It's a either a tear down or rehab and hold.Might the saving grace be area rents?

Thats about the best you can do in my mind without tearing out a whole bunch of concrete or something crazy to try to figure out the issue.There's a nice tile at lowes that looks like hardwood provided you install it with no grout lines (still need to grout the ridges between the tile).

People that are tearing down small houses and building large houses aren't in it as a long-term investment that generates monthly income. 

That might be considered reasonable wear and tear.

I do mostly new development around Denver downtown with a couple local builders, so we are constantly looking for older homes to tear down and rebuild with something new. 

First, they don't get much more in rent than a similar size unit without the bling and second they are crestfallen when the first tenants treat the unit like, well, an average renter will (hello wear and tear)...

It depends how many layers on the tear off but it looks like you've got quite a few there.

Essentially, this is a tear down...A custom builder has recently scraped 5 lots of similar size directly across the street that are offered for $100-120k with a minimum build price of $300k+.

Good thing since if there is mold when I tear the carpet out to replace it in a few years, I may pursue a claim against them since my lease requires them to report things like that ASAP otherwise they will be responsible for the charges.I get people don't want to trouble their landlord or have their landlord coming around for stuff, but when these people don't report it, it ends up causing far more damage.

Is it worth having to pay double the permit fee or tear it down if it doesn't comply with city ordinance?