The L2 LWAPP means that all of your AP will be on the same subnet as the management/ap-manager interfaces. In this mode the AP does not need an IP address, as it will broadcast to find the WLC. This mode of operation is depricated and no longer chooseable, IIRC as of 5.0 code.
L3 LWAPP means that your AP can reside on any subnet so lon as they have IP reachability to the management/ap-manager interfaces. All of the AP will have an IP address.
L3 is the most scalable, as you can spread the AP across your subnets, and do not have to rely on broadcasting for them to join.