you're not overreacting. by your account, he is not upholding the philosophy of the "third place" and his discriminatory behavior is making everyone uncomfortable. your manager is an asshole and needs to do something other than shrug and let their partners be verbally harassed. you don't need to feel physically unsafe in order to ban someone, that's a lie.
**the few dollars this regular contributes to your store's profits are not more important than you, the partners.**
your job is not to be his therapist, you are there to make coffee. mental illness is no excuse for bigotry, and he can find medical help at a doctor's office and not a coffee shop.
if your manager refuses to do their job, file a complaint against them. explain that a customer has become a problem and your job does not extend to babysitting a grown man who is hostile to you.
i'm so sorry you have to deal with this.
$1