Cash-out refinancing as a tax strategy for retired owners?

[Dave Ketcham]

A business partner of mine is in a partnership that owns an apartment building worth about $3M.  They've been upgrading units as they've become vacant, which has reduced the monthly cash flow temporarily with expectations for greater cash flow in the future.

The partners are all retired so they are starting to miss the normal amount of income.  Their property manager is recommending that they do a cash-out refinance to (a) increase their income and (b) reduce their equity in the property to reduce exposure in case of a natural disaster, etc.  He's even suggested an interest only loan and make a break even cash flow and take the equity out.   

Questions:

1. Does this investment strategy make sense for older, retired investors?
2. What are the tax implications of taking cash out now rather than later?
3. Is there a way to take cash out but distribute it to partners over time to reduce taxes?

Any advice would be appreciated!