As mentioned in the comments, this is largely a DM call, but here are some thoughts to help adjudicate this based on RAW and official rulings (and some of my own musings).
First, the illusion can be broken into two categories - changes to the landscape, and decorations placed upon it.
As the spell states (RAW), you cannot change the general geometry of the landscape - flat land (or water) remains flat in the illusion, and vice versa. So the "height" of this component of the illusion would be no more than a few inches, a couple feet at most. It is important to note, however, that the official rulings seem to contradict this - it allows the creations of a crevasse, though it doesn't specify a rough size for this feature - it might be a mere crack in the ground a few centimeters wide. They also allow for the creation of cliffs, though again, the cliff may follow an existing feature - turning a 3 story building into a sheer rocky cliff, for example. The wording in these developer comments implies that the change (the cliff and crevasse in these examples) is a change in the geometry of the landscape, and not just a "re-skinning" of an existing feature, but does not explicitly state that, so DM beware.
The best way to adjudicate this might just be to apply the geometry restriction in only the vaguest sense, which is to say that local exceptions can be allowed so long as the general character is unchanged. A lake can be turned into a plain, but not a large hill. In the middle of that plain, you can have a burbling brook that has carved a 4 foot deep crevasse. This doesn't conform to the existing geometry precisely, but taken as an average over the whole lake, it doesn't move the needle too far.
How you handle interaction with such things as an illusory hole in solid, real ground is dealt with in other questions. I recommend looking to Phantasmal Force.
It's also worth discussing here that the spell contradicts itself in this regard. It states that "the terrain's general shape remains the same", while immediately including and example of changing the appearance of "a precipice" to one "like a gentle slope". So, it seems that at the very least, some liberty can be taken here with the shape of the landscape, if not simply ignoring the restriction entirely. I guess it impels the question of what exactly they mean by "general shape". We have largely assumed it to mean the altitude since that seems to be the general direction of the examples, but it might be worth considering that it may mean something else, though I struggle to imagine what. My best guess is that they are simply stating the (what I feel is) obvious - that while the illusion could be anything, the actual physical terrain is not changed by the spell. This interpretation eliminates a considerable amount of confusion and makes the spell simpler to use and adjudicate.
These are even less well defined, though examples given include buildings and trees. No guidance is given on how big these can be - can you place a giant redwood or a towering castle? By RAW, it appears so.
There are a couple ways you can adjudicate this (well, there are infinite ways you can, but I'll cover two).
One, you can take the "1 mile square" area affected, and simply extend that vertically, allowing any decoration (outside of geological features and creatures as they are specifically limited elsewhere in the spell description) up to that size. A Costco that is a mile high and a mile on each side? Done. Jack's Giant Beanstalk, extending to the clouds (those that are lower than 1 mile, anyway)? Done. A mountain? Nope, sorry (could you even fit a decent one in a mile square?).
Two, you can place some arbitrary measure of "reasonableness" on the decorations. Nothing fantastical. Nothing "too large". So, no floating castle on a cloud. In fact, no castles at all as they are "too large". It would be up to the GM what "too large" is. Maybe nothing larger than a merchant shop, maybe 20 feet to a side and a single story tall. No trees taller than 20 feet. That sort of thing.
Don't hurt your brain
House rules ahoy!
If you try to create hard rules, it might be less fun. It might just be better to allow most anything with the caveat that it should not emulate the effects of combat spells or non-illusion spells, short of the general solidity of the illusion and the changes to terrain difficulty. It also seems that emulating the effects of Phantasmal Force (an illusion spell, but a combat spell as well) is allowed as the objects created by MA can cause damage. So, maybe just allow any illusory effect (combat or not) that doesn't run afoul of the restrictions on creatures (no adding, disguising, or obscuring).
