I know that there is a small river running through the area beyond the train tracks near Toontown Fair/Storybook Circus and a road (World Street) that seems to be close by. A solution for this could be a bridge, over the canal. As for World Drive being an obstacle, there should be enough room between the berm and the street to build a land that is larger than the previous one. I read that this patch of land is about nine acres big, whereas Toontown Fair is only about five. This new Toontown for the Magic Kingdom could have a bit of the Mickey Mouse Clubhouse thrown in. It could look something like this (it's crude, but it should give you an indication of what to expect here):
And while we're at it, we would also clean out the scum from the pond near the site, along with the creek. We can put up the same kind of background wall as in Disneyland around the pond so that guests won't see World Drive or the monorail. The houses can stay where they are but the landscaping near the pond will be the same as seen in "Clubhouse".
The creek/canal can be moved closer to the tracks to be a feature for the WDW Railroad. The architecture for the back side of Toontown can be nautical themed.