However, underwriting guidelines for these have something called a self-sufficiency standard.

Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.5.

We have reserves such that we definitely would not be broke if we did the project now, but it feels impossible to say that any amount of reserves is "sufficient" right now.Would anyone think about this situation in a different way and/or come to a different conclusion?

However, without more information about the downstairs unit and going through the permitting process, it's unclear whether I can get it legalized, and most likely won't have sufficient time during the due diligence process to know for sure.

Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.5.

Does anyone know if that is sufficient to receive that tax treatment?

There are plenty of charitable organizations, churches, and other non-profits, who would gladly write a check to you for allowing this woman to stay in her current home, or provide her with a sum sufficient to move elsewhere.

You get in at a really low cost and learn all the basics.Multifamily in LA may not pass the self-sufficiency test so that will be a hurdle. 

Were there sufficient funds remaining to cover it?

The property will also have to pass the net self-sufficiency test.