Terrain in the Source engine is created with objects known as displacements. Displacements are tessellated modifications of brush faces and are created within the texture tool.
You've probably been wondering what that second tab in the texture tool is. The Displacement tab controls all the terrain features of Hammer. A displacement is the Source's version of terrain, and a displacement surface is created from a four-sided brush face. Unlike regular brushwork, displacements are sculpted almost entirely in the 3D viewport, and it does take some getting used to. There are some guidelines to remember while working with displacements:
A displacement surface must have four and only four sides
Displacements cannot be made into entities
Displacements do not seal the world off from the void
Keeping these things in mind, let's start playing with displacements!