I tested the water mesh idea. It doens't seem to work unless you make it really really big and at a high elevation, not enough room for you to build.
I can't think of any other solution than to use the teratexturing method and the 3ds terrain. Just use the teraformer to convert it to 3ds.
Really, the devs of nl should've made a beter way to blend the background. All that testing was a big pain in the ass.