Hide Terrain does not turn off the physics for terrain.
What you can do is paint the terrain to the lowest point just above the water so AI will work and build your level above the terrain so your floor sits on what would be the terrain. You (the player) should be able to access all areas of your map and AI will walk and traverse on the terrain level.
AI walking on other then terrain should be getting started after the EBE is complete.
Defiantly a work around.
Intel(R) Core(TM)2 Quad CPU Q6600 @ 2.40GHz, 2400 Mhz, 4 Core(s), 4 Logical Processor(s), 8gb RAM, Nvidia gtx660, Windows 7 Pro 64bit, Screen resolution 1680 x 1050.