hi divrom,
groups are essentially blogs, but we call them groups because they are intended to be used by groups and they come with other features such as discussions, events, photos, etc. (all of these are not 100% right now, but thats the plan)
Everything in the site sits on wpmu and we use that for authentication, etc. Each location such as http://something.ie/cork is a blog with a customised theme that pulls in news/events/discussions/etc from Cork (hardcoded sql for now).
In the admin panel for each group blog we enable admins to select the community they wish to be associated with and from there everything they do is linked. We added some extra location fields to the blogs table to do this.
Features such as events or photos are straight php applications that we wrote that sit alongside wpmu and use wpmu for authentication.
discussions are bbpress with the the bbpress/wpmu integration plugins applied.
That said, it looks like site-wide tags could have saved me some effort.