1. I think you mean the LOD landscape. You would need to use TES4Gecko to adjust the form ID of your worldspace to the 00 index, and then generate LOD meshes and terrain.
http://cs.elderscrolls.com/constwiki/index.php/Landscape_LOD_Tutorial
2. This depends on the size of your landmass. Everything outside the active area will appear with water at height 0 as part of the LOD terrain. Everything inside will appear as normal. For those cells which are part of the active area within the game, but do not exist as part of the world in the CS will appear as being empty. To make things look right it's suggested to have atleast 4-6 cells buffer between the playable area of your worldspace and the furthest cell created within the CS. Although this will add additional size to your mod, there really isn't any way around it. If the edge of your playable area is too close to another quad, and no terrain exists in that direction, you can get around this by creating terrain in that quad, generating LOD data for that quad, and saving the mod under a different name (make a backup before working, save after working, rename new save, replace backup).