This research examines the problem of designing a two-echelon freight distribution system in a dense urban area that considers third-party logistics (TPL) and loading-unloading zones (LUZs). The proposed system takes advantage of outsourcing the last mile deliveries to a TPL provider and utilizing LUZs as temporary intermediate facilities instead of using permanent intermediate facilities to consolidate freight. A mathematical model and a simulated annealing (SA) algorithm are developed to solve the problem. The efficiency and effectiveness of the proposed SA heuristic are verified by testing it on existing benchmark instances. Computational results show that the performance of the proposed SA is comparable with that of another state-of-the-art algorithm. The model and algorithm are then used to design a two-echelon freight distribution system in Taipei City, Taiwan. Results of the case study indicate that the proposed model and algorithm provide a better distribution system.