When does something have to be fictional in fiction?
In my story I have written about a town and college (I am really writing about the town of Wooster and Wooster College). Girls go missing and end up being hurt/almost dead in the story, so I figured the college would not appreciate my use of its name, and since I want my son to get accepted there, I made the decision long ago to change the name to Winchester. Unfortunately Winchester is an actual village in Ohio and is located in the wrong area of the state, so I need to change it again. All my characters are fictional. I’ve used real towns (Seattle/Juanita), some fictional towns (Cedar Creek had to be changed from Cedar Falls, because that ended up being a real town in the wrong area).
It was apparent to me that Cedar Creek had to not be real, because I wanted to control every aspect of that town and it was full of nothing but paranormals. I write about the Mountain Herb Farm, and I know about the real Herb Farm in the Seattle area. I guess the real question is where is the line that could cause you problems as a writer?
This is an interesting question and you are far from the first person who has faced this problem. The approach you are taking works really well. Placing a story in a common area for readers to attach the setting to is fantastic. I personally love stories that I can mentally walk with the reader down certain streets that I may have walked down once before.
The fiction element comes in when you might be stepping on someone's toes, or you might have to get permission to use their name in the book. When you refer to The Herb Farm that isn't a big problem. Heck, the characters can even eat at the restaurant. But if you decided to use the actual menu items, which are pretty unique, I would recommend contacting them to get the O.K. In most cases, as long as you aren't giving away a recipe, you should be fine. In those situations, you have to either really work at the fictional element, or decide if it is really worth the effort to place the item in the book. Now, you can do what some authors do. One historical author I have read will place her characters on specific streets in London, but create new addresses.
For the most part though, referring to cities and the things in the story that people visiting the city would see is not really a probem.
Now, the next issue would be using people in the books. If you are inserting real people into your book and having them function as characters, you need to have their permission. If you are writing historicals, sure, you may have real characters in your book, but you simply can't make up something that isn't true. You can place them places they may not have been, or make "educated guesses" on what they would have said and be OK. Just make sure they don't do something that is not appropriate historically.
It's a bit confusing, but if you are "thinking about it" you should be in pretty good shape.