23 CFR 710.509 - Functional replacement of real property in public ownership.
(a) General. When publicly owned real property, including land and/or facilities, is to be acquired for a Federal-aid highway project, in lieu of paying the fair market value for the real property, the State may provide compensation by functionally replacing the publicly owned real property with another facility which will provide equivalent utility.
(b) Federal participation. Federal-aid funds may participate in functional replacement costs only if:
(1) Functional replacement is permitted under State law and the STD elects to provide it.
(2) The property in question is in public ownership and use.
(3) The replacement facility will be in public ownership and will continue the public use function of the acquired facility.
(4) The State has informed the agency owning the property of its right to an estimate of just compensation based on an appraisal of fair market value and of the option to choose either just compensation or functional replacement.
(5) The FHWA concurs in the STD determination that functional replacement is in the public interest.
(6) The real property is not owned by a utility or railroad.
(c) Federal land transfers. Use of this section for functional replacement of real property in Federal ownership shall be in accordance with Federal land transfer provisions in subpart F of this part.
(d) Limits upon participation. Federal-aid participation in the costs of functional replacement are limited to costs which are actually incurred in the replacement of the acquired land and/or facility and are:
(1) Costs for facilities which do not represent increases in capacity or betterments, except for those necessary to replace utilities, to meet legal, regulatory, or similar requirements, or to meet reasonable prevailing standards; and
(2) Costs for land to provide a site for the replacement facility.
(e) Procedures. When a State determines that payments providing for functional replacement of public facilities are allowable under State law, the State will incorporate within the State's ROW operating manual full procedures covering review and oversight that will be applied to such cases.