I spoke to the appraiser who appraised my building 2 years ago when I was first going through the purchase transaction and he states that too many banks have been burned on using the cost approach with people paying too much or over-improving their investments which has caused most people in the industry to only use sales and income approaches to properly appraise a property.

With a M2M lease, as soon as you realize that your tenant is dirty, you give them notice and find someone who won't live like a pig.In reading another post on a similar topic (you should search) someone posted that in TX, "lease rules" so apparently you can add things to your lease that supersede law and it's cool. 

It looked good on the BP flip calculator but didn't fit the 70% rule.  

Are there rules of thumbs governing this decision?

There are rules for using the MLS and penalties for non-compliance.

Every now and then a 1%+ property comes along, but it's extremely rare.And the reason for that is because the whole 1% Test, 2% Test / Score / Rule or whatever you want to call it is designed as a metric for the rest of the county where the median home value is half of what it is in California.

Because of the way it will be valued means you will get 3 or 4 times the money spent on cost to improve.  

The mortgage company for the buyers has requested a list of improvements and my costs for those improvements.

Just be careful not to throw the baby out with the bath water and rule out good areas.

Additional info:primary 1031 exchange rules and requirements include: 1) same taxpayer: the taxpayer who sells is the taxpayer who buys, 2) property identification within 45 calendar days post closing of the first property, 3) purchase of the replacement property within 180 calendar days, 4) trading up: the price of the replacement property is equal to or greater than the old or relinquished property, 5) hold time supports the intent to hold for investment, and 6) related party transaction regulations.