It creates a separate host application that only serves the HTTP (REST) APIs. The web application then performs remote HTTP calls to that application for every operation. If the *Tiered* option is not selected, then the web and HTTP APIs are hosted in a single application, and the calls from the UI layer to the API layer are performed in-process.
The tiered architecture allows you to host the web (UI) application in a server that can not access to your database server. However, it brings a slight loss of performance (because of the HTTP calls between UI and HTTP API applications) and makes your architecture, development, and deployment more complex. If you don't understand the tiered structure, just skip it.