They were growing and dispensing marijuana before the start of their lease and yet did not notify us.  

This is probably the easiest solution but since we don't control it directly, may not be the best to integrate with our system. 2.

But as a real person with integrity, I don't see how a model of nickel and dining an owner will result in a long term relationship that is profitable to both parties. 

Landlords should have the integrity to tell their tenant who they are.

Also, is there a point where it's up to the tenants to solve their own problems and how do you draw that line--eg if there's noise or loud music in the neighborhood or other quality of life issues that don't apply to the physical integrity and function of the property.

That would shake me certainly.Draft that nice letter, honor your suggested option of first option if you want to sell, (integrity matters whether in writing or not), and if you decide to move back in to your home prepare yourself for a few dinged walls and stained floors!  

It is more important to maintain integrity than not hurt feelings.Allen Fletcher

If the tenant has been a good client and you feel charitable (there is nothing wrong with a compassionate business as long as you are not being taken advantage of or starving yourself/family), then I'd arrange with the tenant to deliver the keys to you on XX date and you will either a) prorate their deposit back to them according to the days they had "key occupancy" assuming the condition of the residence meets your standards to release the security deposit, or b) charge them the amount of the anticipated date XX on the 1st of August and then return their security deposit upon their subsequent vacancy and cleaning subject to your inspection.Personally, I like the prorating of the security deposit better if you feel like the tenant is a good individual and will treat your property with integrity before they move, and it shows additional compassion by not tying up their money while they position themselves for a new location.In any case, do not put yourself in odds with the law, and do not perform any activity that would allow your tenant to come back against you. 

Having a team of professionals behind me I know I can make a profitable real estate investing business.My vision for the business is one with a reputation of quality, honesty and integrity.

I have never dealt with such a lack of integrity, honesty and professionalism in any business I have dealt with.