I know the building is a brick structure and it is listed as fire damaged. 

Also address her security deposit as being forfeited due to trash, dirty conditions, damages what ever.

If they did then they got the letter.I think most tenants that are threatening to sue do not follow through, not saying your may follow through or not.I would call their bluff and see what happens.If you have documentation and photos of the damage you should be fine.You can always consult with an attorney.

This includes documenting the existing conditions to ensure they don't damage the property when they move and deposits.   

That cuts down on the amount of "leisure" travelers and "partiers" that have the potential to cause property damage.

Is my only option to let them damage the unit and take it from security deposit after they move out?

If she does not agree let her know that if she does not pay the August rent on time you will be forced to file for eviction which will damage her rental history.

I did actually go over budget by $15000 between unforseenn wood damage and roof replacement. 

Watch for hail Damage and insurance costs.Don’t spend to much time on things like forming llcs or trying to think of the best strategy.

If the tenant had a dishwasher leak a week ago, that would not have done this kind of damage.