They have to follow the conforming guidelines so the paper can be sold.

On conforming.

That may be high, but one thing many of my clients are 'shocked' by is the overall cost for these type of projects even after giving them a summary of what to expect.If this was City of SD and you were bringing this to me based on what you have mentioned I would advise that you are unlikely to get this approved due in large part to the type and number of non-conforming features...the lot size is generally a 'no-go' without some specific reasons why it should be approved.

@Brian Nordman , ....and beware that the best loan terms for rentals (non-owner occupied) are the conforming loans that qualify for FannieMae/FreddyMac .

Perhaps compare to this one 11554 La Maida St, asking 850k, very hot hood as well, two houses, pool, 9000 sqft lot, plus non conforming studio, 10 rated elementary, 8 rated junior, future tear down mansion future maybe and IDK if any rent control as the houses seemed to be "grandfathered" but zoned R1 SFR hood.  

Wouldn't it be better to prove them wrong and shine a light on their stupidity rather than conform to their whims?

I have a great relationship with the lender currently have 4 mortgages with them, 2 portfolio and 2 conforming.

WAY less work, for the same reward (assuming all things are equal) As s result we have shifted our portfolio around so that we have less units now, more cash and cash flow, and are in a much better place to be in the path of appreciation. (3bed 2 bath homes) rather than ODD non conforming triplexes)  In our area a GREAT deal on a house cash-flows just as good as the triplex with way less work. rant over

This is still a lot better than most DSCR lenders, who usually take the lower of market vs actual rent and subject them to the same DSCR.Also be careful how different commercial lenders calculate NOI and DSCR because it will vary from lender to lender; that's the nature of working in a (commercial) realm where every lender makes their own rules (as opposed to having conform to Fannie/Freddie). 

It is also a vocation where practice doesn't always conform to theory, so I would expect that many would seek to learn by soaking up the experience of others.