What is the basic premise behind technology such as is found in Oblivion (and other games, I\'m sure; haven\'t played enough to know), wherein objects from afar are vaguely show
Low-detail versions of models work especially well for vehicles and objects It's really tricky with terrain. I've worked on battlezone-type games and PC flight simulators. A little fog helps cover up the "pops" between details.
At the lower details, texture-mapping is often replaced with a few single-color polygons.
"Another more obvious technique is to store really rough 3D models, but then how does the 3D rendering system specifically choose to render the rough model of the building and not the rough models of other less significant (and probably not-viewable-from-that-distance) objects? How would you store something like that along with your heightmap?"
You can grid your terrain and keep a list of which objects are visible in each grid cell.