In short, MA can be thought of as a Phantasmal Force spell that affects everything in a mile square (as well as those that can see that area), with the added benefit of creating semi-solid interactable objects and changing the difficulty of terrain, and with the limitation that it can't create illusory creatures, nor obscure or disguise real creatures. Being partially real (unlike PF, which is completely within the victim's mind), it is also detectable by truesight. It also has the benefit of not allowing a save, so it will always be "believed"
Under this interpretation, if the caster wants to create some fantastical land of rainbow rivers and levitating buildings, he can put a "Welcome to Fun Land" sign on it and sell tickets. But very few people will believe the illusion (which probably isn't the intention for that particular casting anyway).
If he wants to use it to create a vast underground cave complex, let it be. Is it some extra-dimensional space or a massive Holodeck trick where you just think you are descending into the earth but never leave the surface? Don't worry about it. When the spell ends, everyone that was in the tunnels ends up on the surface anyway, and it doesn't matter if they were there all along or not. Unless the underground caverns were supposed to protect the town's inhabitants from the destined meteor impact that would wipe out the city, in which case, put on your DM pants and figure out if you want it to work or not (I'd probably go with "no").
Also under this interpretation, if they want to turn a lake into a large hill, let them do it. I don't think it unbalances the spell, though it is certainly not RAW. My best guess as to why the RAW restriction against changing the landscape's geometry is there was to prevent the spell from being used to deny access to an area by burying it under 300 feet of imaginary soil or putting a 500 foot deep valley beneath it and forcing some ability to fly be used to access the object now in midair. However, the spell as written can effectively hide or disguise objects anyway (it is only restricted from hiding or disguising creatures), and it is easy enough to rule that willing yourself through the illusion (once you realize it as such - basically only with true sight as there is no Save listed for the spell) is trivial, preventing the spell from hindering those that see through the illusion, though they can continue to interact with those aspects of the illusion they don't will themselves to ignore, because the spell specifically states that it allows interaction even for those that know its nature (emphasizing the "can" in "can still interact" which means that the creature can also choose not to interact).
Considering the other MA question ("Can I use the Mirage Arcane spell to walk on top of a stretch of ocean?"), it might occur to some to imagine that if there were no limit to the height of imaginary items placed on the imaginary landscape (a potential third way to answer this question) that you could place a 500 mile high tree within your MA area, then cut it down and then use it as a bridge between two distant continents. However, the spell specifically prohibits this as "any piece of the illusory terrain (such as a rock or stick) that is removed from the spell's area disappears immediately." This includes things that are only partly removed (though "any piece" could be interpreted differently, it makes sense that the mile square is an area of effect and that the illusion, or any part of it, ceases outside of that area), so anchoring one end of the fallen tree within the MA spell doesn't allow the rest of it that is outside the spell to remain solid. Whether only the portion of the tree that leaves the area of effect disappears or the whole thing does is again, left to the DM.
Could the spell displace water? The water is not part of the landscape at the bottom of the ocean (or the bottom of a lake, for that matter), it is more like the atmosphere. So I don't think it would.
Could you create a building with an airlock in it? Yes, but the inside of the building would still be filled with water.
What about a bubble of air as a floating decoration. Hmm, maybe floating decoration should be disallowed, you think. But the bubble could just as easily be attached to the "ground", so that still doesn't solve the problem. Of course, a bubble is kinda like a hole in the water, so we get back to the whole "is a hole an object" debate.
Anyway, we can look to Phantasmal Force to adjudicate this. You can totally shove your head into that bubble and breathe deep, but you will still drown. Your mind will fill in the blanks to cover the inconsistency - that damn bubble popped before you could get enough air out of it, or it turns out the pressure at this depth is preventing you from inhaling properly, or the bubble turned out to be filed with some non-oxygenated gas. Whatever.
Bottom line, you still drown, and you walk (move) at half speed as underwater is not considered difficult terrain if you have no swim speed - it has its own rule that states that each foot of movement costs 2 feet of move, so the fact that the spell specifically allows you to ignore difficult terrain if the illusory terrain is not considered difficult is irrelevant. Likewise, the BBEG would move freely, and he would somehow (from his point of view) be able to breathe normally (assuming he breathes underwater) if the caster created an illusory space that appeared air filled.