Pmi may cost .500% and if planning properly, may only last 3 to 5 years if you are prepaying your mortgage and the property appreciates.

In the event of a catastrophe, I want the piece of mind to know that the conversion was done properly and the bedroom are legal bedrooms.

Gilberto Grajeda you sound like you have the proper motivation to make you successful!

put the tenant on a month to month and train them properly. 

If in fact they are on M2M you are lucky as you will be able to immediately give notice that you will be requiring them to  sign a new lease, your lease, given proper notice.

You would be doing them a bigger favour to simply have them move on to a new permanent location.With proper screening good tenants are a dime a dozen, find a new one. 

This is my first experience with new construction and i'm not sure how we should properly protect our equity from lawsuits in this situation.

Write up a proper JV contract, where you are putting up the money/credit, they are putting up the time/knowledge.  

(I love the M2M non renew option, hate term leases).Managing your business properly requires setting base line standards that are not moveable, training tenant to what the landlord expects and getting rid of/finding good tenants that will make the management of your business very low demand on time and resources. 

I personally would wait until I get a better idea of what they mean, and then if warranted call out a electrician to inspect. and make sure he leaves a note signed the service is properly working.