A member of the Exchange and Outlook Beta team reached out to me help out. Thank you.
Finally got exchange 2016 installed in our Hybrid environment.
The prepare Active Directory document (Step 2) has a small statement at the end "Important. If you have a hybrid deployment configured between your on-premises organization and Exchange Online, add the /TenantOrganizationConfig switch to the command." This comment is really important but also needs some further instruction.
Here are the important beginning steps if you already have a Hybrid onprem-online environment:
1) Export your Tenant Organization config xml file with the following powershell command:
Get-OrganizationConfig | Export-clixml -Path C:\temp\Tenant.xml
2) Prepare AD with this command:
Setup /PrepareAD /TenantOrganizationconfig:C:\temp\Tenant.xml /IAcceptExchangeServerLicenseTerms
3) Reboot
4) Prepare AD again with this command:
setup.exe /PrepareAD /IAcceptExchangeServerLicenseTerms
5) Reboot
6) run setup.exe to complete UI install