Right click on the cell in the cell selector window, select edit, and then go to "water height" and reduce it so that it is below the ground level.

Erm... wrong.
What he needs to do is use the landscaping tool to raise the land above the default water level. If he lowered the water level as you suggest, he would have have to do it for every single cell, and would have problems when it came to the water level in his cells being compared to the level in cells which don't exist or which are part of a distant terrain.
If you made the worldspace using the heightmap editor, you will need to make sure that all of your terrain is above 4096 units within the heightmap editor. This wiki link provides some useful tips for working with the heightmap editor.
http://cs.elderscrolls.com/constwiki/index.php/Heightmap_editor
It should be noted however that the heightmap editor should ONLY be used if the worldspace you are wanting to create is larger than a few cells wide. For a small island or similar, you should ALWAYS use the landscaping tool to make your terrain as this significantly reduces the file size and memory requirements for your mod (that would otherwise be used for empty cells).