You should review the ADA and any local laws and regulations you have about accessibility.

And then there's HOA and city regulations etc.

Not sure If there are really any regulations for this or not.

@Lonnie Thomas I pulled this from hud.gov that regulates FHA loans, hope this helps4155.1 5.B.4.aDescription ofGift FundsIn order for funds to be considered a gift, there must be no expected orimplied repayment of the funds to the donor by the borrower.Note: The portion of the gift not used to meet closing requirements may becounted as reserves.4155.1 5.B.4.bWho MayProvide a GiftAn outright gift of the cash investment is acceptable if the donor is the borrower’s relative the borrower’s employer or labor union a close friend with a clearly defined and documented interest in theborrower a charitable organization a governmental agency or public entity that has a program providing homeownership assistance to low- and moderate-income families, or first-time homebuyers.So if you can document the relationship of the gift giver from one of the above it may help.

Which NJ regulation says he cannot do this ? 

I would check your states laws and regulations first. 

Individual states and counties have their own unique rules and regulations, with some requiring a 3-day eviction notice to tenants and some requiring a 30-day notice.

That is the only big regulation that I've heard of that could impact your project, but it doesn't sound like you are pursuing a Junior ADU.

Also, read, study and memorize your state's L/T regulations.

In making this determination, the enforcement agency shall consult with the entity responsible for enforcement of building standards and other regulations of the State Fire Marshal pursuant to Section 13146.You should strive for the legal duplex and have the ADU as the backup.