How come it can't be "am Restaurant"?
I have a feeling 'Ich sehe sie am Restaurant' would mean 'I see them on the restaurant' which doesn't make sense, but I'm not 100% sure
I actually said 'am' here as well. If a native or experienced speaker could clarify why it's wrong, I'd appreciate it. Because I see on many similar translations, 'am' and 'im' are usually both accepted.
does the word "Sie" may apply to "she" and "they"?
if so, how do i know the correct meaning?
"sie" is both "she" and "they". You can't tell the difference without context.
why sie and not ihnen?
I wrongly had "im der Restaurant" and DL said that it should be "in dem Restaurant" which I guess is the same as "im Restaurant" ...
but 'sie' is the object of sehen; if it were 'her' wouldn't it be ihr?
No, forget she/her, sie is correct for both nominative and accusative, whereas ihr is for dative.
I would have thought that "Ich sehe sie beim Restaurant" would be the most direct translation. It was rejected!
I agree "Im Restaurant means "in the Restaurant" bei dem or beim means at the. Its in the dative case.