Cities will either not be able to comply or select sites that are currently zoned and used for purposes other than housing.This can lead to more complications with lawsuits and other administrative challenges that in addition to absorbing time and money prevent additional housing units from being built.

Two-story houses bring in more money from rent and make saving on costs easier, but buildings with four homes cost less to start and are simpler to manage.

They'll likely want you to use the money you're making on the sale of the lot to partially pay down the remaining mortgage since it will be for a smaller remaining amount of property which makes sense to me from their point of view. 

And consider that if they had put the money in a good MM, they would be getting 5+% right now

I would use that as a potential guidemap as to where you may need to spend some money. 

You may have to balance spending money on things today that you may not really need until later - but, they may cost a LOT more to change later.

I personally do hard money lending and investing in the city.  

Last year I barely made any money after all expenses were paid.

Anyway the point on the land basis is if you have a very low basis you have just now subjected your land equity to ordinary income and market risks on top of it.Plus personal risk on the loan if it goes bad do you have the money to pay the first off if you need to.  

Growing up in a household with 6 siblings and parents working hard to survive living in California I became very observant of what others were doing to make money.