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Hi Flatlander,
Quote: "You can have up to 38 dynamic lights by default."
That is per mesh , so if you add a house , that house can have a max of 38 lights , but if you add another house to your level this house can now also have 38 lights , so there is not a limit to how many lights you can have on a level , only how many lights a single object can have at the same time.
maxterrainlights=20 , is how many lights there can be lit at any time on the terrain , if you have more then 20 on the terrain then the terrain lights will fade away at this distance "terrainlightfadedistance=4500" ( same as the shadows ).
The terrain was made this way , as the terrain can really be a FPS killer , so doing it this way you can control how many lights you want to be lit at the same time on the terrain , allow you to control Speed vs. Visuals.
This is not the case with entities , they will only do light calculation based on what lights is hitting them, so they can have any amount of lights lit at the same time