How is this legal? Specifically, distributing copyrighted assets and using their name/logo without permission.
TL;DR: it's in a gray area, but nobody with power actually cares (at least for now), so it's effectively fine. As I understand it, Lego is aware of the project (there's been a significant increase in interest in Lego Island in the past few years, with attempts to obtain the original source code) and simply does not care. It's an ancient IP and can't realistically compete with anything new, at least not in a way that…
Once fan projects get too much traction, companies have to cease and desist them because that's the way intellectual properties work in the law. It usually has nothing to do with whether it was a cool project or not, it's just that there's way too much money at stake when not defending your IP.