Doing a level out of models for even fps etc. is certainly possible. I am trying it now with my own made editor, and it works pretty good.
Shading etc. is tricky though, you will e.g. need to have a good shadow shader for that (try Slin's or ShadeC shaders which you can search/find on this forum). Also possible you may want to 'bake' shadows in textures of models in e.g. Blender. I haven't tried that myself yet but it seems to can have huge impacts.
With this editor, you never leave the game and it actually uses the gameplay mechanics, so you're literally playing while building and testing your level. I should warn you, that its a lot of work, but its totally worth it!
, that reminds me of the good ol' times when first playing Age of Mythology and using its editor; placing shitloads of stuff and being able to instantly test/play with it.
Smooth integration of your ingame editor by the way
