The typical cap rate seems just terrible.

Typically 3 ways you can close (from buyer perspective): 1) Go to Office depot and print out a warranty deed ($10 dollars i think).

My thinking for not sellling TH while occupied is that it isn't really an investment property and that the typical buyer would want to live in it. 

Typically if they have plans to move they will not want to spend any money on the space in the short term.Howe far in advance do they have to give notice to renew the lease before exercising the first option period?

It is typically done.

However, zoning typically needs to approve certain types of changes (I often to do Commercial to Residential conversions).

That option typically has a shorter repayment period but two major advantages IMHO.

It's hard to justify $1000 to the atty, + title ins and all other fees associated with a typical close.

Fair warning here - typically, you will get young professionals as roommates in this situation, but the numbers typically do work better than the multifamily properties. 

I got a pretty good rate (much lower than typical HML).