Additional pictures

I am reluctant to start with a negative but this may lead you to the answer you are looking for.

I can see several things wrong in what you have, the kids will climb the wall, they will throw the gravel onto the grass, they will put some in your heat exchanger too, they will find a way to open the gate.

On the plus side, it is contained.

Is there a door to your house there? What is your zone/part of state? In the summer it's going to be hot as all blazes no? I'd start with some type of umbrella or one of those outdoor canopies if money was tight. If not, a pergola with canvas sails or vegetation growing up it. Big ol' covered sandbox and then maybe a little splashy pond. Add a toybox with some outdoor toys. Big stump sections for seats and to climb on.

This is a side yard and we live in PNW so summers are great time to be outdoors. Also The door is to my garage. I am considering removing the grass.. what would be a child friendly surface to consider ?

I've seen some playgrounds done in bark mulch, but grass is really great if you don't get too obsessed with it looking perfect. I gotta tell you, some kind of hideout and something to climb and some water. Does not have to be fancy, even a little splash pool. Kids climb EVERYTHING at our Children's Garden, even things you would never think to climb as an adult. So give them what they love . . .