I found the solution :) 

The option to make a menu a "Site Navigation Submenu" is only available via the UNA Developer module (not via the standard Navigation module). 

Correct:  http://*siteURL*/studio/module.php?name=bx_developer&page=navigation
Incorrect: http://*siteURL*/studio/builder_menu.php

It does say this in your original post, but I missed it.