I can confirm this is happening in the new Sierra OS. In order to move forward, I wanted to clear up the troubleshooting suggestions (in bold):
If your iMac doesn't switch to Target Display Mode when you press Command-F2, check these things:
Make sure the iMac you're trying to use as a display supports Target Display Mode.
Of course it supports it, I, and the user reporting the bug, have used it successfully in the past
Make sure you're pressing Command-F2 on the keyboard that's connected to the iMac you want to use as a display.
I can confirm I am pressing Command-F2 on the display I want to use, and getting a blank black screen
In Keyboard System Preferences, if the checkbox is enabled for Use all F1, F2, etc. keys as standard functions keys, the key combination changes to Command-Fn-F2.
I can confirm I am using the F keys as function keys and not standard. To further illustrate that point, when I hit Command-F2, the display attempts to go into TDM, but just returns a black screen.
Make sure your Mini DisplayPort or Thunderbolt cable is connected to both computers.
I can confirm both cables are thoroughly, securely, and unequivocally attached to both machines.
If you're currently logged in on the iMac you want to use as a display, try logging out to return to the login window. Then press Command-F2 again.
I have logged out, logged in, and reset both machines. Problem still exists.
Some older Apple keyboards and third-party keyboards might not allow Command-F2 to toggle display modes. If this happens, use the keyboard that came with your iMac to toggle Target Display Mode on and off.
I am using an Apple keyboard that is less than a year old.
If your iMac is currently started up in Windows, it won't enter Target Display Mode. Target Display Mode isn't supported in Boot Camp.
I am not starting the mac in Windows. I am booting in Mac OS Sierra on both machines.
Now that we have the copy/paste from the troubleshooting guide out of the way. Is there an actual solution to this apparent bug in Sierra?