentially useless.

I f I were to convert the place to non-residential afterwards or do like a ground lease do you know if that would affect the loan?