So I'm thinking you could do a space for the kids towards the back (Or front, opposite side of the a/c unit. Place a chalkboard or paint the wood/wall with chalkboard paint. Put the rubber mats down in that area so it's softer for the kids and have some outside toys or even their regular toys with a "toybox" that could also be extra seating. For the rest of the space I'm thinking indoor living outside... It's hard to tell the width of the space but I feel like either a nice long dining table or an outdoor sofa with an electric fireplace. I'll attach some pictures of what I'm thinking... Also maybe open that area where the door is to the rest of the back yard and surround your a/c unit with a lattice panel