I have the floor layout that indicates the seating arrangements in my listing as well as photos that clearly show how things are laid out.  

Also-- you won't know who is coming to your property, when, so arranging say a plumber or HVAC would be a nightmare.

If that's the case, you'll need to decide whether to approach the city right away and see if they will work with the arrangement you already have or if they will force you to tear the drywall and everything out so they can inspect from the beginning ($costly$)If its zone single-family only in an entire neighborhood of single family, then the city zoned it that way for a reason and will be unlikely to approve a spot zoning change for your property.

I have just renewed my mortgage  and because it is almost paid off  I arranged for access to a line of credit.

I actually came back home and tried to figure out how my tiny, mundane urban unit could begin to achieve 5 stars.I decided to stop providing fresh flowers and chocolates to our guests because it took me 48 hours before I even noticed that one of our California hosts had a drop dead gorgeous fresh flower arrangement in the living room of our unit.

My lender was fine with this arrangement, and the property ended up appraising for $365,000 as-is.How did you finance this deal?

I don't see a problem with this arrangement, especially since it was disclosed up from that the cottage was not part of the lease.

Should I treat the arrangement like a property management company and offer 8-12% of gross rents, or is it different considering he lives onsite?

It may come down to letting him know that the property isn't a good fit for him based on his contents and that he needs to either rent a storage unit OFF-SITE and have it all out in two days (really - if you give him a week, it will all come down to one day or never) or make arrangements to move within 30 days.  

If you decide to go this route, I would be happy to fund the deal for you and if desired, we can also arrange the conventional or DSCR refinance to exit the interim loan.