Location extensions gives advertisers a way to create new local ads with extensions from scratch or add extensions to your existing text ads. This will replace the need to have local business ads as a separate ad unit. The feature is not yet live for all, Google will roll it out to advertisers in the upcoming weeks, but you will be able to add this feature in the future. To do so, you login to AdWords, click on a campaign, then click on settings. Then under the Audience > Locations section, you can select “Show relevant addresses with your ads.” A Google Local Business Listing is required to make this possible, for more information, see this help document.
I believe, Google started testing this feature in December 2007. I even took a screen shot, back then:
For a full overview of this new AdWords feature, see the AdWords help section.