Randy, I think I figured out why you're getting an error:
notice in the screenshot, it's grabbing the .NET installer for Win8_1.
Server 2016 would actually require the equivalent installer of Win10. So basically, you're running into a compatibility issue.
If you go to server manager, and install 3.5 manually, assuming the Sage installer has a sanity check for the existence of the 3.5 package, you should be ok.
Though, like @BarbaraGoldstein mentioned, if it's not supported, you might be running the risk of having other issues come up down the road.