Do I trust them to make the most responsible call when it comes to repairs or should I arrange it? 

I would allow him to arrange with your repair person to fix the issue and make clear he pays for after hours charges if they apply.

Maybe even diversify and do both.You could fairly easily net your buddy $240,000/yr cash flow on that sum(this is very conservative), show a paper loss on that sum yearly, plus benefit from forced appreciation that will likely outpace the speculative appreciation in most markets; all while barely lifting a finger.Of course you’d no longer be managing that large sum, but I’m sure something could be arranged for your mutual benefit.

The lender for the acquisition has been arranged by the builder. 

This gives both you and the tenant an easy to budget mark.I would write up an addendum to agree to this arrangement.

Unless you suspect there is a willful neglect, bad hygiene or mental health aspect that caused the bed bugs and wasn't just bad luck, don't evict; have them do a written payment arrangement.

Any suggestions on how I would structure such an arrangement?

They collect rents, arrange repairs (though run things by me that are "major" or in-excess of $250).  

That means finding as many other agents in the area as possible who can confirm or deny that arrangement.

I had arranged everything with the title Company doing the closing however they did not follow the process (that they acknowledge in writing) to get the funds from the 1031 intermediary.