[Zeke]

You'll have to rebuild the stairs, most likely, unless you move the floor down exactly one riser. AFA collar ties, they can be added temporarily.

Could you consider doing a part of the upper floor with a step up into the original area? The dormer idea sounds great. Lastly, how many interior walls are affected? All the upstairs will have to be rebuilt, so finding out what the bearing wall(s) situation consists of is necessary.