Is it possible to make a world this small AND have all the necessary lots to make it a fully functional neighborhood?

I love playing on these small worlds because the lag nearly goes bye bye.

Yes, rug-based Rabbitholes will help to attain that, otherwise, moveobjects on to attach many rabbitholes adjacent to each other.

What was the trick to hide rabbitholes underground?

And I wish there was a mod or game feature where you can assign a door (via the pie menu) to act as a rabbit hole and it makes the inside room turn black.

Can you use those rugs with the Late Night room shadowing tokens?

The trick to hid buildings underground was to create a foundation with a hollow center and then take the floor DEEP down and place the rabbithole underneath in the hollow part, the door should be the only accessible area and there should be stairs leading down.

I should also tell you that there is a door that works as a rabbithole, there are also signs that allow workage-as-rabbitholes.

The rugs require 2x2 accessibility, so I don't think they'd work with the LN room shadowing tokens, HOWEVER, the doors do. So you can just make a building that looks like a town hall/restaurant, etc. and make the door the rabbithole entry.

These doors?

http://modthesims.info/download.php?t=435107