It looks like you have pretty good size lot for the area. The first thing you would need to do is to check the zoning on that block. I have a zoning map at my office or I would be able to give you that info.
Once you know what you can build without a variance,you will have a better idea of what is possible.
You mentioned that you had tenant in the top unit. Is is a legal duplex? If so that could give you another option.
There are builders that I do business with that would do joint venture and possibly build out a duplex and give you a unit for your contribution of the lot. Providing that a duplex can go back.
Your question about the tenant is touchy. I do alot of Bank Foreclosures and that is the biggest thing we hope not to deal with. The banks will try to offer the tenants money to leave before the lease expires.
Wether or not to rebuild depends on a alot of factors. Does the property have a large footprint ? Would you get more square footage if you rehab?Will the city not allow you to rebuild the size bulding that you think makes it worth doing? In most cases it makes more sense to pull down the old building and just build new. You will have the ability to customize a little and not worry about spending your summer fixing things.
If I can be of any help, let me know. I've done alot of building in Cape May County and I have a few good builders you can talk to and a local architect.
Edward ( Augie ) Augsberger