Would probably need a permit with your county and have it inspected.

How much is it going to cost to re-tenant (property improvements, holding costs, taxes, potential rent concessions, TI allowances, permit fees, architect/engineering, etc.)?

This isn't much time for construction - especially if you first have to go through a permitting and rezoning effort which are time consuming but add little value (from a dollar perspective)2.

We are currently renting the property long term, but once the current tenants move out we will do further renovations to clean up the property and host it on AirBnB now that we have secured our conditional use permit.

Back Story:My parents have a 4 plex in California (purchased decades ago)One of tenants has stopped paying rent (stopped paying Dec 18)Unfortunately I found out their 4plex is really only permitted as a triplex but when they purchased it came as 4 units (they made no updates. it looks like the back unit had been divided by the previous owner into two units)The non paying tenant is going to sue stating he's in a unit that's not legal and wants all his rent back since 2015 (when he first moved it)Looking at all options it sounds like we're going to have to settle with him. 

He already has permits, build plans, cash needed ($400k cash reserve for monthly payments to the bank), etc. 

Plans, permits already pulled.

Didn’t really understand anything about permits, except to get one for the dumpster on the road.

They want to close on the property after the permits are approved, and have us build them a building after close of escrow.

You could put a little money into each of the units as a tenant changed out, or as the tenants permitted (I would imagine most won't complain about you making their apartment look nicer).