The no Unearthed Arcana rule is for everything in the Unearthed Arcana, so no spells either. I prefer to have some balance to my game and like you said UA can be pretty broken.

As for favored terrain, I would probably say mountain. Waterdeep is built on the flank of Mount Waterdeep, so you'd be able to use the perks of favored terrain in this particular city.

Also, I will make a thread later today so OOC chat can go in there.