ABSTRACT The use of underground freight transportation (UFT) is gaining attention because of its ability to quickly move freight to locations in urban areas while reducing road traffic and the need for delivery drivers. Since packages are transported through the tunnels by electric motors, the use of tunnels is also environmentally friendly. We examine the use of tunnels to transport individual orders, motivated by the last‐mile delivery of goods from e‐commerce providers. The use of UFT for last‐mile delivery requires more complex network planning than for direct lines that have previously been considered for networks connecting large cities. We introduce a new network design problem based on this delivery model and transform the problem into a fixed‐charge multicommodity flow problem with additional constraints. We show that this problem, the ‐UFT, is NP‐hard, and provide an exact solution method for solving large‐scale instances. Our Benders decomposition‐based solution approach exploits the combinatorial sub‐structures of the problem in a cutting planes fashion. We provide computational results for real urban environments to build a set of insights into the structure of such networks and evaluate the benefits of such systems. We estimate the costs for implementing UFT systems and break them down into a per‐package cost. Our estimates indicate at least a 40% cost savings from using a UFT over traditional delivery models. This indicates that UFT systems for last‐mile delivery are a promising area for future research.