In my opinion you should NOT pass up the opportunity to secure solid, life long rapidly increasing income in a growing industry with a serious demand for talent with flight time.

The chances of you getting any additional money out of them are extremely slim to none.

You're right in that it's tough to justify an expense like that with an increase in rent alone.

The chances of them paying out the rest of the lease are SLIM!

As a flipper who purchases from wholesalers I  can vouche that when I get a chance to do inspections I'm very grateful because it doesn't happen often. 

And interest rates right now with the Fed increasing again will be in the 6's or so. 

NY state law will tell you how far in advance you have to provide written notice of an increase in rent....usually 60 days in many states, some are 30 days....then the debate will be do you do it all in one big jump or small increments as not to shock the current tenants enough to leave...... that's a debate on here in many posts

My only options would be to 1) keep the basement strictly as storage or 2) go through the process of getting a CO and deal with the potential tax increase on an already high tax property.

Inform the prospective tenant that due to the amount of people your going to anticipate a higher water bill and would have to increase the rent ( what ever you deem reasonable) .

The good thing about these criteria is that they are mostly static as opposed to often changing.Population: Look for population to be steadily growing = increasing customers.Jobs: A stable job market = a stable tenant base.Supply: Too much product = increase in concessions / decrease in rental income to attract solid, long term tenants.Demand: Product type.