Just in case anyone else encounters this, I got past this error by adding this line to the Project/PropertyGroup section of the cloud service .ccproj file:
<TargetFrameworkVersion>v4.6.2</TargetFrameworkVersion>
e.g.
<?xml version="1.0" encoding="utf-8"?>
<Project ToolsVersion="12.0" DefaultTargets="Build" xmlns="http://schemas.microsoft.com/developer/msbuild/2003">
<Import Project="$(MSBuildExtensionsPath)\$(MSBuildToolsVersion)\Microsoft.Common.props" Condition="Exists('$(MSBuildExtensionsPath)\$(MSBuildToolsVersion)\Microsoft.Common.props')" />
<PropertyGroup>
<Configuration Condition=" '$(Configuration)' == '' ">Debug</Configuration>
<Platform Condition=" '$(Platform)' == '' ">AnyCPU</Platform>
<ProductVersion>2.9</ProductVersion>
<ProjectGuid>8c99xxxx-xxxx-xxxx-xxxx-xxxxxxxx273e</ProjectGuid>
<OutputType>Library</OutputType>
<AppDesignerFolder>Properties</AppDesignerFolder>
<RootNamespace>MyCloudService</RootNamespace>
<AssemblyName>MyCloudService</AssemblyName>
<TargetFrameworkVersion>v4.6.2</TargetFrameworkVersion> <!-- Added -->
<StartDevelopmentStorage>True</StartDevelopmentStorage>
<Name>CloudSheetCloudService</Name>
etc...
By default the cloud services project does not specify the framework (it doesn't need to) but something in MSBuild appears to be doing a version check between the cloud service and the web / worker roles and then failing the build.
Changing the tools version did not help.
As background - I have an old cloud service that references a 4.6.2 project that uses the new csproj style like this:
<Project Sdk="Microsoft.NET.Sdk">
<PropertyGroup>
<TargetFramework>net462</TargetFramework>
</PropertyGroup>
</Project>
HTH.
Mark.
Edit: The file to edit is the .ccproj not the .cproj file as previously stated.