After looking at the pics, yours isn't far off from what mine was like when I got it.
The rotten wood is an issue. Mine got the lower panels that bolt to the bed replaced in my rebuild. They only stapled the boards to the aluminum frame so it's not hard to replace. It does force a complete rebuild of the cabinet on the drives side. That's not a bad thing as the rest of the wood they used there was particle board and given the leaks yours had it's probably soggy.
That does give you options for changing the layout. This is a radical idea, but one I'm kicking around when I do the siding and canvas on mine. The major change would be eliminating the right side bench completely and the front part of the cabinet on the left. A forward split dinette would be created with seats behind the front seats but facing the middle. This would be similar to how a chalet floor plan is or the Blazer campers made by Hallmark. You would have one cabinet in each rear corner. Size would be dependent on how wide you made the seats. The seats still could convert into sleeping space, but it would be in the same direction as the upper bunk. This would force a change of windows to two smaller windows, but one on each side and eliminate the one on the back wall. Which would require a reskin of the siding.
If you don't want to go that far, the side dinette you propose is good too. It wouldn't sacrifice as much storage as one might think, just some of it will be between the seats in the middle and not secured inside the larger single seat. Adding a net between the two seats would keep stuff contained in that space while traveling. You'll find with use, anything not tied down or inside a space will move around a lot!
The latches could be tightened up with going to the next size up screw. Remember all that stuff is self tapping so going gonzo with an electric drill or impact to install the screws might have you wipe them out again. The front latches you can actually get to the backside and add a block of wood to the inside surface and run longer bolts with nuts to eliminate the self tappers into the aluminum.
The rear door is one thing I have not tackled in my rebuild yet. On these units they are actually framed out of wood. I'd like to replicate mine out of metal to eliminate the wobbly feel of the door in general.
As far as the canvas goes, it you are going to replace it, I agree in going taller by at least 10-12 inches. I can't sit upright in the upper bunk and that extra space would be nice. That forces a change for the lift panels and I'd definitely make them out of electrical conduit as it works the same if not better and is much cheaper to make than the factory style. Plus with yours being gone you lack the hinges to remake the factory style anyway. The process is simple and outlined in my build. It's a common mod used by other FWC campers over on wander the west too.
Ideally, you fix the roof, canvas and lift panels in one shot. Many take the roof off completely to work at a lower height. I'd plan on adding wiring in the roof for a vent fan and solar, even if you don't plan to put solar in yet. Now is the time to prep for it if it's apart. Adding rigid foam insulation between the framework Is my plan and a common thing to do to these. I will ditch the stock headliner for water resistant shower paneling in a light color to keep the inside bright.
You got a decent base to start with for sure. Needs all the same stuff mine did for sure.
How did the 5.3 do with the added aero drag and weight of the camper and trailer do on the trip? What gears and tire size are you running too?
Moving the dinette to the front is definitely a more common layout for the true slide ins and seems to be a good for for that floor plan. I like having the opening to the camper from the truck though and I am not sure I want to sacrifice the rear window to a cabinet. It was pretty handy for double checking my blind spot. I was going to try to not modify the exterior in an attempt to keep it somewhat original and save some money. If I am going to go that far I would look into new windows, etc.
I had seen a few FWC an other campers with the side dinette layout and it seemed the most open floor plan for how I was envisioning packing all of our gear, making quick stops on the road and still having some walking space / space for the dog(s) if its really cold or rainy.
I think we will definitely need to pull the top for the roof work. I will have to look into the wiring requirements for solar. Its definitely on the list of future wants. Also plan go to with the powered roof vent.
The shower paneling is interesting, are you worried about it trapping moisture?
The 5.3 did pretty well honestly. I wish I could have stayed in OD more. The extra weight of the trailer and the wind drag kept us in D quite often. I was running at about 2600 RPM trying to hold 65 MPH with my 33" tires and 3.73 gears. The only time I had a truly hard time accelerating was when I got stuck behind a semi going less than 10 MPH up Rutan Pass leaving CO. The Blazer still took off without problem but it made an odd sound. Not sure if it was the manual fan or my power steering, hopefully not the trans! We went over a lot of big mountains on the trip and the truck could have probably maintained 70+ on almost all of them if I wanted to force it. Its tuned for premium (better power and MPG) but I think I have an exhaust leak at each of the manifold flanges once everything heats up. So I switched to regular fuel because the O2's were reading pretty lean so the PCM was dumping in a bunch of fuel. With the trailer we got around 11-12 mpg and I was running 2600-3000 RPM most of that time. With the camper I had to slow down some because of the body roll and we were in less of a hurry as we saved part of a day driving after picking up the camper. I stopped checking MPG because any time we hit major wind I was back in the 2600-3000 RPM range, but we still got about the same mileage between fuel stops so I don't think the camper really made too big of a difference in MPG. The truck handles and drives pretty great based on the short trip around town without the trailer.
The 5.3 really lacked power at elevation though. Even 5-6K ft it was down on power pretty noticeably. That said, we had a cooler full of drinks and ice, tail gate in the truck, all of our gear for the week, extra fluids for the truck. Plus the weight of all the tools I could think to grab for working on just about anything on the truck.
This road trip and a previous trip with a 4.8L ext pickup to moab definitely have me worried about fuel range though. Debating going with the 31 gal tank but I am not sure how that fits onto a truck frame that originally had a 25 gal tank. I would also need a new fuel tank skid plate.