Following the concept of “those at fault are the ones to pay”, the City should use eminent domain to buy the house, demolish it, and then put the lot back on the market to recover what costs they can.
Owner gets paid for what is not his mistake, and can repurchase the lot and rebuild further back if that is desired.
What a convoluted approach, the owner already owns the lot, nothing happened to the lot.
The misguided agency should make him whole, by demo and building a new house, that’s it!