As for learning how to increase your current cash situation you should listen to the BP Money podcast. 

I have recently requested to have my PMI dropped on my primary residence because I believe the value of the property has increased enough to merit the PMI cancellation.

EMD is part of the consideration.

I have rent increases annually at 7% a year to get to market rate by year 4.

Can you imagine, an 8+% rent increase for sales tax? 

The first in Santa Rosa have created an increasingly large housing shortage, providing opportunity to developers. 

I have a great tenant in there (going on 3 years with slight rental increases every year). 

We expect to get about $150k out of the property when we sell.Do we take the cap gains hit, pay off the mortgage on the second rental ($80k) to increase cash flow on that property and do something else with the remainder (pay down our mortgage, invest, etc.)orDo we 1031 exchange into something else? 

He messed up, he knows it, and he is attempting to fix it so he doesn't get tied down in courts for (possibly) years on end.That being said this sounds like a possibly amazing opportunity for you, its like your duplex just appreciated in value considerably faster than the entire city.

The mortgage has passed through several lenders and is now with Shell point mortgage, the homeowner wants to keep the house with some help from the mortgage company, monthly payment used to be around $1100 and now all of a sudden the lender has increased the mortgage to over $2000.