I don't get it, why not pay off the note and live your life?

Have you considered a conditional use permit including a provision to provide off-street parking? If you can take the parking issue off the table it gives you more leverage. Best of luck.

Let me know if I understand this correctly.

Your brother bought a property that was zoned for multiple dwellings (above R1.) During his ownership, there was a move to rezone the property to R1 that was, apparently, successful. After the rezoning, or during the process, your brother built a permitted "storage" unit on the property that, although plumbed for kitchen and bathroom, was never designated as an inhabitable space, meaning his property was in compliance with the R1 zoning. Many years later, you own the property and decided to finish off the storage space into an inhabitable space. Now the R1 property has two residential units, only one of which is allowed.

Does this sound correct? If so, I see no chance for a variance as 1) the second living space was never designated nor permitted as such when it was constructed, and 2) it was converted, illegally, to a living space recently (by you) and had not existed as one for the last 30 years. If your brother or some other previous owner had made the conversion years ago and had rented it out, you might have grounds for a variance. Otherwise, I see this as an illegal bootleg living unit that violates the zoning of the area. If you have reluctance from banks, remove the improvements that make it an inhabitable unit--the kitchen and bathroom--and return to compliance.

I would sell the house and get out of Pedro!

Born and raised in Pedro but got out 20 years ago, but we still go back once in a while because wife's parents still live there. We were just there this past weekend for Christmas.

Pedro has become the dumping ground for all the crap the city of LA wants to get rid of. The homeless and especially the criminal element and drug activity is way out of control. I drove around last friday just to see if everything I've been hearing was true or not. It was worse! Seriously beginning to look exactly like skidrow on 5th to 9th street in LA. Since LA closed Harbor Division Jail there are minimum police presence and cops have to come from other areas when a call comes in. Many times they just don't respond.

Sorry to go off on my own rant, but Pedro used to be such a great town. Not anymore.

As a former City Planning Director, I have to agree with Ossiblue's points below. The illegal conversion of the unit from a storage space to a living space after the rezone to R1 pretty much shoots you in the foot. Short of a legal rezone to R2 or some similar zoning that allows accessory dwelling units, I don't see you winning this. Zoning is one of those cases where you get the letter of the law the day you apply. Had the unit been legally constructed under its former zoning, then you would have a legal non-conforming use. As it is, you simply have an illegal accessory dwelling unit.

The variance is to allow a parcel map.

Or, possibly a CUP. As I said, many cities in California are trying to increase their density.

If it had a permit when built and zoning changed it should be grandfathered. Do a consultation with a land use attorney.

Yes, this is happening, especially in coastal cities. Generally, you're talking about "Granny Flats" which have restrictions on size, cannot encroach on setbacks, and must have adequate parking space. Check with the City of San Pedo, but I believe their ordinance is like that of L. A. Granny flats cannot exceed 640 sq.ft. and must have one parking space. You would likely fall under the new construction rules since your second unit was not constructed as a livable space under previous rules and, therefore, cannot be grandfathered in to compliance.

When you sell, no one will make a loan on it, unless you sell for all cash. I would return the rear unit to storage when you sell. Or eliminate one of the plumbing fixtures temporarily, once it has an appraisal. The buyer can do what he wants, I just did it.

Yep, when we sell I figure we can just rip the kitchen out and call it a workshop/artists loft.
It is not a very fancy kitchen so no big loss.

But that is a few year down the road... we just wanted to pull some cash out to pay off our car loans and start the new year with zero debt... doesn't look like that will happen, not the end of the world.