In fact thinking about it some more, regarding the UI, we can probably get rid of the Restrict to dropdown and replace it with a button that says
"Virtual library"
When clicked the button pops up a menu with the choices I described below, in addition, an extra submenu that says "Additional restriction" which will allow the use of the current restrict to feature.
That will make the feature more discoverable, as opposed to putting it inside the library menu.
In such a case Doctor-Ohh is right and the VL feature should become the "base". i.e. it should be used in Preferences->Behavior and in the content server.
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