UNDERCAPITALIZATION

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. In the industrial example above, if the cottage was converted to flats or left as a cottage it would be undercapitalization.

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, the warehouse. Therefore, the existing cottage has no value or demolition value only. In fact it is a nuisance, a 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 may be few vacant land sales.

See highest & best use

Compare with overcapitalization