Negative equity

Okay, this is a doozy and hope someone might have a fresh way of looking at this.  My hubbie and I purchased a 2bed unit off the plan in 2003 for $495k – absolute beachfront location, small block of units, 1.5 hour south of Brisbane (hoping for capital gain and quick re-sale).  Settled in 2006 with a valuation of $600k.  We were happy with the finished unit, gorgeous fitout and the building won numerous awards.  All going well!  Not long after the unit next to us sells for $720k!  Yes, should have sold then, but buyers were few and far between.  We purchased the furniture package on settlement and added some extra money to the loan to cover initial shortfall – total mortgage $575k.  Unit was originally in the holiday letting pool, but didn't do well due to new resort, so we permanently tenanted it, earning $500 / wk.  After negative gearing it has probably cost us around $40k shortfall.  Unfortunately due to market falling and some mortgagee sales, units are now selling for around $450k (unfurnished, inferior position), so ours is probably realistically worth about $500 – 520k.  Our tenant has just moved on and the problem is the BC now tells us that the DA for the building was only ever for "tourist accommodation" and we can no longer permanently let or owner occupier (this has come as a surprise for all the owners that I know).  I've checked with the council and they are right.  This will probably have an effect on the value also.  So…..holiday rental situation still not looking great, so I can see our return dwindling and we can't even put in a tenant.  We can't sell the unit without losing money and yes unfortunately it is cross colateralised with our PPOR.  Our PPOR is worth about $850k with a $385k mortgage.  We simply don't have the personal income to support the unit under these circumstances. At the moment after ITWV is costing about $700/wk (with no income – worst case scenario).  The unit is 99% in my husbands name (for negative gearing purposes) and our home is 50/50.  Do we sell and take the loss or hold and struggle on and see if the holiday letting pays off?  Although, if we place it on the market, I'm worried that the onsite PM's will probably fill our unit last as they'll be wanting to keep the other owners happy first, and it may take months to sell.  Are we totally screwed??  If anyone could provide any advice we'd be extremely grateful.  We have made some money on an IP in the past, but at the moment, we don't think we'll ever do it again.