Real Estate Law
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This is going to depend on what the geographic boundaries of the city easement is and whether it goes from building to building or if there is some type of set back requirement of a few feet where it is still considered the owner's private property.
The way to determine this is to get a copy of the recorded easement and then see exactly what its geographic boundaries are.
So for example if the alley is 30 feet wide and the easement gives a 20 foot right of way, then logic would dictate that there is a 5 foot setback on either side and the legal owner could do what they want on that 5 foot space as long as they didn't interfere with the 20 foot wide easement, including installing AC and a fence.