For D365FO dev environments you have three different deployment options. All of these options are "onebox" environments where you have all D365FO components installed on one VM.
1) Local VM. This is the downloadable VHD that you can run in your own infrastructure
2) Cloud hosted environment. You deploy from LCS to your own Azure subscription and pay per minute for using it.
3) Microsoft hosted "add-on" environment. If you have an implementation project in LCS, you can buy Tier 1 add-on environments which will be deployed by Microsoft in Microsoft's Azure subscription. You will pay a fixed monthly fee for the environment. You do not have administrator access on the VM with this option.
No matter which one you use for development, the result is compatible with D365FO cloud and on-premises versions.
You develop, check in to version control, and create a deployable package which you can apply to non-development environments.
