Transit priority based in exclusive right-of-way is a low-cost way of improving transit service by minimizing delays caused by interaction with other vehicles. This effect can increase the share of public transit against private cars in the mode preferences of commuters and consequently alleviate heavy congestion resulting from the dominance of single-occupancy cars. In this work we propose a modeling and optimization framework for the problem of Dedicated Bus Lanes (DBL) location selection in bi-modal urban networks with time-varying traffic congestion. Traffic flow is replicated by dynamic macroscopic traffic model with queueing characteristics instead of steady state models, to capture potential spill-back effects caused by poor DBL planning. A combinatorial optimization problem is formulated aiming at minimizing total passenger delay. Optimization is performed by Local Search (LS) and Neighborhood Search (NS) algorithms, while a network decomposition technique is proposed for improved computational cost. The results show the proposed algorithms effective in significantly improving an initial DBL plan with reasonable computational cost.