Wait, I'm pretty much sure that if you use Vanilla Med II "North-European" castles, you should be able to use Teutonic red castles too, since the cultural ownership should be the same (Teutons are classed as North-European in their campaign, too, so...). I think there should be a chance of having both of them as possibilities on map. Anyway, If it wasn't possible, I'd use the Red ones, they're cool, unique and they should fit the faction
As for the Alfheim Kingdom, I like your idea. Are you going to implement such a feature in a similar way to "Next Heir Ancillary" submod in SS?
Anyway, this setup could also give the faction a certain unique flavour, and historical background. Let's say, "The Alfheim Kingdom was forged after centuries of conflicts between the sovereign dinasties of ........, ........ and ......, when, in the year ........, nearby the city of ......., the dinasties of ........ and ....... accepted, in a certain measure, the sovereign of the House of ....... Since then, Alfheim has been an independent, fierce and multiform State, in which powers are shared and held by the three houses, which have retained their original Kingship titles, with the House of ........ being the most prominent, as House of the High King. Since then, the rulers of House ...... have led Alfheim to great successes over their neighbours, defeating and incorporating the nearby kingdom of ......., launching attempts of colonization the shores of ......., and often warrying against their powerful souther/nouthern/western/eastern neighbour, the .............
Yet, despite House ..........'s successes, the other Houses secretly still remember the times when they were independent, and perhaps only wait for an occasion to strike, an occasion which could soon incur. Current ruler, High King .......... ...., has in fact proved in his youth to be a skilled warrior, a capable ruler and a wise diplomat, yet he is now approaching the winter of his life, with no direct heir but, after the death of his firstborn son, of his nephews. Whether the other Houses will retain their alledgiance to the Throne, fight for gaining control of it, or try to free themselves of the yoke of House ......., it is far to be a certain thing..."
Following this line, however, you could also split it in three factions, perhaps under control of the High House, represented as a one-city power, in a similar way to the Romans and Senate in Rome Total War. Being you the modder, you could decide which ones are the necessary conditions for the "coup d'etat", and decide whether it would happen sooner, or later, perhaps with a scripted event.
Hope it helps, it has been interesting writing it down
Also, will you use the original Byzantine name pool for the Atlanteans?