Help with privacy fence options

(cross-posted to alt.home.repair)
I'm hoping to get some advice on what to do about erecting some kind of privacy screen or fence along my back property line. I have a small lot (1/8 acre) with a 3'+ concrete retaining wall along the back edge. My neighbors' yard behind me is elevated about 3' from mine. Here is a link to some photos: http://www.flickr.com/photos/37849137@N00 /
These neighbors recently removed the privacy hedge (see photos) from along their back property line. From our backyard, we now have nothing between us and the back of their house, the back of their (ugly) strorage shed, and the (busy) street in front of them. The removal of this hedge has destroyed the privacy and coziness of our outdoor space.
So here are the some of the options that we've been considering, along with their respective issues and drawbacks:
Option #1: Erect an eight foot fence along our back line just in front of the retaining wall. Problems: our town puts a limit of six feet as the highest fence you can put on your property line without a variance. Getting a variance in this town is reputed to be a torturous process. I would argue that since our yard is three feet lower than the neighbor's yard, we would really only be putting up a five foot fence, but that's an argument I would have to make via the variance process. We've thought about just putting one up anyway and hoping no one notices. But then there's also the problem of finding a contractor to do the work.
Option #2: Put up a six foot fence and then extend it with some trellising, a la this method: http://www.hammerzone.com/archives/landscape/fence/extend1/lattice.htm Problems: seems like a pain and I don't really have time to do the work myself. Is this really so different from an eight foot fence that a) a contractor will agree to do it, and b) the town will look the other way?
Option #3: Offer to pay for a six foot fence on my neighbor's property.
Problems: even if they go for it, they are getting pretty old and there's no guarantee how much longer they'll be in the house. Still, I could justify the $2k for a few years of privacy. There's no guarantee we'll be in our house five years from now either.
Option #4: Put up a privacy screen of 6-8' plantings. Problems: Our backyard is so small to begin with, losing another 3-4 feet along the back line to a row of plantings would make it claustrophobic. Plus it's really expensive to buy plantings that big. Plus we both really hate arborviteas, which is the only plant that anyone seems to recommend for this kind of thing in our climate (Massachusetts).
One last question related to the fencing options: should I be concerned about negatively affecting the integrity and stability of the retaining wall if I'm digging four foot deep post holes directly in front of (or behind) it?
Thanks a ton for any feedback or suggestions, Jay L.
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Do you own the wall or do they?
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airborne wrote:

The assumption is that they own the wall, i.e., it is on their property. 95% certainty, but we do not have an up-to-date plot plan ($1000 for the surveying in these parts). I should probably get the plot plan anyway.
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I would go for the variance. You have before and after pictures, and that should help your case. Just because it may be a pain in the ass, it might work out in the long run. Also, the people that would allow the variance, may or may not be in a good mood when someone else asked about one. That may be the reason you heard, "Getting a variance in this town is reputed to be a torturous process".
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Finding the keyboard operational snipped-for-privacy@gmail.com entered:

Just a semi-serious suggestion if you can't get a variance. Install a 3' high retaining wall on you side of the property with a 6" space between their existing and your new walls. Then fill the space with dirt and put in a 6' fence. What you have done is raised a portion of your yard and shouldn't count as fence. BTW, do you have any drainage problems due to the wall? That might help you if you can use correcting the drainage as part of the solution to the view. Bob
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