Update: Solution: Simply launching a new terminal or running source ~/.zshrc was good enough in my case.
I somehow was using an older version of cookiecutter. I checked the version with this command:
and it reported that I was calling cookiecutter version 1.73. Based on my reading, Local Extensions requires cookiecutter 2.1 or newer.
I think I have an unusual case. I'm on a Mac with conda installed. This was messing with my virtualenv. It seems that the path was not updated after running pip install cookiecutter and it was giving priority to an older installation of cookiecutter in my conda distribution. restarting the environment by launching a new terminal and reactivating my virtualenv cleared it up.