The only other option is to exercise your appraisal clause or financing clause and walk away. 

The inspection revealed rotting and termite damaged structural wood so I don't think rehabbing is feasible or practical.

I have no idea how he'd afford the two down payments that way as this seems to be a huge drawback to me, but regardless I've suggested that as an exercise to test our partnership, we should at LEAST figure out how we could possibly structure this deal to be fair even if he decided not to take it.

But, if you are looking to go this route you have got to be practicing what you preach.

He is the attorney for McColly and has his own practice.

Per New York State guidelines, I will need to give a 90 day notice for rent increase, but beyond this I'm seeking any advice on best practice for broaching the topic with the tenant as a landlord.

Yes, we all get LOTS of idiots that don't read our ads and we have to politely respond to them.Best practice is to write several really good responses, politely directing them back to your ad, listing your basic requirements, etc. 

If you happen to pick up a lead or two that you can take home and practice some due diligence on, even better.

Find Brandon's videos on YouTube for the "four square" method of analyzing homes and practice.

This is just practice.