FRANCHISING AND MARKETING ACTIVITIES

Franchise fee revenue includes domestic initial franchise fees and international area development fees of $8 million, $9 million, and $12 million for the years ended December 31, 2015, 2014 and 2013, respectively. In addition, franchise fee revenue is net of annual volume incentives provided to real estate franchisees of $51 million, $50 million and $48 million for the years ended December 31, 2015, 2014 and 2013, respectively. The Company’s real estate franchisees may receive volume incentives on their royalty payments. Such annual incentives are based upon the amount of the franchisees commission income earned and paid to the Company during the calendar year. Each brand has several different annual incentive schedules currently in effect.

The Company’s wholly owned real estate brokerage services segment, NRT, pays royalties to the Company’s franchise business; however, such amounts are eliminated in consolidation. NRT paid royalties to the Real Estate Franchise Services segment of $284 million, $269 million and $265 million for the years ended December 31, 2015, 2014 and 2013, respectively.

Marketing fees are generally paid by the Company’s real estate franchisees and are generally calculated based on a specified percentage of gross closed commissions earned on the sale of real estate, and may be subject to certain minimum and maximum payments. Such fees are recorded within other revenues on the accompanying Consolidated Statements of Operations. As provided for in the franchise agreements and generally at the Company’s discretion, all of these fees are to be expended for marketing purposes.

The number of franchised and company owned outlets in operation are as follows:



	(Unaudited) As of December 31,
	2015	2014	2013
Franchised:
Century 21^®	6,897	6,902	7,109
ERA^®	2,355	2,304	2,314
Coldwell Banker^®	2,258	2,396	2,489
Coldwell Banker Commercial^®	163	167	195
Sotheby’s International Realty^®	794	717	666
Better Homes and Gardens^® Real Estate	304	283	259
	12,771	12,769	13,032
Company Owned:
ERA^®	—	—	11
Coldwell Banker^®	708	651	631
Sotheby’s International Realty^®	41	39	32
Corcoran^®/Other	38	37	32
	787	727	706

The number of franchised and company owned outlets (in the aggregate) changed as follows:



	(Unaudited) For the Year Ended December 31,
	2015		2014		2013
Franchised:
Beginning balance	12,769		13,032		12,880
Additions	445		311		478
Terminations	(443	)	(574	)	(326	)
Ending balance	12,771		12,769		13,032
Company Owned:
Beginning balance	727		706		712
Additions	74		38		15
Closures	(14	)	(17	)	(21	)
Ending balance	787		727		706

As of December 31, 2015, there were an insignificant number of franchise agreements that were executed for which offices are not yet operating. Additionally, as of December 31, 2015, there were an insignificant number of franchise agreements pending termination.

In connection with ongoing fees the Company receives from its franchisees pursuant to the franchise agreements, the Company is required to provide certain services, such as training and marketing. In order to assist franchisees in converting to one of the Company’s brands, expand their operations or as an incentive to renew their franchise agreement, the Company may at its discretion, provide non-standard incentives, primarily in the form of conversion notes (prior to 2009, the Company issued development advance notes). Provided the franchisee meets certain minimum annual revenue thresholds during the term of the notes and is in compliance with the terms of the franchise agreement, the amount of the note is forgiven annually in equal ratable amounts over the life of the franchise agreement. Otherwise, related principal is due and payable to the Company. The amount of such franchisee conversion notes and development advance notes were $115 million, net of $1 million of reserves, and $97 million, net of $1 million of reserves, at December 31, 2015 and 2014, respectively. These notes are principally classified within other non-current assets in the Company’s Consolidated Balance Sheets. The Company recorded a charge in the statement of operations related to the forgiveness and impairment of these notes of $17 million, $15 million and $11 million for the years ended December 31, 2015, 2014 and 2013, respectively.