Inside our $20 MILLION K-Mart Conversion

Feb 08, 2024

Flipping houses can be a great way to make a quick profit, but have you ever heard of flipping a whole mall? It may sound crazy, but it's becoming a popular trend in the real estate industry. In this blog post, we'll dive into the world of mall flipping, including the market analysis, feasibility analysis, and the process of converting a mall into a profitable venture.

Understanding the Market

One of the crucial aspects in real estate is the ability to discern between a promising deal and a potential failure. The key principle is that profits are made at the time of purchase, and this becomes particularly vital in the context of developments or conversions. These ventures involve a prolonged and costly process with inherent risks, underscoring the significance of making sound investment decisions from the outset.

When we search for good opportunities, we consider two aspects. First, we check if the overall market conditions support the success of the deal. Second, we evaluate the asset itself, taking into account factors like costs, prices, and contracts.

This isn't my first time converting a Kmart. We did one around five years ago, and interestingly, it was also in Nevada, but in Reno. This would be like a Reno 2.0. Because the buildings have a strangely similar and almost identical layout, indicating that they were probably owned by the same retailers. We're considering doing the exact same indoor conversion for climate-controlled self-storage. 

Additionally, we plan to convert the outdoor parking area and separate parcels into multi-family housing. Our idea is to surround the entire property with multi-family buildings based on the demand in the area. The location is strategic, situated on major roads in a high-growth area. The road connects to the freeway, making it a crucial corridor for the surrounding homes and multi-family developments. 

Comprehensive Analysis of Project Feasibility

When we analyze the feasibility of a project to decide if it's worth pursuing or not, we consider different aspects. This involves examining the market, understanding the driving forces, and assessing the project's viability from the customer's viewpoint and demand.

Brian Mullally, VP of Acquisitions at Cedar Creek, emphasizes the significance of closely examining the trade area, defined as the three to five-mile radius around a site. The focus is on understanding economic drivers, including the demographic profile of the residents in that radius—considering factors like age, housing types (apartments, single-family homes, townhomes), and historical performance.

Mullally stresses the importance of taking a comprehensive approach by assessing both the long-term outlook, projecting 10 years into the future, and looking at past performance, such as how the area weathered the recession. This dual perspective, combining forward-looking and backward-looking analyses, helps in determining whether a particular investment is likely to be a sound deal.

Crucial Insights into Asset Analysis for Successful Conversion Projects

Moving on to the next aspect, the analysis of the asset becomes crucial, especially concerning capital expenditures or significant issues. This step is highly significant as it represents one of the most crucial elements in the evaluation process. It is here that potential pitfalls can emerge, and deal breakers may significantly disrupt the underwriting process and overall performance of the asset due to their substantial impact on financials.

Conner Skeen, Director of Project Management at Cedar Creek, highlights critical factors that can potentially jeopardize a deal when considering a conversion project. It is essential to assess how the existing structure can accommodate the intended use. Questions to address include whether the structure can support the desired product-market fit, meet the required square footage, and allow for the construction of necessary unit types.

Additionally, Skeen emphasizes the importance of evaluating the load capacity of the building's concrete, ensuring the slab meets self-storage capacity requirements per square foot, and confirming that the ceiling height permits the achievement of the required rentable square footage, especially if considering a second floor.

He underscores the need for thorough inspections of HVAC systems and roofing, as these are significant capital expenditure items that could potentially derail the deal if not adequately addressed. Overall, meticulous testing and inspection of these elements are essential to mitigate risks and ensure the success of the project.

The Crucial Role of Roof and HVAC Assessment

When dealing with these buildings, especially vacant Kmart buildings, the primary concerns often arise from the condition of the roof. Roof replacement becomes a crucial need, and the challenge is exacerbated by the presence of aging and expensive HVAC systems. In older buildings, the repair and maintenance of both the roof and HVAC systems tend to deteriorate rapidly, presenting significant cost factors.

Additionally, if there are plans to construct new infrastructure such as roads or driveways, the need for updated ventilation systems through the roof arises. Therefore, it is imperative to thoroughly assess and understand the cost and condition of the building from the top down. This proactive approach allows for a comprehensive evaluation of potential challenges and associated costs, particularly those related to roof and HVAC concerns, ensuring a more informed decision-making process.

What will it cost?

The question is: what will it cost to convert this property to meet our needs? In this market (which was 2022 at the time we were working on this deal) we estimated the total cost to be somewhere between $15 to $20 million. To illustrate, let me provide an example: when we initiated a project in Reno, the cost was around 80 cents per square foot per month. Here, we're looking at a higher rate.

The revenue potential associated with this asset is considerably higher, easily doubling what we've observed in comparison to other locations. At this juncture, we have options—we can sell the land to reduce our overall cost basis, possibly bringing it down to $15 million. Alternatively, we can utilize the land for development. The decision will heavily hinge on the strategic use of the land and how it aligns with our goals.

If we decide to retain the land for future use, our total investment in this building would be around $20 million. In terms of its current market value, it's estimated to be well over $40 million, likely around $50 million.

These opportunities are unique because we're optimizing the utilization of an asset class. Currently, by today's standards, the revenue potential of this asset is remarkably low. The exciting part is that we don't need to make extensive changes to significantly boost the revenue, thereby completely transforming its valuation.

This shift not only alters how the asset is viewed but also impacts how it is held and the source of its revenue. The transition is relatively seamless for us, resulting in substantial gains.

Timelines & Demand

When we assess demand in our comprehensive feasibility analysis, we focus on thoroughly examining significant capital expenses. These are crucial factors that can either make or break a deal. We need to determine how much the overall market can handle. It's a delicate balance we constantly navigate when dealing with new acquisitions, developments, or conversions. It's important to have the flexibility and time to carefully analyze potential issues and deal breakers. Ultimately, we aim to find solutions to any challenges that may arise.

How much time does it take to complete the conversion of this thing? One of the great advantages is that it's not built from the ground up, and the entire process is conducted indoors. When you observe the space, the structural poles remain in place, and everything else is removed. We might keep or remove the ceiling tiles, but essentially, storage units are constructed within the existing structure. It's a bit like playing Tetris, making the process more efficient and cutting development time in half.

After zoning, it takes about six to eight months. It's quite remarkable to witness and overall, it's a pretty cool experience. The profitability of these projects is astonishing when executed correctly, making it an exciting challenge.


Ensure that your contract allows for flexibility. You can keep it short, but include provisions that give you the ability to address and resolve issues. Understanding demand is crucial, not just from a computer screen but also on the ground,  which involves secret shopping. This is one of the most important practices we employ to understand market demand. If you're interested in witnessing how secret shopping works and what we're searching for, explore our other related blogs and articles.

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