fix: separate model deployment location from resource group location

Introduce AZURE_AI_DEPLOYMENTS_LOCATION env var to decouple model/project
deployment location from the resource group location (AZURE_LOCATION).

When a user selects a model from a different region during init, only
AZURE_AI_DEPLOYMENTS_LOCATION is updated, preserving AZURE_LOCATION for
the resource group. This prevents provisioning failures when the Foundry
project and resource group are in different regions.

Fixes #7670
Supersedes #7873

Author: Jian Wu

cli/azd/extensions/azure.ai.agents/internal/cmd/init_foundry_resources_helpers.go

@@ -661,11 +661,18 @@ func loadAzureContext(
 		envValueMap[value.Key] = value.Value
 	}
 
+	// Prefer AZURE_AI_DEPLOYMENTS_LOCATION for model/project operations;
+	// fall back to AZURE_LOCATION for backward compatibility.
+	location := envValueMap["AZURE_AI_DEPLOYMENTS_LOCATION"]
+	if location == "" {
+		location = envValueMap["AZURE_LOCATION"]
+	}
+
 	return &azdext.AzureContext{
 		Scope: &azdext.AzureScope{
 			TenantId:       envValueMap["AZURE_TENANT_ID"],
 			SubscriptionId: envValueMap["AZURE_SUBSCRIPTION_ID"],
-			Location:       envValueMap["AZURE_LOCATION"],
+			Location:       location,
 		},
 		Resources: []string{},
 	}, nil
@@ -774,7 +781,7 @@ func ensureLocation(
 	}
 	if azureContext.Scope.Location != "" {
 		fmt.Printf("%s", output.WithWarningFormat(
-			"The current AZURE_LOCATION '%s' is not supported for this agent setup. Please choose a different location.\n",
+			"The current location '%s' is not supported for this agent setup. Please choose a different location.\n",
 			azureContext.Scope.Location,
 		))
 		azureContext.Scope.Location = ""
@@ -789,7 +796,13 @@ func ensureLocation(
 
 	azureContext.Scope.Location = locationName
 
-	return setEnvValue(ctx, azdClient, envName, "AZURE_LOCATION", azureContext.Scope.Location)
+	// Set both AZURE_LOCATION (resource group) and AZURE_AI_DEPLOYMENTS_LOCATION (model/project resources)
+	// to the same value by default. AZURE_AI_DEPLOYMENTS_LOCATION can be changed independently later
+	// (e.g. during model selection) without affecting the resource group location.
+	if err := setEnvValue(ctx, azdClient, envName, "AZURE_LOCATION", azureContext.Scope.Location); err != nil {
+		return err
+	}
+	return setEnvValue(ctx, azdClient, envName, "AZURE_AI_DEPLOYMENTS_LOCATION", azureContext.Scope.Location)
 }
 
 // ensureSubscriptionAndLocation ensures both subscription and location are set.
@@ -1148,6 +1161,13 @@ func selectFoundryProject(
 
 	// Set location from the selected project
 	azureContext.Scope.Location = selectedProject.Location
+	if err := setEnvValue(ctx, azdClient, envName, "AZURE_AI_DEPLOYMENTS_LOCATION", selectedProject.Location); err != nil {
+		return nil, fmt.Errorf("failed to set AZURE_AI_DEPLOYMENTS_LOCATION: %w", err)
+	}
+	// Seed AZURE_LOCATION (used for resource group) from the project location so that
+	// downstream provisioning has a default. If the user already set AZURE_LOCATION to a
+	// different value (e.g. via `azd env set`), this will overwrite it to match the project,
+	// which is the correct behavior since the resource group should be co-located.
 	if err := setEnvValue(ctx, azdClient, envName, "AZURE_LOCATION", selectedProject.Location); err != nil {
 		return nil, fmt.Errorf("failed to set AZURE_LOCATION: %w", err)
 	}

cli/azd/extensions/azure.ai.agents/internal/cmd/init_models.go

@@ -82,11 +82,11 @@ func (a *modelSelector) updateEnvLocation(ctx context.Context, selectedLocation
 
 	_, err := a.azdClient.Environment().SetValue(ctx, &azdext.SetEnvRequest{
 		EnvName: envName,
-		Key:     "AZURE_LOCATION",
+		Key:     "AZURE_AI_DEPLOYMENTS_LOCATION",
 		Value:   selectedLocation,
 	})
 	if err != nil {
-		return fmt.Errorf("failed to update AZURE_LOCATION in azd environment: %w", err)
+		return fmt.Errorf("failed to update AZURE_AI_DEPLOYMENTS_LOCATION in azd environment: %w", err)
 	}
 
 	if a.azureContext == nil {
@@ -97,7 +97,7 @@ func (a *modelSelector) updateEnvLocation(ctx context.Context, selectedLocation
 	}
 	a.azureContext.Scope.Location = selectedLocation
 
-	fmt.Println(output.WithSuccessFormat("Updated AZURE_LOCATION to '%s' in your azd environment.", selectedLocation))
+	fmt.Println(output.WithSuccessFormat("Updated AZURE_AI_DEPLOYMENTS_LOCATION to '%s' in your azd environment.", selectedLocation))
 	return nil
 }