Our house is a two-on-one in OB. The original house was a 1929 beach cottage built straddling two lots. (In OB the standard lot is 25′ wide and curb to alley in depth, typically around 150′). In the late 80s a second house was built and the city required a four car garage to provide off street parking. If you drive up and down the alleys in OB, particularly at the south end of OB you’ll see lots of houses like this. It sounds like you’re being subject to the same rules.
And yes, there’s no getting around the height limit. However, IIRC they measure from the highest point on the lot, so the effective height depends a lot how your lot is graded and the house position relative to that grade. You do see three stories in OB but they’re not common. You see a lot more rooftop decks on top of two stories because your limit is set at the deck railing.
