Undercapitalization is the opposite to overcapitalisation. The building is a much lower land use than that for the highest and best use. That is, the building does not capture the full potential of the site. An industrial example would be a cottage instead of an allowable substantial factory.

An intending developer would pay nothing for the old cottage as it would be have to be demolished to make way for the highest and best use; a factory.  Not only does the cottage have no value or demolition value only, it is a nuisance or detriment to the site as the new owner will have to incur the cost of demolition. That is, the land value is less than for an equivalent vacant site nearby.

Sales of such properties are known as site sales and are good evidence of land value in a locations where there are few vacant land sales.

See highest & best use

Compare with overcapitalization