Dear Staten Island Friend:
Your friend should consult a lawyer. Even without a legal right to claim a residence in the basement of a commercial building threatening an eviction without process of the court is an actionable claim.
The landlord is also in a bit of a fix as to the proper form of proceeding. Although the building is commercial and the basement is not lawful as a residence, your friend is a living in the building. The landlord may find it difficult to articulate a claim in a residential holdover proceeding, since the building is commercial and likewise would find it hard to state the facts to support a commercial holdover proceeding because the tenant is a person and not a business, and is living in the basement of the building.
Because the landlord may feel that there is not a simple court solution, the landlord may look to short circuit the court system by asking for an inspection by the FDNY. A vacate order may force your friend out quickly.
That is another reason for your friend to get an attorney involved right away. The chance that a vacate order may come around and the ambiguity in the form of legal proceeding, should provide your friend's attorney with enough room to work out a settlement for your friend to move with a bit of money.
The answer provided to you is in the nature of general information. The general proposition being that you should try to avoid a bad outcome if you can.
I don't think the lawsuit is worth much. First there appears to be nothing in writing ("landlord lied") and you know the landlord does not tell the truth - this is not someone who is going to admit to renting the space for residential use. Second, the tenant will likely have to answer the question: "what made you think it was legal to reside in the basement of a commercial building." Unless this place was fully set up for residential use when your friend took occupancy (full bathroom, kitchen, etc), it is a very tough case - if that IS the case and he left, I hope he took pictures.