1.) The value of the "Largest Infrastructure Size" setting is used to create a grid over the Reality Model (Reality Mesh or Point Cloud). The grid's tiles must be big enough that each tile contains at least one ground point. Ground points (called "Seed Points") are found in each tile and a TIN is computed from those points. To validate seed points, output them to a DGN level by selecting the "Seeds" output method.
2.) The second step consists of iteratively refining the TIN created in the first step. The "Terrain Variation" setting influences the number of iterations. A smaller value will create a flatter terrain. Getting this setting right may require a bit of trial and error.
3.) Once the TIN refinement is completed: