I had an idea for an addon, tell me if I'm smoking crack here.
Basicly a .p3d model of a hill that is placed on totally level ground, it has textures like the water in game for the stream or small lake. For the water fall you basicly modify a smoke grenade effect but have the "smoke" (actually the water) fall to the ground instead of rising (a reverse gravity effect) and for the dispercal pattern to be tighter. Then add a waterfall sound.
I realize the p3d would have a high poly count, but would add alot of character to an island. I'm not sure if it can be done really, it's just an idea.