There are two type of towers. Lookout towers that give the unit extra vision when standing in the tower. The lookout tower counts as the same terrain as it is built on. Lookout towers can not be constructed in the game, they are already on map when the game starts.
Guard towers is the other type of tower. Guard towers can be built anywhere on any terrain, even water. To build a guard tower select a unit with construction ability and go to orders->contruct tower. A popup will ask you about the level of the tower and give you the cost.Constructing a tower costs 100 gold + gold per level. Defense 0 cost 50 per level, defense 1 costs 75 per level and and defense 2 and 3 costs 100 gold per level.
Guard towers hides the units inside. The only way to figure out whats inside is to attack the tower.Guard towers does not cost any upkeep. A guard tower loses 1 level every time it changes owner. If the tower is at level 1 when captured it will be razed and disappear from the map.