What I'm afraid of is,
the horrible fog in the city.
You can't see the end of the city.
While driving, even if you're really close, cars and pedestrians appear out of no where :/
Long post ahead, but i'd like to share some of my thoughts that might explain and clear up a few things about why this game has such shortcomings.
I think the biggest cause of the poor draw distances in the game appears to be that they still appear to be using largely the same engine that has been powering their handheld Lego games for years now. It has been modified somewhat to support a more open world experience, though it still suffers from some of the limitations inherent with that engine that could likely have been avoided had they opted to port the console engine.
To be specific, this engine was originally created for the regular DS Lego games, designed around the DS' notoriously low polygon limitations. This engine was first created when they released Lego Star Wars The Complete Saga (after the hopelessly glitchy mess that was Lego Star Wars 2 on DS). Most of the Lego games on DS since then have used this engine. It supports a much more limited amount of character models onscreen (only 5 or so max) and a less dynamic camera (which i'm assuming was designed to limit your field of view so you don't see the likely incredibly short draw distance beyond).
While this engine is perfectly suitable and acceptable for DS standards given the DS hardware limitations, the core problem is that Travelers Tales began to use the same engine with relatively little modification for the more powerful handhelds that were capable of handling ports of the console versions (albeit somewhat scaled back graphically). PSP for example previously received fully fledged ports of the console version Lego games. This included Lego Star Wars 2, Lego Batman 1, and Lego Indiana Jones 1. While some concessions were made to the visuals, the games themselves were intact and surprisingly faithful from a graphical perspective considering the hardware in question.
Unfortunately this practice of porting the console versions of Lego games to handheld systems that were capable of handling them stopped with Lego Indiana Jones 2. After the DS version of Lego Star Wars Complete Saga came out, Travelers Tales apparently decided to hand all of their handheld Lego games over to TT Fusion. And since then, every handheld Lego game has used the inferior DS versions as a basis instead of being a port of the console version. This even extended to the Vita versions. On the flipside, the regular Wii continued to receive full ports of the other console Lego games (with only minor graphical concessions), even the Lego games that now have the new large open world hub areas such as Lego Batman 2 and Lego Lord of the Rings. The draw distance has even been fine on Wii, and it still shows the massive quantity of onscreen characters.
So I think here it comes down to what it too often comes down to- developer laziness. I want to stress that I don't mean any offense to anyone who enjoys this game (in fact it looks like it's quite a fun game from a gameplay perspective). But I do wish to convey that the reason the game suffers from such poor draw distance on environments and characters is very likely due to developer laziness and their continued insistence on using an engine that was not only never designed with open world in mind, but just doesn't properly utilize the 3DS' hardware. They've certainly upgraded the engine somewhat to be an open world scenario for sure. But the game still shows clear signs of many of the limitations inherent with the engine's DS roots. The poor draw distance is one sign that this engine was never designed for this kind of open world experience, along with the fact that the game rarely ever shows more than 5-6 people onscreen at any given time, and they pop in and out of existence at a very close proximity to the camera. And while there's a lesser extent to the open world element, the Wii versions of recent Lego games again still showed what a superior engine could do even on weaker hardware compared than 360, PS3 and Wii U.
I'm not claiming the 3DS can handle a graphically intact port of the Wii U version, far from it. But I am claiming that the game could have certainly looked better than it does now. With a superior engine, based on the Wii version's scaled down Lego game engine instead of the inferior DS engine, we likely would have had a 3DS Lego game with far better draw distance and greater amounts of characters onscreen at once.