Keep in mind that there are no balconies on the second floor. You can slide the door open, etc., but can't step out.
We have a six and nine year old and they loved being on first floor and being able to step right out onto the beach. I'm sure they would have been just as enthralled with stepping out on garden side as well. The only potential negative is privacy concerns, but on our two stays, this has not been a concern in any way.
The third floor does have the balconies, but as you mention it is indeed a smoking floor. The various reviews seem somewhat hit and miss as to how noticeable the odor is - some say their room had no smell, others feel like they stepped into a Shriner's Convention.
I can just say that for us, first floor was the way to go and we had no problems. Good luck!