Don't know if I'm up to date but I think you have to use make feature layer infront of your select by location. Out of the help files:
import arcpy
arcpy.env.workspace = "c:/data/mexico.gdb"
arcpy.MakeFeatureLayer_management('cities', 'cities_lyr')
arcpy.SelectLayerByLocation_management('cities_lyr', 'intersect', 'chihuahua')
you should use:
arcpy.env.workspace = r"C:\folder\Data.gdb" and not
arcpy.env.workspace = r"C:\folder\Data.gdb\"
r"C:\Data.gdb\%Name%_selection"
will not work in python code,
you will need to create a unique name for your output file.