Good question - I have experienced something similar and I would personally go with your second location in a sub-folder as you say you have already established this site and you will be able to benefit from the authority already gained. I would place relevant anchor text including the location possibly in the main homepage navigation pointing to this second location. When I worked on a similar site I had three locations from one site and I placed the relevant terms in the main navigation anchor text and obviously did the other basics such as keywords in URLs. Then I concentrated on building the authority of each locations homepage, including using competitions to get social interaction to each of these and building great local content that I then exposed to the relevant local audiences. Each one of the location pages then started to gain more natural links from local sources and I found they all ranked really well for their local terms.
Hope this helps..