The problem is that you were never on the TAP flight that was delayed. Your reservation was amended - in agreement with you - and your final destination became LIS. There is no relevant delay to compensate.
The case law you refer to (long delays equals cancellation) allows the pax to claim compensation also for delay but it still requires that the pax actually arrived with a delay at final destination.
There is no duty to reimburse a FAO hotel if you had been rebooked (and taken) the late evening LIS-FAO flight. It has nothing to do with TAP that you could not check-in at FAO accommodation past midnight.
There was no point in discussing compensation, hotel etc with the ticket office at LIS - these discussions take place after your flight and when you submit your receipts etc to TAP for reimbursement.